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Ethereum Becomes Deflationary as Fees Spike — ETH Price Could Reach $3,500

Published September 30, 2024 7:35 AM

By Valdrin Tahiri

Analyzing Ethereum's Fee Spike | Credit: Derek Fenech

Key Takeaways

Ethereum (ETH) fees spiked between Sept. 24-26.
The ETH price has increased by 5% in September.
How will Ethereum’s price fare the rest of the year?

Ethereum’s price fell sharply in August, creating a large bearish candlestick. However, it regained its footing in September, regaining some of its losses and validating an important support level.

An interesting development last week was that Ethereum (ETH) fees spiked, causing the supply to become deflationary for the first time since March. Let’s analyze why this happened and its effect on the ETH price.

Ethereum Fees Spike

Data from IntoTheBlock noted that Ethereum hit $45 million in weekly fees last week. This was the highest level since that, starting the week of June 10. The biggest increase in fees happened between Sept. 24-26.

Interestingly, while gas fees spiked to over 20 Gwei during this period, transaction volume and count remained constant. The average transaction fee also increased above $5 , the highest level since June, increasing burn rates.

Ethereum Fees | Credit: Valdrin Tahiri/Santiment

Since network activity has remained the same, the fee increase may have occurred due to network congestion or transaction complexity.

Complex transactions, such as interactions with DeFi platforms’ smart contracts, use more gas and can increase fees even if the volume is constant.

This hypothesis is supported by Ethereum’s daily decentralized exchange (DEX) volume , which reached a new monthly high on Sept. 26. Decentralized Finance is responsible for over a third of Ethereum’s burn rate.

A side effect of this increase in transaction fees is that the Ethereum supply briefly fell into deflationary territory for the first time since the Dencun upgrade. However, it is now back in its inflationary curve.

Ethereum deflation — Ethereum Inflation | Credit: Ultrasound.Money

The Ethereum supply has fallen by 0.063% since the merge in September 2023. However, it increased rapidly in April, shortly after the Dencun upgrade reduced transaction fees for Layer-2 solutions.

At the time, Ethereum’s supply had fallen by 457,204 since the merge. As of Sept. 30, the supply is only 155,508 lower than the merge. The supply will become inflationary again near the end of Dec. 2024 at the current rate of increase.

Ethereum’s Monthly Close

After an extremely bearish August, the ETH price regained its footing in September, increasing by slightly over 55%. Interestingly, Ethereum has created long lower wicks in both months, highlighting the importance of the $2,200 horizontal area. This area has acted as both support and resistance since March 2021.

What’s Next for ETH?

Ethereum’s 3-day price chart gives a bullish outlook. It shows that ETH has fallen inside a descending parallel channel since April, creating long lower wicks each time it touched the support trend line. The wicks coincide with those created in the monthly time frame.

During the two recent bounces, the three-day RSI generated a bullish divergence and broke out from its resistance trend line shortly afterward. This usually precedes price breakouts.

Finally, the price of ETH has moved above the channel’s midline, indicating a bullish trend.

Ethereum Price Movement — ETH/USDT 3-Day Chart | Credit: Valdrin Tahiri/TradingView

Analyst Julian Bittel posted a fractal that shows Ethereum’s price perfectly following the movement between Jan. 2023 – March 2024. This fits with the bullish outlook given by the 3-day time frame.

So, if the ETH price breaks out from its descending parallel channel, it will likely increase toward the $3,500 resistance area first and then approach its all-time high of $4,868.

If the price of Ethereum reaches the 1.61 external Fibonacci level of the previous drop, it will reach a new all-time high of $5,324.

Ethereum Price to $3,000

While Ethereum fees spiked last week, this was not caused by increased network activity. Periods of network congestion were likely the catalysts for the fee increase.

As a result, the brief deflationary period in Ethereum’s supply will likely not last.

In any case, Ethereum’s price shows bullish signs in different time frames, and a continued ETH increase is likely accelerated with a breakout from the descending channel pattern.