Ethereum’s (ETH) supply has surged back to pre-Merge levels, raising concerns about its potential impact on the cryptocurrency’s price and investor sentiment. This development comes as Ethereum’s supply has now reached over 120.5 million ETH tokens, an increase that might stall ETH’s recovery prospects, especially in relation to Bitcoin (BTC).

Pre-Merge Goals and Current Supply Surge

The Merge, which occurred in September 2022, transitioned Ethereum from Proof-of-Work (PoW) to Proof-of-Stake (PoS), with several goals in mind. These included enhancing energy efficiency, reducing Ethereum’s issuance (supply), and preparing the network for future scalability upgrades. However, Ethereum’s recent supply dynamics are showing a different trend than anticipated. According to UltraSound Money data, over 46,000 ETH have been added to the supply in the past 30 days alone. This uptick is largely attributed to the Blob upgrade that took place in Q1 2024, which lowered Layer-2 (L2) transaction costs and, in turn, reduced ETH burn rates.

Impact on ETH/BTC and Market Sentiment

Since the Merge, ETH has significantly underperformed against BTC. The ETH/BTC trading pair, which measures ETH’s price relative to Bitcoin, has dropped more than 65%, signaling that investors have been more inclined to invest in Bitcoin rather than Ethereum. Crypto analyst Benjamin Cowen previously predicted that this supply increase could continue to drag down ETH’s performance relative to Bitcoin, limiting any significant gains for Ethereum in the near future.

The introduction of L2s and the Blob upgrade has reversed the deflationary effects on Ethereum that were expected post-Merge. Despite efforts to scale Ethereum through L2 adoption and higher ETH burn rates, the increase in supply could affect short-term sentiment around ETH. This supply surge might also lead to a prolonged ETH/BTC price imbalance, limiting ETH’s upward momentum.

ETH’s Price Outlook Amid Macro Uncertainty

Ethereum’s price could face further challenges due to the current macroeconomic uncertainty. Analyst Cryp Nuevo has pointed out that ETH could potentially retrace further to fill a price imbalance around $3,000, based on a recent candlestick pattern. This forecast suggests that ETH might experience more downward pressure before any significant recovery, especially if broader market conditions continue to weigh on altcoins.

Will ETH Recover?

While the supply issue may dampen Ethereum’s near-term outlook, some analysts remain hopeful that the broader developments in Ethereum’s ecosystem, including increased adoption of L2 solutions and scaling efforts, could help fuel future growth. Additionally, Ethereum’s transition to a more sustainable network through PoS could continue to make it an attractive asset in the long term.

However, for now, Ethereum’s supply growth to pre-Merge levels, combined with the lack of strong price action, may cap ETH’s recovery potential against Bitcoin and hinder bullish sentiment in the short run.

Conclusion

Ethereum’s rising supply is presenting a challenge to its market performance, especially compared to Bitcoin. The recent surge in supply, driven by L2 scaling and reduced ETH burn rates, could dampen ETH’s potential for short-term recovery. As the broader market faces uncertainty and ETH’s relative underperformance continues, Ethereum may struggle to regain its upward momentum, leaving investors to closely monitor how future upgrades and macroeconomic conditions play out.

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