Ethereum’s ‘Bullish Self-Reinforcing Cycle’ Commences as Daily Transfers of ERC-721 Tokens Reaches ATH

Ever since falling to nearly $1,725 on July 20, Ether has been surging, climbing to almost $3,270 on Wednesday, a level last seen in May during the sell-off. 19 out of these last 22 days, ETH has printed green candles.

As of writing, ETH/USD is trading above $3,259, down about 26% from its all-time high three months back.

ETHBTC is also on an uptrend this month, currently around 0.07, with next resistances at 0.0735, 0.077, and the May high of 0.82. After this comes Jan. 29, 2018, a high of 0.1227 on Coinbase.

“A bullish self-reinforcing cycle seems to have developed in ETH,” stated digital assets traders, QCP Capital.

In the options market, “the frenzied buying of calls in both BTC and ETH across the curve has resulted in a short squeeze (in both spot and vols),” which is expected to be from “funds and large speculators making large topside bets, buying BTC strikes up to 80-100k, and ETH strikes up to 8-10k from as early as September 2021 out to June 2022.” BTC -4.21% Bitcoin / USD BTCUSD $ 42,651.78
Volume 43.13 b Change -$1,795.64 Open $42,651.78 Circulating 18.83 m Market Cap 802.94 b
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It further noted that the ETH spot rallied thanks to EIP-1559 and reignited interest from speculators, with NFTs leading the charge.

ERC-721 Transfer Count

Source: CoinMetrics

The trading volume in NFTs has been surpassing every other ETH transaction venue, including DeFi and Stablecoin flow, which has led to a greater burn rate on ETH, spurring further price appreciation, which in turn encourages more interest and speculation, creating a feedback loop.

This mania in NFTs and digital collectibles can be seen in daily transfers of ERC-721 tokens, the standard for Ethereum-based NFTs, which is near an ATH.

So far, in less than a week, 27,270 ETH worth $82.35 million has been burned ever since EIP-1559 went live as part of Ethereum's London hard fork on August 5th.

With this new design of Ethereum’s transaction fee mechanism, where fees are composed of a “base fee” which is required for a transaction to be included in the block and burned and a “priority fee,” which is a voluntary tip, ETH’s net inflation rate has reduced.

Since the release of EIP-1559, the net ETH issuance per block has been between 1-2 ETH, and in some blocks, it has even turned negative.

While creating a better UX for transaction fees, EIP-1559 also creates a new dynamic for network congestion which leads to high gas prices and now post upgrade will result in burning a large amount of ETH, a positive for supply economics that will further help push up the prices.

This upside move in ETH and overall crypto moving higher has been seen as positive, but QCP Capital remains “wary of potential downside risks on the horizon,” as well. Last month they had called for a rally on the back of the EIP-1559 mainnet implementation and then a larger Q4 sell-off on the US Federal Reserve’s tapering.

Just today, Richmond Fed President Thomas Barkin said tapering could take a few months as the focus is not on the calendar but on more improvement in the job market, particularly further increase in employment to population ratio.

But QCP remains uncertain of how crypto prices would be impacted by macro forces given the idiosyncratic divergences between BTC and macro assets such as gold; their 1-year correlation is currently approaching 3-year lows.

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