Ethereum Gas Has Hit its Bottom, Will the Market Hit Bottom and Soar?

[TL；DR]:

Recently, the median of Ethereum Gas has reached a three-year low, with a median of only 6.43gwei on April 27th. Ethereum’s circulation supply has increased by over 10000 units in the past seven days.

Despite significant upgrades in Ethereum, the issue of high gas fees on the mainnet has not been effectively resolved, which has led to the rapid rise of other competitive chains such as Solana.

The current low gas will help the market break free from the current stagnation and may drive Ethereum to a recovery trend, but the short-term weakness remains to be observed.

Introduction

Recently, Ethereum gas fees have significantly decreased, with the median gas reaching a three-year low. Many investors believe this may signal that the market has hit a bottom. This article will delve into this topic in depth.

Reasons for the Rise and Fall of Ethereum Gas

Despite significant upgrades in Ethereum, the issue of high gas fees on the mainnet has not been effectively resolved, which has led to the rapid rise of other competitive chains such as Solana.

Against the backdrop of recent market downturn, gas on the Ethereum chain has also continued to decline, even falling below some L2 levels, and as of the date of writing, this value remains at eight gwei.

Source: etherscan.io

Before exploring the relationship between low gas and market price trends, we must introduce the uses of gas.
Gas, also known as fuel, refers to the computational workload required to perform specific operations on the Ethereum network. Because every Ethereum transaction involves computing resources to ute, it is necessary to pay for these resources to ensure that Ethereum is not vulnerable to spam attacks and does not fall into an infinite computing cycle.

That is to say, gas is the fuel used to perform certain operations multiplied by the cost per unit. Of course, whether the transaction is successful or not, fuel fees must be paid.

On the Ethereum mainnet, gas must be paid in Ethereum’s local currency, ETH. It is worth noting that fuel is usually priced in Gwei, a unit of measurement for Ether. A Gwei is equivalent to one billionth of an Ether coin. Gwei is an abbreviation for giga wei, meaning one billion wei. One gwei is equal to one billion wei, named after Wei Dai, the inventor of b-money (opens in a new tab), and is the smallest unit of Ether.

In short, the security of the Ethereum network benefits from its fuel cost mechanism. Every computation performed in the network requires payment, which effectively curbs the behavior of malicious actors sending spam messages. To ensure the efficiency and security of code ution, each transaction needs to set restrictions on the utable code calculation steps to prevent unintentional or malicious infinite loops and other waste of computing resources.

Source: tastycrypto

The reason why Ethereum’s fuel costs are very high during a bull market is mainly due to the surge in the workload of on-chain interactions. Users are often willing to pay higher tips to improve the chances of transactions being processed to ensure that their bids can surpass those of other users.

In addition, complex smart contract applications may involve numerous operations during ution, resulting in the consumption of a large amount of fuel, which is also an important reason for the increase in fuel costs.

Does Ethereum’s Low Gas Indicate a Market Bottom?

According to Santiment’s monitoring data, the median gas on the Ethereum mainnet has recently reached a three-year low. On April 27, the median gas was only 6.43gwei, and the average transaction fee dropped to below $2.6 per transaction, the seventh lowest daily gas median in the past three years.

Correspondingly, the circulation supply of Ethereum has increased by over 10,000 units in the past seven days, reaching its peak since March 14.

Source: Ultrasound Money

Does this indicate that Ethereum is at a freezing point in market sentiment and is about to experience a reversal and upward trend?

Generally speaking, gas on the Ethereum network often serves as a barometer of sentiment in the crypto market. When market sentiment is high, and investors are generally optimistic about the upward prospects of crypto asset prices, transaction costs often peak. On the contrary, when market sentiment is low and people generally believe that the crypto market is in a downturn, transaction costs often fall to lower levels.

The close relationship between trading costs and market sentiment can reveal the cyclical characteristics of the crypto market. The peak of transaction costs often corresponds to the high point of Ethereum prices, while the trough of transaction costs usually occurs near the bottom of prices. This correspondence provides us with a window to observe the dynamics of the crypto market, which helps us better understand the ups and downs of the market.

As shown in the figure below, in early December 2022 and early October 2023, the average cost of Ethereum on-chain transactions was only below $1.15, and the corresponding ETH price was also at the temporary bottom position at that time.

Source: santiment

In February of this year, due to market hype over the experimental token standard ERC-404, Ethereum’s Gas fees climbed to an eight-month high. However, as ETH prices gradually fell after reaching a high of nearly $4,100 on March 12, market sentiment cooled again. Gas fees continued to ease, reaching their lowest daily level since October 18.

Slightly Sluggish in the Short Term, with Plenty of Room for Long-term Growth

We have noticed that many observers believe the current low gas will help the market break free from its current stagnation. It is expected to drive Ethereum into a recovery market.

The current market environment often influences investors. As Sentiment describes, in an excited environment, investors are very optimistic and believe in going to the moon. However, when prices plummet, they often seek grandiose reasons for a market downturn.

However, this consensus sentiment change is often reflected in transaction costs. As we can perceive from the above chart, when the market is actively prosperous, gas will continue to rise, while when the market enters an undervaluation, it will drop to a very low level.

However, taking a closer look, we need to recognize that the decrease in gas indicates a market downturn, but it is difficult to make accurate judgments on when to reverse and whether it will continue to decline.

If we analyze from a purely technical perspective, Ethereum, like Bitcoin, has already seen its first bearish candlestick after six consecutive bullish days, which is very similar to several historical trends, and there are still expectations of further downturns in the future.

Source: Gate.io

From a financial perspective, there have been frequent rumors in the market that the US SEC is unlikely to pass the spot Ethereum ETF in May, which will dampen the current speculation about the progress of ETFs. According to Lookonchain monitoring, although many funds are continuously entering ETH, there is still a large amount of selling. On April 29, six whales sold over 44,000 ETHs (approximately $1.4 billion) after the market fell.

Overall, although the long-term value of ETH needs to be further released, it may still need to be adjusted in the short term. On the one hand, there is an expectation of loose macro liquidity, and on the other hand, there is a need to wait for the landing of eco innovation, such as the recent hot LRT re-staking track.

It can be foreseen that Ethereum’s low gas will be unsustainable, and the current low-cost environment will encourage user backflow to some extent, which will help prices recover. On the journey towards openness and global permissionless Ethereum, we not only care about the price fluctuations but also will continue to care about the value growth potential of the smart contract market.