Many crypto users and investors haven’t been thrilled with Ethereum’s token (Ether) performance over the last two years. With many positive drivers, like successful technology upgrades, scaling solutions, restaking, and the recently approved spot Ether ETFs, most expected these factors to significantly increase demand for the largest smart contract platform’s token. But ether’s price hasn’t delivered.

Can we really point the finger at Ethereum, though? Not really. The overall market has recently been choppy. Sentiment is shaky with mixed expectations – despite rate cuts and regulatory support, the market seems distracted by recession fears, rumors of large Bitcoin sales by Mt. Gox creditors and the U.S. government, and the market’s failure to benefit from the positive economic backdrop. Other looming uncertainties such as the fear of an economic slowdown and geopolitical tensions have only further waned the appetite of investors.

But if we look behind the gloom, there’s another story. Ether’s price might be falling, but its liquid supply is shrinking. If demand picks up next quarter, we could see a supply crunch that pushes prices higher. Here’s why:

Media outlets like FXStreet and AMBCrypto were quick to mention the “significant” supply glut in ether exchange reserves, warning it could ramp up selling pressure and drive prices further down.

This is because a glut (or an oversupply in the market) can put downward pressure on prices, potentially causing a sell-off if enough investors panic and start dumping their crypto holdings to cut losses. We saw this when the German government shook the market by suddenly selling its $3 billion worth of seized bitcoin just a few months ago.

But if we zoom out, this “glut” is less than 1% of exchange reserves, and in reality, these reserves still remain near their all-time lows – 18.7 million ETH, or 15% of the total supply.

Spot ether reserves are even less and now at an all-time low of around 8.4 million ETH. Any inflow is quickly matched by outflows, so any selling pressure is likely being absorbed. The recent uptick in Ether reserves is mainly on derivative exchanges, where Ether is being used as collateral for long/ short positions.

Ether’s 78% gains ($2,282 to $4,066) from January to March have almost been wiped out (now $2,321), yet ether exchange reserves have still fallen by 10% since the start of the year. This is unusual given that reserves and prices are usually inversely correlated; perhaps suggesting that investor confidence in Ether’s long-term value potential remains strong.

Even though the price of Ether has dropped 42% from its all-time-high, staking deposits continue to climb, increasing by nearly 20% since the start of the year. Over 34.5 million ETH ($81.3 billion) are currently staked or 28.8% of the total supply, which is an all-time high.

Investors seem either hungry for higher returns by restaking on platforms like EigenLayer (and more recently, Symbiotic) or are happy with a lower risk / lower reward option through traditional staking options and protocols. Either way, dollar values are down, Ether amounts are up.

Demand for staking and restaking seems unfazed by Ether’s declining prices. If this trend persists, it will continue to remove more Ether from the available liquid supply.

Ether’s price underperformance compared to Bitcoin and Solana has been substantial, with the disappointing launch of the ether spot ETFs (which has mostly seen net outflows) further dampening sentiment.

It wasn’t until months after BlackRock’s Bitcoin ETF filing that the crypto market saw growth in the form of a year-end rally. Since then, Bitcoin has risen 114%, Solana has surged 564%, but Ethereum has only risen 27%.

Solana’s token performance and network growth have been impressive lately, with transaction volumes rising by 50% since the start of the year and recently reaching an all-time high of 3.9 million active addresses. But its market share (3.02%) is still just a fraction of Ethereum’s (13.56%) in the current $2.05 trillion crypto market. It is also worth mentioning that most of Solana’s impressive activity has been dominated by memecoins. Is this really sustainable in the long run?

After a long period of underperformance, negative sentiment around Ether might be nearing its bottom. An uptick in Ethereum ETF inflows could be just the catalyst needed to trigger the supply crunch and upside shocks in Ether’s price.

With a favourable economic backdrop of falling rates and looser liquidity, regulatory support, not to mention, the growing institutional interest in crypto ETF products (including some of the most conservative traditional investors such as state pension funds), a new wave of institutional inflows seems likely.

Meanwhile, the crypto market has failed to price in these positive fundamentals, so the opportunity is there for a sharp catch-up rally.

If we combine a new wave of inflows with Ether’s shrinking liquid supply, any upside shocks in Ether’s price will be sharp and quick.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.