Will Ether's Supply Crunch Lead to Higher Prices in Q4?

Ether's price might be falling, but its liquid supply is shrinking. If demand picks up next quarter, we could see a supply crunch that pushes prices higher

Ether’s price might be falling, but its available supply is shrinking. If demand picks up next quarter, we could see a supply crunch that pushes prices higher.

Here’s a closer look at the on-chain metrics that could be setting the stage for ether to outpace the market in Q4.

Fresh data from on-chain analytics firm CryptoQuant shows ether exchange reserves are rising, which could indicate selling pressure and drive prices further down.

This is because a glut (or an oversupply in the market) can put downward pressure on prices, potentially causing a sell-off if enough investors panic and start dumping their crypto holdings to cut losses. We saw this when the German government shook the market by suddenly selling its $3 billion worth of seized bitcoin just a few months ago.

But zooming out, this “glut” is less than 1% of exchange reserves, and in reality, these reserves still remain near their all-time lows – 18.7 million ETH, or 15% of the total supply.

Spot ether reserves are even less and now at an all-time low of around 8.4 million ETH. Any inflow is quickly matched by outflows, so any selling pressure is likely being absorbed. The recent uptick in Ether reserves is mainly on derivative exchanges, where Ether is being used as collateral for long/ short positions.

Ether’s 78% gains ($2,282 to $4,066) from January to March have almost been wiped out (now $2,321), yet ether exchange reserves have still fallen by 10% since the start of the year. This is unusual given that reserves and prices are usually inversely correlated; perhaps suggesting that investor confidence in Ether’s long-term value potential remains strong.

Ether staking deposits continue to climb

Even though the price of Ether has dropped 42% from its all-time-high, staking deposits continue to climb, increasing by nearly 20% since the start of the year. Over 34.5 million ETH ($81.3 billion) are currently staked or 28.8% of the total supply, which is an all-time high.

Investors seem either hungry for higher returns by restaking on platforms like EigenLayer (and more recently, Symbiotic) or are happy with a lower risk / lower reward option through traditional staking options and protocols. Either way, dollar values are down, Ether amounts are up.

Demand for staking and restaking seems unfazed by Ether’s declining prices. If this trend persists, it will continue to remove more Ether from the available liquid supply.

Big underperformance

Ether’s price underperformance compared to Bitcoin and Solana has been substantial, with the disappointing launch of the ether spot ETFs (which has mostly seen net outflows) further dampening sentiment.

It wasn’t until months after BlackRock’s Bitcoin ETF filing that the crypto market saw growth in the form of a year-end rally. Since then, Bitcoin has risen 114%, Solana has surged 564%, but Ethereum has only risen 27%.

Solana’s token performance and network growth have been impressive lately, with transaction volumes rising by 50% since the start of the year and recently reaching an all-time high of 3.9 million active addresses. But its market share (3.02%) is still just a fraction of Ethereum’s (13.56%) in the current $2.05 trillion crypto market. It is also worth mentioning that most of Solana’s impressive activity has been dominated by memecoins. Is this really sustainable in the long run?

Year-end rally?

After a long period of underperformance, negative sentiment around Ether might be nearing its bottom. An uptick in Ethereum ETF inflows could be just the catalyst needed to trigger the supply crunch and upside shocks in Ether’s price.

With a favourable economic backdrop of falling rates and looser liquidity, regulatory support, not to mention, the growing institutional interest in crypto ETF products (including some of the most conservative traditional investors such as state pension funds), a new wave of institutional inflows seems likely.

Meanwhile, the crypto market has failed to price in these positive fundamentals, so the opportunity is there for a sharp catch-up rally.

If we combine a new wave of inflows with Ether’s shrinking liquid supply, any upside shocks in Ether’s price will be sharp and quick.