ETF and Staking Tighten Supply: Is a New ETH Rally Brewing?

A short squeeze ignited the rally, but whether it continues depends on sustained inflows of new capital

Original title: Ethereum Supply Tightens as Staking and ETF Demand Reduce Liquid Float
Original author: Itai Smidt, Investing.com

Editor's note: In late August, ETH staged a rare strong rally for the year. From Aug. 19 to 21, ETH rose from about $1,916 to an intraday high of $2,546, significantly outperforming BTC over the same period. Since then, the price has not quickly retraced but has consolidated at high levels around $2,500, and the ETH/BTC ratio has also rebounded notably from its mid-year low.

The rally was initially sparked by improved risk appetite and a short squeeze, but the article's real focus is on the supply-demand shifts behind the move: U.S. spot Ethereum ETFs saw net inflows of nearly $700 million in a single week, about 42 million ETH are now staked, exchange balances have dropped about 15% since early June, and corporate treasuries continue to accumulate. These forces combined are compressing the amount of ETH available for immediate sale.

Author Itai Smidt argues that ETH's liquid float has tightened significantly since June, and new capital entering a thinner market could produce greater price elasticity. However, declining supply does not guarantee price increases; this rally also includes substantial short covering and leveraged funds, and the sustainability of ETF inflows remains unverified.

Therefore, what the market needs to confirm next is not just whether ETH can break above $2,550, but also whether institutional funds can continue to flow in, whether ETH/BTC can hold its rebound, and whether staking and corporate holdings continue to absorb new supply. These variables will determine whether this rally is a rapid short squeeze or the beginning of a relative repricing of ETH.

Below is the translated original article:

In August, ETH finally shook off its relative weakness that had persisted for most of the year.

From Aug. 1 to 21, ETH rose from about $1,867 to a high of $2,545.88, a cumulative gain of about 36%. Most of the gains were concentrated from Aug. 19 to 21: ETH rose nearly 20% in three days, while BTC rose about 7% over the same period, marking the first time since 2026 that ETH has clearly outperformed BTC in a major rally.

The market then entered consolidation at high levels. ETH repeatedly attempted to break above $2,500 to $2,550 but faced selling pressure each time. As of the original publication, the price was still trading around $2,450, less than 4% below its recent high. This suggests strong profit-taking pressure above $2,500, but the market has not yet clearly fallen back to its pre-rally range.

The author believes the key to this rally is not just the price increase. ETF inflows, increased staking, declining exchange balances, and corporate treasury accumulation are happening simultaneously, further reducing the tradable supply compared to mid-year.

Under this structure, even limited new capital could have a larger price impact. But this logic still needs to be validated by capital flows and price action.

Short squeeze ignites rally, but not enough to confirm trend reversal

In the first seven months of this year, ETH consistently underperformed BTC. By mid-year, ETH's year-to-date decline was about 32%, while BTC's was about 11%, a relative performance gap of more than 20 percentage points.

The prolonged underperformance also led to a buildup of large ETH short positions. The original article states that the mid-August rally was amplified by a short squeeze of about $2.9 billion; on Aug. 23-24, about $60.61 million in ETH short positions were still liquidated.

From a market mechanism perspective, a short squeeze occurs when rising prices force short covering, and the covering trades further push prices higher. It can create sharp short-term rallies but cannot alone prove that fundamentals or long-term trends have changed.

A relatively positive aspect of this rally is that ETH did not immediately give back most of its gains after the rapid rise. The pullback from their respective highs was similar for BTC and ETH, meaning ETH's relative advantage has been preserved for now.

The ETH/BTC ratio also rebounded from a June low of about 0.025 to around 0.033, a cumulative rebound of about 32%. This change suggests the market is starting to trade a valuation repair of ETH relative to BTC, but the current ratio is still far below the highs of the previous cycle.

The author views 0.033 as a key level to watch. If ETH/BTC can break above and hold that level, the capital rotation logic may strengthen; if it falls back below 0.030, it would suggest the relative strength is still mainly driven by short covering.

ETF weekly inflows near $700 million, institutional demand rebounds

ETFs are the most easily quantifiable part of new ETH demand in this rally.

For the week ending Aug. 21, U.S. spot Ethereum ETFs saw total net inflows of about $697 million, the highest weekly level since 2026; on Aug. 21 alone, net inflows were about $185 million. Over the same period, Bitcoin spot ETFs saw net inflows of about $1.918 billion, with the two product categories absorbing a combined $2.62 billion.

Daily data shows Ethereum ETFs had net inflows for five consecutive trading days from Aug. 17 to 21, at about $30.85 million, $71.47 million, $189 million, $221 million, and $185 million respectively, indicating that funds were not concentrated in a single trading day.

The author concludes that institutional demand has rebounded. However, ETF inflows and ETH's rise occurred simultaneously, which only shows a strong correlation and is not enough to attribute the entire rally to ETF buying. Improved risk appetite, short covering, and leveraged position expansion are also amplifying price volatility.

The concentration of funds also warrants caution. The original article states that on some trading days, a single issuer absorbed about 78% of Ethereum ETF net inflows. Dominance by a few large funds can push prices higher in the short term, but it also means the stability of buying depends on a limited number of allocators.

The next potential catalyst comes from ETF staking. If regulators allow U.S. spot Ethereum ETFs to participate in staking, these products could not only gain ETH price exposure but also share in network staking rewards, improving their total return attractiveness relative to BTC ETFs. But until formal approval, this remains a policy expectation and cannot be counted as confirmed demand.

42 million ETH staked, exchange balances down 15%

Compared with the fast-changing ETF flows, the adjustment in ETH's supply structure may have more long-term significance.

According to data cited in the original article, about 41.7 million to 42 million ETH are currently staked, accounting for about one-third of total supply. Meanwhile, the amount of ETH held on exchanges fell from about 7.7 million in early June to 6.54 million by mid-August, a decline of about 15%, equivalent to 1.16 million ETH leaving trading platforms.

Staking refers to holders committing ETH to the Ethereum proof-of-stake network to participate in validation and earn rewards. Staked ETH is not permanently locked, but withdrawal and sale require a certain process, and its immediate liquidity is usually lower than assets held on exchanges.

A decline in exchange balances does not mean these ETH will never be sold, but it can reduce the supply available for immediate trading. When ETFs, corporate treasuries, and other large buyers enter simultaneously, thinner market depth can amplify price movements.

The author believes this can partly explain the difference in gains between ETH and BTC in this rally: about $697 million in weekly Ethereum ETF net inflows corresponded to a nearly 20% gain in ETH, while larger Bitcoin ETF inflows produced relatively limited short-term gains.

But this comparison cannot rule out differences in leverage, market depth, and short positions. More precisely, supply tightening may have increased ETH's sensitivity to new demand, rather than solely determining its gains.

After Ethereum completed the Merge and transitioned to proof-of-stake, new issuance has been significantly lower than during the previous proof-of-work era, reducing long-term dilution pressure. The original article argues that ETH's supply structure is now more favorable than before, but rising staking cannot simply be equated with "supply disappearing": a significant portion of staked assets may come from long-term holders with low selling intent.

In contrast, declining exchange balances are more indicative of holders' active choices, and are therefore viewed by the author as a more meaningful supply indicator.

BitMine holds nearly 5% of ETH, structural buying with concentration risk

Corporate treasuries are becoming a new variable in ETH's demand structure.

BitMine disclosed that as of Aug. 24, the company held 5.8476 million ETH, an increase of 32,447 from the previous week, with an average cost of about $2,440; of these, about 5.0673 million are staked. Based on the company's cited total supply of about 120.7 million ETH, its holdings represent about 4.8%.

This scale is close to 90% of the exchange ETH balance mentioned in the original article. A single company's holdings and purchase pace can already influence ETH's marginal supply and demand.

BitMine calls holding 5% of total ETH supply its "Alchemy of 5%" goal. According to the company's disclosed holdings, it is already close to this target. However, corporate plans cannot be directly treated as confirmed buying; future purchases still depend on equity financing capacity, company valuation, and market conditions.

Corporate treasuries can provide structural demand with relatively low price sensitivity, but they also increase holding concentration. If the company's financing conditions deteriorate, its stock price comes under pressure, or its treasury strategy changes, concentrated holdings could turn into potential supply.

Therefore, BitMine's accumulation is positive for ETH's short-term supply-demand balance, but its long-term impact is not one-sided. The market needs to watch not only the size of its purchases but also the funding sources, staking ratio, and balance sheet capacity.

Can a new rally be confirmed? Three key validations

After the rapid rise, ETH's short-term technical indicators have become clearly overheated.

According to a combination of data, ETH's daily Relative Strength Index (RSI) once rose to the 75-85 range, above the 70 level typically used to signal overbought conditions. The MACD has flattened at high levels, indicating that the price remains strong but new momentum is fading. The Fear and Greed Index also rose from 46 on Aug. 19 to 73-74, with sentiment quickly shifting from cautious to greedy.

The $2,500 to $2,550 area is currently the most obvious resistance zone. ETH has repeatedly attempted to break above this range recently but has faced selling each time; the more important consolidation zone below is around $2,330 to $2,360.

Supply tightening provides ETH with better price elasticity, but it does not guarantee a one-sided continuation. To judge whether a new trend can form, three variables need to be watched:

First, whether ETFs can maintain net inflows. The author views weekly inflows of $300 million as a reference level; if funds continue to flow in, the probability of ETH retesting $2,550 may rise. If ETFs quickly turn to net outflows, the sustainability of August's buying will be questioned.

Second, whether ETH/BTC can hold above 0.033. If the relative ratio continues to strengthen, it would suggest the market may be shifting from a dollar-price rebound to a sustained repair of ETH relative to BTC.

Third, whether the price can break above $2,550 and hold the $2,330 to $2,360 support. An upside breakout would strengthen the supply-tightening trading logic; a break below the consolidation zone would indicate that leverage and short covering may still be the main drivers of this rally.

ETH's supply structure has indeed tightened further compared with June, and ETFs and corporate treasuries have brought new demand. But until there is an effective breakout above $2,550, a "new rally" remains a market judgment awaiting validation.

[Original link]