Ethereum’s native token, Ether (ETH), has the potential to double its market valuation in the coming months, thanks to a confluence of supportive technical and fundamental indicators.
Ether's price soared by more than 9% on Oct. 1 to hit nearly $3,300 for the first time in 10 days. Its gains surfaced primarily in the wake of a price rebound across all the top cryptocurrencies, including Bitcoin (BTC), which gained 9.5% to hit $48,000, its highest level in 10 days.
Ether-Bitcoin correlation against rising U.S. inflation
Oct. 1’s crypto market boom coincided with the release of the United States Commerce Department’s report on consumer spending.
The data shows that the U.S. core personal consumption expenditures price index, the Federal Reserve’s preferred measure of inflation, rose by 0.3% in August and was up 3.6% year-over-year. Thus, the core inflation surged to its highest levels in 30 years.
Speculators tend to treat Bitcoin as a hedge against inflation, which explains the benchmark cryptocurrency’s latest response to the higher consumer prices in the United States.
Meanwhile, Ether’s 30-day average correlation with Bitcoin sits near 0.89, as per data from CryptoWatch, which resulted in ETH moving almost in lockstep with BTC.
A University of Michigan survey conducted between Aug. 25 and Sept. 27 found that the longer-term inflation expectations among U.S. consumers rose to 3%, the highest in a decade.
The outcome appeared in contrast with Federal Reserve Chairman Jerome Powell’s views, who had described the rising inflation as “transitory” for months but admitted during a recent Senate hearing that the higher consumer prices might stay intact at least until the next year.
As a result, inflationary pressures gave crypto bulls a reason to pitch Bitcoin as an ultimate hedge, with MicroStrategy CEO Michael Saylor suggesting corporations convert their cash-based treasuries into BTC.
MicroStrategy holds about 0.5% of the total Bitcoin supply in circulation, currently worth over $6 billion.
Supply squeeze
Ethereum went through a network hard fork upgrade on Aug. 5 that further raised the bullish outlook for Ether, owing to the classic law of supply and demand.
Dubbed the London hard fork, the upgrade introduced an improvement protocol, EIP-1559, that initiated the burning of a portion of Ethereum’s network fee, called the base fee. So far, EIP-1559’s activation has permanently removed 410,404 ETH (around $1.32 billion) out of active supply, as per Watch the Burn.
Ethereum is also preparing to switch its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS). As a result, it has launched a staking pool that will allow users to earn rewards and grow their ETH holdings if they lock 32 ETH into the official PoS smart contract for a certain period.
So far, the amount of ETH deposited in the Ethereum 2.0 staking contract has surged from around 11,500 in November 2020 to 7.82 million ETH today. That said, the transition has effectively temporarily removed 7.82 million ETH from circulation.
On the other hand, the total amount of Ether tokens held across all crypto exchanges has dropped to record lows. Data from CryptoQuant shows that exchanges now hold only 18.1 million ETH compared with 23.73 million ETH a year ago.
The declining ETH reserves show that traders may want to hold their Ether tokens rather than sell them for other assets, as there could be a supply squeeze for investors looking to enter the Ether market, thus making ETH more valuable.
Cup and handle
A mix of lower supply and higher demand serves as a bullish backstop for the price of Ether. Meanwhile, more evidence for an upside breakout comes from a cup and handle pattern on Ether’s longer-timeframe charts.
Related: Ethereum bears look to score on Friday’s $340M weekly ETH options expiry
The cup and handle is a bullish continuation pattern, comprising a rounding bottom and a descending channel setup, as shown in the chart below. The structure’s profit target is typically at a length equal to the cup’s maximum height.
Considering that the cup’s resistance level is near $4,000, a breakout from there could send ETH to above $6,000, almost double its current price.
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