Ethereum Fee Plunges To 5-Year Low—Is This A Bottom Signal?

On-chain data shows the Ethereum transaction fee has dropped to the lowest level in years recently. Here’s what this could mean for ETH’s price.

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Ethereum Average Fees Now Valued At Just $0.168

In a new Insight post, the on-chain analytics firm Santiment has discussed the latest trend in the Average Fees of Ethereum. The “Average Fees” is a metric that, as its name suggests, keeps track of the average amount of fees that senders on the ETH network are attaching with their transactions.

This indicator’s value directly correlates to the amount of traffic that the blockchain is dealing with. The reason behind this lies in the fact that the network only has a limited capacity to handle transfers.

When the chain is busy, transfers can remain stuck in waiting until the transactions ahead of them clear out. Those who want their transactions to be processed ASAP can choose to attach a larger-than-average fee, so that the validators prioritise them.

In times of especially high traffic, this kind of competition among users can quickly drive the Average Fees up to significant levels. When there is little activity, however, senders have little incentive to pay any notable amount of fees, so the metric’s value can remain low.

It would appear that Ethereum has been witnessing the latter kind of conditions recently, as the Average Fees have registered a drop.

Looks like the value of the metric has declined to a low level in recent days | Source: Santiment

As displayed in the above graph, the Ethereum Average Fees have fallen to a low of $0.168 recently, which is the lowest that it has been since 2020. This means that activity on the network is historically low at the moment.

According to the analytics firm, this may not actually be so bad from a trading perspective, as low fee periods can often precede rebounds in the cryptocurrency’s price.

Below is a chart that shows an example of this trend in action:

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The past trend in the transaction fees of ETH | Source: Santiment

As is visible in the above graph, the Ethereum Average Fees falling under the $1 mark back in 2023 led to bullish momentum for the asset. The explanation behind this pattern may lie in the fact that low-fee periods can indicate disinterest from the crowd.

Historically, ETH and other digital assets have tended to move in a way that goes contrary to the expectation of the majority. This means that a lack of optimism can lead to rebounds, while excessive hype can result in tops. From the chart, it’s apparent that ETH’s Q1 2024 top came as the metric surpassed $15, indicating a plethora of excitement.

“Generally, fee levels under $1 are a pretty promising sign that the crowd has become disinterested,” notes the analytics firm. “Just remember that there is no set guaranteed “bottom” or “top” level every time fee costs breach below or above a certain level.”

ETH Price

At the time of writing, Ethereum is trading around $1,600, up more than 1% in the last 24 hours.

Looks like the price of the asset hasn't moved much recently | Source: ETHUSDT on TradingView

Featured image from Dall-E, Santiment.net, chart from TradingView.com

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