Expert Commentary

Crypto Deflation & Central Bank Angst

It’s a weird, weird world, but there’s one element I understand.

Browsing the news this week I came across this headline:

“Ethereum supply flips briefly into deflation as gas fees spike.”

This was the title of an 11 August article posted on cointelegrpah.com. Curious, I started to read but very quickly felt that I had been transported to another planet. I don’t know if the crypto currency world deliberately tries to make its “economy” sound opaque and complicated, or whether it’s just me, as an old fart, who fails to grasp the lexicon of millennials, but here’s a gist of the content:

“The network has come under heavy load over the past couple of days, which has resulted in a lot more gas being burnt. As of 22:00 UTC, ETH Burn Bot recorded an instance when 545 Ether (ETH) was burned within a one-hour period. With Ethereum issuance reported at 532 ETH per hour, it resulted in the asset seeing deflation of minus 13 ETH for that brief period.”

Nope. Me, neither!

Nevertheless, with a little bit of research I find that “gas” refers to the unit that measures the amount of computational effort required to execute specific operations on the Ethereum network. This, apparently, is key to the deflationary property of Ethereum.

I will leave the technicalities of it to the geeks, but the main point is that Ethereum and crypto currencies have this element of constrained supply which makes them, essentially, deflationary. In other words, theoretically, if the supply of a currency is limited, its value will go up in terms of what it can buy in goods and services. Goods and services prices fall, relative to the value of the currency. Compare that to fiat currencies, where supply is unlimited. In this situation, the value of the currency falls in terms of what it can buy in terms of good and services. Goods and services prices rise, relative to the value of the currency.

This is why central banks around the planet are now ganging up against the crypto world. Crypto currencies are exposing government fiat currencies as being inherently inflationary. Fiat currencies had their 50th birthday this week, marking half a century since President Nixon ended the U.S. dollar’s link with gold and the end of the Bretton Woods monetary system. Since then, the biggest debt bubble in history has been created.

The jury is still out as to whether crypto currencies will survive and thrive as deflationary currencies, or whether, as some believe, the constrained supply element makes them one giant Ponzi scheme. Thankfully, we don’t have to worry about that. As always, all we do is allow the Elliott waves to guide us as to the potential direction of value. In that regard, the chart below shows that Ethereum still looks like it will continue to appreciate in U.S. dollar terms. But, please make sure to check out www.elliottwave.com to keep on top with how that develops!


Ethereum Crypto Currency Value in US Dollars