Ethereum's Supply Dynamics and ETF Reversals Signal a Potential Base Formation in 2026

Ethereum's post-Merge transformation has redefined its tokenomics, creating a unique interplay between supply dynamics and institutional demand. As the network transitions from an inflationary to a deflationary model, recent on-chain behavioral shifts and ETF reversals suggest a potential base formation in 2026. This analysis explores how Ethereum's evolving supply mechanics, coupled with institutional buying activity, are reshaping its investment narrative.

Supply Dynamics: From Deflation to Inflationary Pressures

The Merge in September 2022 marked a pivotal shift in Ethereum's supply dynamics. By transitioning to proof-of-stake (PoS), daily issuance plummeted from ~13,000 ETH under proof-of-work to ~1,700 ETH, an 88.7% reduction. This was further reinforced by EIP-1559, which introduced a burn mechanism to remove ETH from circulation. By 2024, Ethereum's inflation rate had dropped to ~0.52%, with periods of high network activity generating net deflation.

However, the Dencun upgrade in 2024 introduced blob transactions, which reduced the proportion of fees burned, leading to a resurgence in supply inflation. As of mid-2024, Ethereum's circulating supply had increased for 72 consecutive days. Despite this, the long-term deflationary trajectory remains intact, as network usage and Layer-2 adoption continue to drive demand. For instance, over 60,000 active RWA wallets and growing TVL in rollups like Arbitrum and Optimism highlight Ethereum's role as a foundational infrastructure for decentralized finance.

ETF Reversals: From Outflows to Institutional Inflows

Ethereum's ETF landscape has seen significant volatility. In 2025, spot ETFs faced $853.9 million in outflows, driven by broader market corrections. Yet, by early 2026, a reversal emerged. On January 14, 2026, spot ETH ETFs recorded record inflows of $175 million, marking their fourth consecutive day of positive flows. Weekly inflows reached $474.6 million, outpacing new supply entering the market. This surge coincided with Ethereum balances on exchanges hitting seven-year lows, signaling reduced "ready-to-sell" supply. The SEC's potential approval of staking for spot ETFs could further amplify demand. If BlackRock's staked Ethereum ETF is approved, it could create a new uptrend, with a potential higher low forming around $3,000. Analysts argue that staking ETFs would allow traditional investors to earn yield (currently ~2.8% APY) while holding Ethereum, further aligning institutional interests with Ethereum's long-term value.

Institutional Buying: A Catalyst for Base Formation

Institutional adoption has become a dominant force in Ethereum's price action. Over 29% of the total ETH supply is now locked in the native staking contract, with firms like 21Shares, Bitwise, and Grayscale offering staked Ethereum ETFs. Bitmine has staked over 1 million ETH, reflecting confidence in the asset's utility.

On-chain data also reveals a shift in behavior. While Ethereum transactions increasingly occur on Layer-2 networks, reducing mainnet fee revenue, institutional buying has offset this trend. For example, corporate entities like BitMine Immersive Technologies accumulated 3.86 million ETH in 2025, valued at $112 million, underscoring broader institutional confidence. This contrasts with retail-driven leverage-based rallies, which often lack sustainability.

Base Formation: A Convergence of Factors

The convergence of Ethereum's supply dynamics and institutional demand suggests a potential base formation in 2026. Key factors include:
1. Reduced Supply Inflation: While short-term inflationary pressures persist, Ethereum's supply remains below pre-Merge levels, and long-term deflationary mechanics are intact.
2. ETF-Driven Demand: Record inflows into spot ETFs and the potential approval of staking ETFs are creating organic demand, reducing exchange liquidity.
3. Institutional Staking: Over 29% of ETH is now staked, with institutions prioritizing yield and security over speculative trading.
4. Network Utility: Growing TVL in Layer-2 rollups and Ethereum's role in tokenization (supported by firms like BlackRock and Fidelity) reinforce its foundational value.

Financial experts like Tom Lee forecast Ethereum reaching $7,000 by early 2026, citing these structural shifts. If realized, this could mark the formation of a robust base, supported by both on-chain fundamentals and institutional adoption.

Conclusion

Ethereum's post-Merge supply dynamics and ETF reversals are creating a compelling case for base formation in 2026. While short-term inflationary pressures exist, the network's deflationary narrative remains intact, bolstered by institutional buying and evolving use cases. As ETF inflows and staking adoption accelerate, Ethereum's trajectory appears increasingly aligned with its role as a foundational asset in decentralized finance and tokenization. Investors should closely monitor on-chain metrics, SEC developments, and Layer-2 growth to gauge the strength of this emerging base.