While Ethereum updates its all-time high day after day, there are numerous things happening in the background that might cause so-called supply shock. Some analysts agree that it is already here and is affecting the asset price.
How supply shock affects the market
A supply shock is an unexpected, rapid decrease in the supply of a product that directly impacts its price. There are two types of supply shock: negative and positive. In the case of Ethereum, the market is facing a negative supply, which causes asset prices to increase rapidly. In case of a positive supply shock, the price of a product decreases.
The main reason behind Ethereum's supply shock is the implementation of the fee-burning mechanism that has already led to the burning of more than 800,000 ETH coins. With the demand for the coin continuously rising and issuance progressively slowing down, the market faces a supply shock.
More reasons behind the supply shock
While fee burning directly impacts the available supply, indirect factors are also changing the position of Ethereum on the market. Additional factors include the number of coins in staking contracts, coins locked in DeFi and exchange supply flow.
Currently, more than 8.2 million Ethereum are being locked in the DeFi contract, which can be considered an illiquid supply that cannot be used urgently by the market. At the same time, more than eight million coins are also locked in staking contracts.
$ETH continues to hit new all-time highs.— IntoTheBlock (@intotheblock) November 8, 2021
A supply squeeze seems more probable since:
- The staking contract hit 8.2m ETH
- +8m ETH locked in #DeFi
- Since October 1st, more than 860k ETH left centralized exchanges, decreasing the supply available.https://t.co/s9gSaI5JGF pic.twitter.com/EtPQwUAm9h
Exchange flows are also not in favor of the supply, with more than 800,000 Ethereum coins that have been moved away from exchanges since the beginning of the month.
All factors combined put Ethereum in a tough spot in terms of available liquid supply. There are still plenty of coins available on the market even for large retail traders. But at the current rate of supply change, markets might face problems with liquidity relatively soon.