Investors and traders in the cryptocurrency world are witnessing the rise of Ethereum as a dominant force and, at the same time, are facing the challenge of a highly complex ecosystem. Gas fees are one of the biggest things in the Ethereum network and miners are compensated for the transactions that they process with gas fees.
Gas fees are almost 100 percent a transaction cost, but can also give some insight into future price movements on Ethereum. Traders can gain a unique advantage when understanding gas fees and Ethereum prices.
In this article, we’d like to discuss how Ethereum gas fees work, what affects gas fees based on network activity, and how you can use it as a signal to predict the Ethereum price movements in the market.
What Are Ethereum Gas Fees?
Ethereum gas fees are the price to pay to run transactions or smart contracts on Ethereum’s blockchain. The fees are measured in ‘gwei’ – a tiny denomination of ETH (1 ETH is 1 billion gwei). A gas fee is required whenever you make a transaction on the Ethereum network — that is, when you transfer ETH to another wallet or interact with a decentralized application (dApp). The fee will cover the cost of miners (who do the work and confirm your transaction).
Gas fees change based on how complex the transaction is and the demand on the Ethereum network at a point in time. When the network is congested, users normally want to pay higher fees for a quicker transaction, so it requires higher fees.
Gas Fees & Network Activity
Network activity is directly mapped onto Ethereum’s gas fees. Gas fees generally tend to increase when demand for transactions on Ethereum rises or for smart contract executions, as this causes the network to be congested. High demand can occur for several reasons:
Decentralized Finance (DeFi) activity: Many DeFi platforms run on Ethereum’s blockchain tech and often process large transaction volumes. Gas fees can rise to astronomical levels during times of high DeFi activity, or simply periods of high demand, like during days of yield farming or liquidity pooling.
Non-Fungible Token (NFT) trading: One of the most popular use cases of Ethereum has been NFTs as high volumes of buying, selling and minting new NFTs. The activity is expensive and requires a lot of transactions, which pushes gas fees higher.
Market volatility: During times of extreme market volatility in crypto, more people start buying and selling Ethereum. The more transactions that happen on the network, the more gas fees rise.
Network congestion: Gas fees rise on the Ethereum network when the network is congested because the users vying for transactions to occur faster on the network find themselves competing with each other. Those that pay higher fees get their transactions confirmed sooner and jump the queue.
Using Gas Fees as a Lead to Ethereum Price Changes
It’s the fact that gas fees represent the overall demand for the network that correlates gas fees to Ethereum price movements. The ability to track gas fees helps traders understand network congestion, user activity and occasionally price trends in the network. Here’s how you can use gas fees to forecast Ethereum price movements:
1. Increased Network Demand is Signaled by High Gas Fees
This indicates an increased demand for the Ethereum network when gas fees are high, consistently. All of this increased activity usually contributes to a higher demand for ETH since it is used to pay gas fees. This upward pressure to price found as more users buy Ethereum to use dApps, DeFi or NFT transactions.
One example, for instance, is the spike in gas fees during NFT booms that causes corresponding increases in price for Ethereum as demand for the asset grows. Analyzing gas fees on the Ethereum network while gas demand is high can be a good way to get early signals that gas demand is also rising, which might lead to price gains.
2. Sudden Spikes in Gas Fees Can Be an Indication of Incoming Volatility
If you notice sudden and large gas fees spikes on Ethereum, this may mean there is about to be volatility in Ethereum’s price. It could be due to huge trading activities or a market-wide panic buying or selling or some speculative frenzy in NFT or DeFi markets. When traders and investors are streaming into the Ethereum network en masse to trade and speculate, or to hedge against a loss, that’s a telltale sign of high gas fees.
If these spikes occur, this could be a suitable moment to adjust your trading strategy, i.e., secure your profit, set stop losses or investigate further buying opportunities.
3. Monitoring Gas Fees During Key Events
There also can be spikes in gas fees around major events like token launches, Ethereum hard forks, or giant updates to large DeFi protocols. If you monitor the gas fees around these events, you can then infer how they are making the network’s usage increase or decrease and as a result also understand how Ethereum price may behave accordingly.
Tools for Tracking Gas Fees
Access to real time gas fee data is needed if you wish to use gas fees as a means of forecasting Ethereum price moves. Several tools and websites provide up-to-date information on Ethereum gas fees:
ETH Gas Station: A particularly popular resource for tracking gas fees and keeping an eye on network congestion.
Etherscan: The details of Ethereum transactions and gas price analytics.
Gas Now: Real time gas fee predictions as well as transaction data to help you time your trades more effectively.
Final Notes
Gas fees are not just transactional costs, they are a strong indication of network demand and potential price movement. If you monitor gas fees closely, you get to know market activity, know periods of volatility, and adjust your trading strategy accordingly.
And now that the Ethereum network is growing, knowing what gas fees are and why you should care will be integral to staying ahead in this developing market.
