An Inflation Based Theory of Ethereum’s Price

For months now we have been noticing some striking similarities between bitcoin’s price up to around 2015 and ethereum’s price action so far.

One way to explain the similarities is based on waves of adoption and that might still partly apply because bitcoin was stupendously innovative, as is eth.

Both are quite complex to get your head around when first coming across them, both have a prior reputation of sorts with eth called a scam by bitcoiners for years and still called centralized and other misleading statements. For bitcoin, of course, it is the old ponzi scheme and so on.

As they are sufficiently similar, yet very different due to smart contracts, the suggestion that they go through the same waves of adoption is probably reasonable, but somewhat subjective.

A far more objective similarity is how bitcoin up to 2015 and ethereum until now share in many ways the same inflationary story.

The comparison here can’t be perfect because at the beginning there were zero bitcoins, while for eth there were some 70 million sold in an ICO. Inflation for bitcoin, thus, begins at 100%.

That means we have to start on the reverse. Currently, bitcoin’s inflation is at around 4%. Prior to its halving in 2016, it was about 8%. Prior to its halving in circa 2011-2012 it was somewhere around 16%.

For bitcoin, such halvings are automatic as ordered by the code, and their effect on price is notable. In 2011, for example, it reached a high of around $20. After the halving it then rises to $270 in March 2013, and ends that year as it enters 2014 at around $1,200.

Price then crashes and falls below the price level of a year ago for the first time. A divergence is further seen between price levels and the number of bitcoin transactions.

For ethereum, the time-line is a bit more condensed. It rises to $20 in 2016, then a year later in May 2017 it reaches $420. Until that point, its inflation rate was around 16%.

In September 2017, its inflation rate is nearly halved from around 5eth per block to 3eth per block. Price then shoots up significantly in November to eventually a high of $1420.

That brings it to the current inflationary rate of around 7%. Same as for bitcoin in 2015 and 2016 before the halving.

Just as then, eth’s price likewise is behaving in a pretty similar way. Falling recently for the first time below the price level it had a year ago and seeing recently a significant divergence between eth’s price and transaction volumes.

Something which might suggest, at least on observation and while considering the comparison is necessarily not perfect, that the level of inflation might have considerable effect on price and its behavior.

Eth is discussing a halving of sorts again to 2 eth from the current 3 eth per block, which would bring it within bitcoin’s inflation levels of 4%, with it potentially going in as early as this October.

How price will behave then, remains to be seen, but so far it does appear that inflation has been very much a factor in price actions.

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