Ethereum No Longer ‘Ultrasound Money’? September Inflation Turns Investors Bearish

Ethereum failed to capitalize on the upward momentum in the crypto market, amid inflation concerns.

Little girl appears to be sad whilst holding an Ethereum balloon.
Created by Gabor Kovacs from DailyCoin
  • September saw a notable rise in the crypto market cap.
  • Ethereum moved further away from its deflationary narrative
  • L2s increasingly canibalize network traffic.

After months of bearish momentum, September was a month of recovery. Partly due to the Federal Reserve’s decision to lower interest, the total crypto market cap was rising. On the other side of the globe, China also cut interest rates, further fuelling optimism. 

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These conditions helped drive growth in several key crypto assets, including Ethereum (ETH). However, due to rising inflationary pressures of its own, ETH failed to capitalize and showed sluggish growth. 

Ethereum No Longer ‘Ultrasound Money’? 

While Ethereum presents itself as a deflationary asset, recent events have put that into question. On Friday, October 4, Binanceโ€™s report on the state of the crypto market in September highlights this issue for Ethereum, and how it translates to its underwhelming market performance.ย 

Chart of market cap gains by major crypto assets in September.
Source: Binance

In September, Ethereumโ€™s issuance rate reached an annualized 0.74%. Like with fiat currencies, issuance of new coins translates to inflationary pressures. This puts into question Ethereumโ€™s ‘Ultrasound Money’ narrative, which promised that ETH would be even more deflationary than Bitcoin. 

This has put pressure on Ethereumโ€™s gains in market cap. For instance, while Bitcoinโ€™s market cap rose 7.5% in September, ETH’s market cap rose only 2.8%. Most recently, Ethereum has seen a major selling trend, with one whale dumping $48 million in ETH. 

Why Ethereum is Becoming Inflationary

The likely source of this inflationary pressure is the drop in activity on the Ethereum mainnet. Notably, following the long-anticipated Decun upgrade in March, much of Ethereum traffic moved to its layer 2 chains. 

While L2 chains are supposed to help with Ethereumโ€™s scalability, they also demonstrate some adverse effects. Notably, both the Binance report and Sygil Bankโ€™s recent report suggested that L2s are โ€œcannibalizingโ€ Ethereumโ€™s traffic. 

This is significant because traffic directly affects Ethereumโ€™s inflation rate. After the Merge upgrade in 2022, Ethereum introduced a base burn rate for every transaction. At the same time, the network also creates new tokens to reward validators. 

In periods of heavy network usage, such as the NFT boom, the burn rate was higher than the inflation rate. This made Ethereum deflationary. However, after the Dencun upgrade, L2s became more prominent, leading to a 15% decline in traffic for the Ethereum network. 

On the Flipside

  • While L2s have their drawbacks, they are essential for Ethereum to remain scalable and competitive in terms of fees. 
  • Thanks to improving scalability, L2s help grow the overall Ethereum ecosystem. This way, they can negate the adverse effects on base traffic in the long run. 

Why This Matters

Ethereumโ€™s recent inflationary turn challenges the narrative that Ethereum can serve as a deflationary asset like Bitcoin. This has significant implications for its price in the near term. 

Read more about the Decun upgrade:ย 
Ethereumโ€™s Decun Upgrade Is Live: Hereโ€™s How Users Reacted

Read more about Solana vs Ethereum:ย 
Is Solana Ready to Flip Ethereum? Sygnum Bank Thinks So

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
David Marsanic

David Marsanic is DailyCoinโ€™s journalist, focusing on Solana and crypto exchanges. David currently doesnโ€™t hold any crypto.

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