Ether has been climbing ahead of its planned ‘Shanghai’ tech upgrade. Here’s what the event could mean for crypto investors

Avatar photo


See all articles
Ether has been climbing ahead of its planned ‘Shanghai’ tech upgrade. Here’s what the event could mean for crypto investors

Ether rose last week as investors looked ahead to the Ethereum network's next big tech upgrade. The second-largest crypto asset by market cap hasn't had the kind of rally it did leading up to its migration from a proof-of-work to proof-of-stake protocol in September. This week it added more than 4%, outperforming bitcoin, which gained less than 1%, and the major stock indexes. It gained 12% in March, though that was upstaged by the various forces that pushed bitcoin up 22%. Last year it rallied in the weeks leading up to the upgrade. ETH posted a 70% gain in July alone. It fell about 20% shortly after the upgrade was complete . The upcoming change, known both as the "Shanghai" upgrade and, more recently, the "Shapella" upgrade, is scheduled to take place April 12 and will allow investors to withdraw staked ether from the network for the first time ever. It's meant to strengthen Ethereum's proof-of-stake consensus mechanism, which it migrated to in September's "Merge" event, which ultimately would allow more liquidity to ether investors and stakers. "The upgrades represent a significant step for the Ethereum network, and while tough to say what ETH flows may look like post-upgrade, more liquidity will exist all else equal," said Alex Markgraff, analyst at KeyBanc. "Greater liquidity could be a catalyst for a change in institutional participation while simultaneously presenting commercial opportunity for staking providers." It's also meant to extend the migration that took place in September, meaning it should make the network faster, more scalable and more energy efficient than if it was a proof-of-work protocol. "This upgrade is a significant milestone in Ethereum's shift to proof-of-stake," said Andrew Ballinger, head of staking solutions at Canadian investment fund manager 3iQ. "The liquidity that comes with it will allow for greater participation in staking and as a result enhanced network security." ETH.CM= 1M mountain Ether (ETH) Here's what investors need to know about the next Ethereum update: Withdrawing your 'locked up' ETH While the Merge turned Ethereum into a proof-of-stake network and gave investors a bigger opportunity to earn passive yield on their ETH holdings through staking -- which includes locking tokens up on the network for a period of time -- Shapella will make it possible for investors to "unstake," or withdraw, their ETH. "Up until this point, staked assets were locked up indefinitely, and those who wanted to participate in the network and generate yield on their ETH holdings often had to get comfortable with an indefinite timeline for liquidity," Ballinger explained. There are several reasons someone might want to unstake their funds at any given point. Investors who may want to engage with other parts of the network, like buying NFTs or participating in a decentralized finance protocol, may be unable to with their funds locked up. Some staked their ETH before the emergence of liquid staking protocols emerged, Ballinger pointed out. Owen Lau, an analyst at Oppenheimer, noted that short-term traders may simply want to unstake their ETH to sell it -- especially at a time like now, when crypto prices including ether have been rising. However, he added, they're more likely to get an even bigger return by keeping their funds locked up. (When you stake your crypto, you contribute to the proof-of-stake system that keeps decentralized networks like Ethereum running and secure; you become a "validator" on the blockchain, meaning you verify and process the transactions as they come through, if chosen by the algorithm. The lock-up of your funds serves as a sort of collateral that can be destroyed if you as a validator act dishonestly or insincerely. For more, check out our staking primer here .) "Providing liquidity for staked ETH will allow a significant group of institutions and traders, who have been sitting on the sideline, the ability to finally participate in the network," Ballinger said. "And greater participation in ETH staking strengthens the security of the Ethereum network as a whole." Potential ETH selling pressure Many market participants have speculated that there will be a wave of negative sell pressure on the market as previously locked funds on Ethereum are released. Data from CryptoQuant suggests any sell pressure would be low, however. Typically, selling pressure emerges when market participants are sitting on extreme profits. Currently, however, the majority of the ETH staked (54%, or 9.7 million ETH) is currently at a loss, the firm said. The average depositors of the largest staking pools are also currently at a loss, according to the data. Ballinger pointed out that unlocking won't happen on day 1 of the update either. It could take as long as 30-60 days for participants to exit, due to the two-day "unbonding" period (the amount of time a blockchain delegator waits before they can move or sell their tokens) and a variable exit queue that changes based on the number of participants in line, he said. "Given there's a limited amount of participants that can exit in a day, this sell pressure will not be as instant or violent as advertised by some commentators," he said. "We still may see some sell pressure on the price of ETH, but it will come over a period of weeks -- a much healthier resolution for the Ethereum network."

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Exclusive Capital communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.

Read our detailed Marketing Communication Disclaimer