Could EIP-1559 Make ETH Deflationary in 2021? (1/25/21 Forecast)

By Biz Wisdom | Crypto Daily FX | 23 Jan 2021

Ethereum rallied on Friday, initially falling down to the $1,050 level before turning around and catching a bid, ending the trading session and week on a positive note around the $1,240 area. This is a neutral candle as ETH continues to find buyers, yet it appears they are catching a falling knife as ETH continues to put in lower highs and lower lows (in the short-term). This leads me to believe that we're going lower next week and possibly thereafter until ETH finds a bottom. 4df3baeb2a543de50fd5c5a9787d9099f5dbd3aa14b879ddc0912bd360e369ea.png

(January 22, 2021 7:30 PM EST)

A picture is worth a thousand words so if you've missed my previous Ethereum analyses recently, see above for my primary view of my Ethereum daily price forecast going forward. It's a rough sketch and pay no mind to the timeframe but rather the price pattern, which I think coincides well with the recent price action, support and resistance levels, and Elliott Wave patterns.

EIP-1559: Ethereum Deflationary by late 2021?

Tonight I want to analyze something different: Ethereum EIP-1559. There are a lot of misconceptions on EIP-1559 and its ramifications. For those of you who don't know, EIP-1559 is an "Ethereum Improvement Proposal" proposed by ETH Co-Founder Vitalik Buterin, among other developers, to streamline the way Ether transaction fees are presented to users and manage Ethereum's fees. EIP-1559 would make Ether fees predictable and introduce an Ether burn mechanism by scrapping the current auction-style fee system, introducing an algorithmically-determined base cost known as the "BASEFEE." The BASEFEE institutes a uniform fee across all Ethereum-centric platforms and services which fluctuates based on network activity. This would eliminate fee discrepancies between ER-20 wallets, protocols, and exchanges. However, EIP-1559 includes an option for users to tip miners to incentivize faster-processed transactions. Secondly and what will likely have a much more significant impact on Ethereum's price is the introduction of burning Ether. With this function implemented by EIP-1559, Ethereum will burn the BASEFEE, meaning the vast majority of Ether used to process transactions is removed from existence as opposed to being given to network validators (miners, stakers, etc.). This would potentially mitigate if not exceed Ethereum's supply issuance and inflation which currently has no hard cap but increases in difficult and decreases in reward over time. For now, the details remain unclear, but if this EIP is able to reduce or even negate Ethereum's inflation, then ETH's macro fundamentals will become much more firm, like Bitcoin's, with ever-increasing demand and a limited (or even deflationary) supply. The idea is this will encourage the steady deflation of Ether, which, in turn, should help bolster prices over time.

EIP-1559 is anticipated to go live sometime after the Berlin hard fork, which could be relatively soon. In the meantime, the CME Ethereum Futures product is set to go live in February, following in Bitcoin's footsteps but this time in a rapidly maturing market being rapidly adopted by institutional investors, banks, university endowments, hedge funds, and more. When BTC futures went live, BTC was a much younger and less developed asset and market on a parabolic retail-driven bull run. This time, ETH is trading at a 15% discount of its ATH and is picking up steam as it rolls out its layer-2 scaling solution ETH 2.0.

It's expected that EIP-1559 will be implemented sooner than ETH 2.0 and possibly go live as early as later in 2021.

Conclusion.

ETH is going higher in the medium-longer term, it's just a matter of buying near the ATH or waiting for a pullback (like this one). For anyone 'brave' enough to buy now or even wait a few days to buy lower, they will be rewarded. Anyone too scared to buy when there's blood in the streets will likely FOMO in later after ETH breaks above $1,500 and will pay a premium of $400+ per ETH for buying during a sustained short-term uptrend. Why not buy more ETH at a lower cost basis earlier to start the countdown for long-term cap gains? Smart money has been buying since early 2019 and will continue to accumulate during this pullback. Will you?

Simple strategy: Buy the dips and earn ETH however possible. Otherwise, DCA on a weekly/biweekly basis, whatever you can afford.

Historical charts and models all point to 2021 being substantially better for crypto and ETH in particular, although ETH has outperformed BTC in 2020 so really it's no surprise there.

Support: Look for local support at the 38.2% fib around $1,000. Below that, look for support at my primary support at the 50% fib around $850 which is further supported by the rising 50 Day EMA.

Resistance: $1,400 remains immediate resistance until we get an impulsive candle breaking higher. Then, ETH should look toward $1,500 and then $2,000. "Longer"-term, I think a $5,000 - $10,000 ETH by 2022-23 is not only realistic but likely given crypto's adoption, ETH 2.0's launch, and the fiat currencies' rampant inflation.