'Ultrasound Money' Unravels as ETH Supply Grows 0.23%
The central promise of an "ultrasound money" thesis for Ethereum has failed to materialize, directly contributing to its market underperformance. The concept was that a fee-burning mechanism (EIP-1559) combined with reduced issuance from the Proof-of-Stake transition would make ETH a deflationary asset, even scarcer than Bitcoin. While the network initially saw its supply contract, conditions have reversed. Since the 2022 Merge, ETH's supply has grown at an annualized rate of 0.23%.
This shift from deflation to modest inflation is driven by two key factors. First, average transaction fees on Ethereum's mainnet fell to around $0.21 in March, a 54% decrease from the previous year, reducing the amount of ETH burned. Second, user activity has migrated to cheaper Layer-2 scaling solutions, which now process 926 user operations per second (UOPS) compared to just 22.36 on the Ethereum mainnet. While crucial for scalability, this migration starves the mainnet of the high-fee activity required to maintain a deflationary state.
Investors Favor Bitcoin's Predictability, Driving 65% ETH/BTC Decline
Investors have decidedly favored Bitcoin's transparent and immutable monetary policy, causing the ETH/BTC trading pair to fall roughly 65% since Ethereum's PoS transition. Bitcoin's hard-coded supply cap of 21 million coins and predictable issuance schedule provide a level of certainty that Ethereum's more malleable policy currently lacks. This investor preference is starkly visible in the U.S. exchange-traded fund (ETF) market. As of March, spot Bitcoin ETFs commanded over $91.9 billion in assets under management, while spot Ethereum ETFs held a comparatively small $12.1 billion.
The underperformance is not just relative. In U.S. dollar terms, ETH has struggled to gain new momentum, only marginally surpassing its previous all-time high near $4,800. This contrasts sharply with Bitcoin, which has seen its price double from its 2021 peak. Negative sentiment has been amplified by criticism from firms like Culper Research, which disclosed a short position on ETH, and periodic token sales linked to Ethereum's co-founder and the Ethereum Foundation, feeding a narrative that insiders are selling into market strength.
Every altcoin promises scarcity but delivers inflation by design. Ethereum abandoned its ‘ultrasound money’ narrative the moment it became inconvenient.
— Handre, Analyst.
