Ether (ETH) probably had the best prospects when it entered the July trading session, with a major technical update called EIP-1559 promising to make its native token ETH less common through the network’s first burning mechanism.

But so far for the month, the second largest cryptocurrency by market capitalization has lagged its top rival Bitcoin. A positive correlation was evident on July 13 after the opening bell in New York, when ether fell below $ 2,000 and at the same time hit a two-week low with Bitcoin, while simultaneously falling below $ 32,500.

In fact, the ETH / USD exchange rate hit an intraday low of $ 1,961.10 after falling 3.43%. The pair’s modest downward move is linked to Bitcoin, which has fallen with concern as traders judge the latest US inflation data.

The US consumer price index rose 0.9 percent in June to 5.4 percent year-on-year, marking its highest level since 1991. Merchants sold Bitcoin and other currencies in other electronic devices after the news, indicating concerns that inflation rates would continue rise The US Federal Reserve has withdrawn its quantitative easing policy.

Macroinflation vs. Ethereum Deflation Gim

In particular, the minutes of the June Federal Open Market Committee meeting found that officials are in favor of at least two rate hikes by the end of 2023, assuming the inflation rate is too high for Target 2. The central bank has kept rates below 0.25% since March 2020, which has reduced investor demand for dollars and thus increased demand for so-called assets, safe havens, including Bitcoin.

Ether, which has a one-year correlation to Bitcoin of 0.64 according to Crypto Watch, rose through the course of 2020 and into the first quarter of 2021 due to similar macroeconomic fundamentals.

However, the cryptocurrency has seen better returns than Bitcoin because of its role in a variety of booming crypto areas, including decentralized finance (DeFi), unusable tokens (NFT), and stablecoins.

However, the Ethereum network also encountered technical obstacles in the form of congested bandwidth. An overloaded blockchain has caused miners – the units that process transactions and add them to Ethereum’s public ledger – to raise their fees. In some cases, users are forced to pay more for gas than they are transferring.

The problems seem to be over as Ethereum intends to move its protocol from a miner-friendly but energy-intensive proof-of-work to a faster and cheaper proof-of-stake. In particular, the so-called hard fork in London, which contains five suggestions for improvement, hopes to combat these inefficiencies.

One of the improved protocols called EIP-1559 introduces a new fee structure to make Ether less inflationary.

It suggests burning some of the fees charged at ETH, which creates more deflationary pressure on the cryptocurrency. The upgrade also replaces miners with validators. Ethereum requires every validator to encrypt at least 32 ETH in order to operate its proof-of-stake network.

As a result, a large part of the ETH offer was withdrawn from circulation and is thus scarcer than Bitcoin.

For Konstantin Anissimov, Managing Director at CEX.IO, rising macroinflation offers more upside opportunities for Ether than for Bitcoin. He added that in an anti-inflation narrative, he predicts that the ETH / USD exchange rate will hit $ 3,000.

“As things calmed down, the Federal Reserve increased its balance sheet to more than $ 8 trillion since early 2020 – a significant increase,” he said, adding:

“Depreciation is a way for market investors to amass money at a discount while having confidence in their ability to be an appropriate hedge against inherent inflation.”

And so the accumulation of aether is happening at a rapid rate. According to CryptoQuant, a Korea-based blockchain analysis company, the total ETH reserves on all crypto exchanges more than halved after the price correction in the second quarter of 2021 from $ 4,384 to $ 1,700.

Correlation risk

The correlation of Ether with Bitcoin remains a bottleneck as ETH continues to hit even higher highs. However, Josh Arnold, a financial analyst affiliated with Seeking Alpha, pointed out that ether and bitcoin are sometimes negatively correlated. The correlation efficiency 0.64 is not perfect.

Instead, Arnold focused on Ether’s price chart structure, noting that the cryptocurrency top-out in mid-May 2021 formed a descending triangle pattern after a small period of consolidation.

Arnold noted that ether bulls must hold triangle support to maintain their uptrend or risk losing the market to the bears. He explained:

“A breakout of the descending triangle to the downside would cause Ethereum to hit new lows in 2021 and seek support again, but at much lower levels.”

However, given Ether’s resilience to the bears, Arnold predicts that the cryptocurrency will likely rise higher.