An End To Ether Mining Could Be Exactly What Ether Needs

An End To Ether Mining Could Be Exactly What Ether Needs
Jonathan Hobbs, CFA

almost 2 years ago5 mins

  • Ether mining is set to end this year, as Ethereum becomes a proof-of-stake blockchain.

  • The switch will make Ethereum more secure and environmentally friendly, while also leading to a scarcer supply of ether.

  • And from a technical standpoint, the ether price has responded well recently as Ethereum moves towards PoS.

Ether mining is set to end this year, as Ethereum becomes a proof-of-stake blockchain.

The switch will make Ethereum more secure and environmentally friendly, while also leading to a scarcer supply of ether.

And from a technical standpoint, the ether price has responded well recently as Ethereum moves towards PoS.

Like everything else in crypto, ether is trading well below its 2021 highs right now. But ever since a particularly nasty price correction in January, it’s rallied about 40%. And for my money, that might have something to do with its plan to end mining once and for all. Let’s look into why, and whether this shift might drive its price higher still…

What’s the alternative to mining?

Like bitcoin, Ethereum currently uses a “proof-of-work” (PoW) system to secure its blockchain. In other words, miners solve complex cryptographic puzzles to validate blocks of transactions, which they can then attach to the blockchain. And for their trouble, they earn all the ether they successfully mine.

But under “proof-of-stake” (PoS), miners and mining are a thing of the past. Instead, there are “validators” who validate each block of transactions according to how much ether they “stake” – that is, how much they put up as collateral – and earn transaction fees for every block of transactions.

When is Ethereum moving to PoS?

Ethereum’s move to PoS has been in the works for a while. Back in December 2020, ether holders started staking a minimum of 32 coins on the “Beacon Chain” – a separate PoS blockchain that runs in parallel to the current PoW chain.

Since then, around 10 million ether – roughly 8% of circulating supply – have been staked on the Beacon Chain. And now, the finish line is finally in sight. According to Ethereum’s website, it’s planning to merge the Beacon Chain with the current PoW blockchain sometime in the second quarter of this year. At that point, Ethereum will become fully PoS.

Why is Ethereum moving to PoS?

For one thing, PoS is a much greener alternative to PoW. It uses about 99% less electricity than PoW, which institutional investors with environmental, social, and governance mandates should welcome. Their renewed interest alone could give the asset’s price a serious boost.

The switch could also make the Ethereum network even more secure. With the current PoW mechanism, you’d need more than half the network’s computing power to overcome the mining network and reverse a transaction. That’s no easy feat, but it is technically possible. With PoS, you’d need to own more than half the total ether staked to outbid the validator network. What’s more, you’d then have to literally put your entire investment at stake to commit the crime. And if you got caught, you’d lose every scrap.

PoS is also likely to limit overall supply, which would help prop up ether’s price in the long term. In fact, according to IntoTheBlock, the issuance of new ether could drop by as much as 90% once Ethereum moves to PoS. See, mining currently adds around four new ether to the total supply every 12-14 seconds. That’s because the reward for miners needs to be high enough to incentivize them to shell out for expensive mining equipment and high electricity bills. But staking is far less resource-intensive than mining, which means PoS validators don’t need to be incentivized by the potential for big ether rewards.

That’s not the only reduction to supply: around 250,000 ether’s worth of miner transaction fees have been “burned” out of circulation each month since the network’s EIP-1559 upgrade last year. Dubbed the “London hard fork,” the upgrade was put in place to make Ethereum’s fees more predictable. And the “fee burning” is only going to continue when PoS kicks in. Between that and the drop-off in new ether issuance, the ether supply could actually experience a net decrease every year. If that pans out, it would make Ethereum even more deflationary than bitcoin, which currently has a yearly supply increase of about 1.6%.

Finally, the downward pressure from sellers should start to wind down following the switch. Ethereum miners earn about 15,000 ether every day, but they have bills to pay like any other business, which means they need to sell a portion of those holdings to cover expenses. One study by North Rock Digital suggests that if 85% of miner ether revenue goes toward covering expenses, they must be selling around $40 million worth of ether a day (assuming a $3,000 ether price). But once Ethereum switches to PoS, validators won’t have such heady bills to pay, and they’ll instead be able to use the ether to earn a yield.

So should PoS convince you to invest in ether?

It’s impossible to say for sure whether PoS is going to support ether’s price in the long term, but the fundamentals are certainly promising. In fact, I can think of three charts that seem to underscore the positive fundamentals we’re seeing.

1. The amount of ether on exchanges

The chart below shows the amount of ether being held on crypto exchanges. Notice how this has continued to drop, suggesting more and more coins are being used for long-term holding and staking.

Total ether held on crypto exchanges (purple line) vs ether price (black line). Source: CryptoQuant.
Total ether held on crypto exchanges (purple line) vs ether price (black line). Source: CryptoQuant.

2. Ether’s trading above its 50-day moving average

Ether is trading above its 50-day moving average, which now has an upward slope for the first time since the crypto market peaked in November last year.

Ether price in US dollars. Chart drawn with TradingView.
Ether price in US dollars. Chart drawn with TradingView.

That’s a sign of changing momentum. And like bitcoin, the cryptocurrency has been in a giant consolidation pattern for over a year, with higher lows on price ever since. Provided it can maintain this higher low structure, the future looks bullish.

3. The price of ether versus bitcoin

Here’s where things get particularly interesting from a technical standpoint. If we look at the ether price versus bitcoin, we can see a similar setup in play: it’s also above the 50-day moving average, and is showing a similar consolidation pattern of successive higher lows.

Ether price in bitcoin. Chart drawn with TradingView.
Ether price in bitcoin. Chart drawn with TradingView.

As always, much will depend on how crypto responds in the overall macro environment, which – let’s be honest – isn’t too good for riskier assets right now. But if bitcoin can play ball here, and the move to PoS runs smoothly, the ether price could certainly do the same.

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