Market Commentary
Market Commentary: ETH Fee Burn
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November 2, 2021

Recently, both bitcoin and ether have reached new highs, and both assets continue to consolidate near these levels.

Bitcoin has now traded above $60,000 for 24 days in its history and has spent 103 days above $50,000. Price has been accepted at these levels, and bears (if there are any) have been uninterested in pushing price any lower.

Near-term, $62,500 serves as resistance, but any sustained move above this price will likely provide runway for new highs into the end of the year. Traders eye $58,000 as near-term support and naturally, $50,000 as a key level and milestone for the price of bitcoin.

“Uptober” certainly came into fruition, as BTC gained 40.4% and ETH gained 43.6% in the month.

Interest last week was around ETH, which created a new all-time intraday high $4,459 on October 29 as well as an all-time high close of $4402.9 on the very same day. While network activity within Ethereum has been strong, increased flows into underlying “meme” tokens on the Ethereum blockchain were last week’s catalyst for increased ETH demand.

Price chart of ether, below:

This week, we provide updates on ETH, preview Wednesday's FOMC meeting, and highlight the lack of selling from bitcoin miners.

Momentum Frenzy Drives Demand for Ether

While we actively move clients away from “meme coins" with little to no long-term intrinsic value, the surge in interest around dog-related ERC-20 tokens increases revenues for ETH miners.

When momentum-chasing traders want to take part in the action, many use decentralized exchanges such as Uniswap or Sushiswap to gain exposure to these tokens (even if they are available on US centralized exchanges). The most recent frenzy was fueled by a rise in Shiba Inu (SHIB), and Messari research estimates approximately $83.4 billion in volume just last week.

This increasing use of decentralized exchanges drives Ethereum network activity higher. As a result, both the number of transactions as well as the fee per transaction increases, and miners experience a rise in revenues:

These fees paid to miners increases the security and longevity of a blockchain as it provides economic incentive to continue supporting the network. Ethereum has certainly provided its stakeholders (no Eth 2.0 pun intended) reason to stick around: ETH miners generated $938 million in revenue just in the week ending October 31 and $17 billion in revenue year-to-date.

ETH Fee Burn

With high network activity, an increasing amount  of new ETH supply was burned. As a refresher, the upgrade to Ethereum that took place in August optimizes fees based on network congestion and removes base fees from circulation. When network activity is high, base fees can be greater than the designated two ETH block reward, and supply is reduced in that given block.

Last week, ETH had four straight days with negative net emissions:

Since the beginning of EIP-1559 on August 5, 2021, over 710,000 ETH have been burned, which equates to over $3 billion based on Sunday’s closing price of $4,268. New supply has been reduced by 58% since EIP-1559, and there have been 7 days in which ETH had negative net emissions.

ETH investors appreciate periods of increased network activity. This “fee-burn” can be thought of as a buyback: Ether is being removed from circulation, reducing the level of new supply that comes to the market.

ETH/BTC Chart Update

One way to track relative performance of ether versus bitcoin is through the ETH/BTC pair, or the price of ETH per BTC:

The ETH/BTC pair hit a high of 0.148 about 6 months before bitcoin's parabolic advance to $20,000 in December of 2017 (ether was $393.4 and bitcoin was $2,656 on June 12, 2017).  ETH/BTC moved lower as bitcoin began to rise in the second half of 2017 and ultimately hit a low of 0.0164 on September 6, 2019, when ether was $170 and bitcoin was $10,353.

With ETH outperforming bitcoin year-to-date (110.3% vs. 477.5%) the ETH/BTC pair has moved higher to ~$0.07. A sustained move above $0.08 would be the first sign of an ETH/BTC expansion, and both traders and investors have monitored this development as a sign of further room to run in the price of ether.

November’s Fed Meeting: Announcement Wednesday

In a highly anticipated meeting, Jerome Powell and the FOMC are expected to announce the beginning of the tapering on Wednesday given the market’s consistent worries about sustained inflation through much of 2022. Participants have recently priced in additional hikes next year because of these concerns, a theme likely to be the focus of many financial analysts in the coming meetings.

Powell has telegraphed his every move, and as a result, risk-assets haven’t felt too much selling pressure. With US Equities hitting new all-time highs again last week, it’s tough to be bearish on bitcoin and digital assets.

BTC On-Chain: Bitcoin Miners Uninterested in Selling This Rally

Miner flows to exchanges is one of the many ways to determine market sentiment, as the group often sells more bitcoin than usual when they believe price nears relative highs. Both traders and investors monitor this development on-chain as it implies the potential for increased selling pressure.

While this occurred in the rally that took place earlier this year, this has not yet occurred in the most recent rally to new highs:

Miners sent an average of 365 bitcoin to exchanges per day in the rally from October 1st to April 15th, while sending an average of 174 bitcoin per day in the most recent rally that began on July 20th.

Thus far, miners are holding bitcoin rather than distributing at these prices.

As always, please reach out with any questions or comments.

Stay Tuned,

Joseph Orsini, CFA
Director of Research

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