ETH is at $2335 at the time I started writing this post. However, it was ~$1800 in the last 24hrs, making a substantial losses from $4000 ATH. That was when I decided to make this investigation in the ultra sound money assumption of ETH. Does having supply deflated really matters to its price performance? Therefore, I decided to dive into some on-chain data and make simple observations with a few plots.

For a context, ETH switch from POW to POS on 15 September 2022, that was when ETH narrative changes into being ultra sound money, referring to having supply decreases when there are more activity on-chain. People believe that this mechanism would drive ETH's price up in the long term, in opposite to the fixed 21 millions supply of BTC. However, the mechanism can affect the price in negative direction if there are less activity; less token burned leads to inflationary in supply.

As a long-term investor, it is then crucial to understand the role of this supply changes and how it affects in the price. Thus, we look at the relation of ETH price and its supply. We use close prices from Binance and a supply data from Etherscan. The period since the Merge has been considered.

Below, we plot the ETH daily close price and its total supply since the Merge date. The cumulative correlation has been negative since then, implying opposite movement between the two variables. This is agree to our assumption; the supply inversely drive long-term the price. The results can also describe the ETH recent poor performance as well as the supply has been in the up-trend since its all-time-high price.

To dive into this deeper, we calculate correlations between average supply and the lagged prices, by shift an index for lag day. The data shows the ETH's price move more inversely with the negative shifted price. This implies that the price will drop stronger by some delay time (~200 days) after seeing an increasing supply. On the other hand, the correlation surprisingly turns positive when shifted time is positive. However, it is unclear to say what does it means.

Because ETH total supply directly relates to the burned amounts and block reward for stakers, and the former depends on how many the activities on-chain, we thought the average daily gas might be a useful variable to predict the future direction of total supply. However, the long-term data shows that the price is hardly correlated with average gas.

To understand this, we again calculated correlations for the shifted supply with average gas. Here we can see the negative correlation in the left-shifted; the leading in surged gas would reduce the total supply after some delay (~100 days). This seems correct as the chain getting more crowded would need more token burned. The positive correlation in the right-shifted regime might be interpreted that the supply increased may lead to more average gas (a.k.a. more activity on-chain) after some delay. Again, an explanation for the latter case is still not so clear.

The long term correlation shows that the ETH price seems to hold to ultra sound money assumption. The correlation with the lagged price suggests that the ETH supply's trend might be used as a leading indicator of for the future change in prices. Similary, the trend of average daily gas on-chian could be useful to predict the future trend of the total supply.

ETH is at $2335 at the time I started writing this post. However, it was ~$1800 in the last 24hrs, making a substantial losses from $4000 ATH. That was when I decided to make this investigation in the ultra sound money assumption of ETH. Does having supply deflated really matters to its price performance? Therefore, I decided to dive into some on-chain data and make simple observations with a few plots.

For a context, ETH switch from POW to POS on 15 September 2022, that was when ETH narrative changes into being ultra sound money, referring to having supply decreases when there are more activity on-chain. People believe that this mechanism would drive ETH's price up in the long term, in opposite to the fixed 21 millions supply of BTC. However, the mechanism can affect the price in negative direction if there are less activity; less token burned leads to inflationary in supply.

As a long-term investor, it is then crucial to understand the role of this supply changes and how it affects in the price. Thus, we look at the relation of ETH price and its supply. We use close prices from Binance and a supply data from Etherscan. The period since the Merge has been considered.

Below, we plot the ETH daily close price and its total supply since the Merge date. The cumulative correlation has been negative since then, implying opposite movement between the two variables. This is agree to our assumption; the supply inversely drive long-term the price. The results can also describe the ETH recent poor performance as well as the supply has been in the up-trend since its all-time-high price.

To dive into this deeper, we calculate correlations between average supply and the lagged prices, by shift an index for lag day. The data shows the ETH's price move more inversely with the negative shifted price. This implies that the price will drop stronger by some delay time (~200 days) after seeing an increasing supply. On the other hand, the correlation surprisingly turns positive when shifted time is positive. However, it is unclear to say what does it means.

Because ETH total supply directly relates to the burned amounts and block reward for stakers, and the former depends on how many the activities on-chain, we thought the average daily gas might be a useful variable to predict the future direction of total supply. However, the long-term data shows that the price is hardly correlated with average gas.

To understand this, we again calculated correlations for the shifted supply with average gas. Here we can see the negative correlation in the left-shifted; the leading in surged gas would reduce the total supply after some delay (~100 days). This seems correct as the chain getting more crowded would need more token burned. The positive correlation in the right-shifted regime might be interpreted that the supply increased may lead to more average gas (a.k.a. more activity on-chain) after some delay. Again, an explanation for the latter case is still not so clear.

The long term correlation shows that the ETH price seems to hold to ultra sound money assumption. The correlation with the lagged price suggests that the ETH supply's trend might be used as a leading indicator of for the future change in prices. Similary, the trend of average daily gas on-chian could be useful to predict the future trend of the total supply.