Ethereum’s Shanghai Upgrade Could Awaken This Sleepy Giant

Ether’s been a bit on the quiet side this year. Sure, it rallied with bitcoin and the rest of them, just not as much. That might be about to change: with Ethereum’s Shanghai upgrade just a month away, the No. 2 crypto could be on the verge of a far bigger move. And this could create two possible opportunities: one in the long run, and one in the short run.

What’s the Shanghai upgrade?

Back in September, Ethereum had a major upgrade, dubbed the “merge”. It switched from a proof-of-work blockchain, with miners, to a proof-of-stake one, with validators who stake their own ether as collateral to verify transactions. Not only did it make Ethereum 99.99% more energy efficient, but it also turned ether into a scarcer digital commodity.

Shanghai is Ethereum’s next major upgrade, and it’s expected to happen sometime around mid-March. It involves five Ethereum Improvement Proposals (EIPs), but the one you need to pay attention to is “EIP-4895” – because it’s going to affect ether staking in a big way.

Although the merge happened in September, validators have been staking ether on Ethereum’s “beacon chain” since December of 2020 as part of the buildup. It’s earned them a juicy yield on their coins (currently around 5%), but they’ve had to lock up their ether to get it. That’s going to change after Shanghai: validators will be able to gradually withdraw their staked ether, along with the ether rewards they generated from staking.

What does this mean?

Right now there are around 16.6 million ethers locked away for staking – that’s just over $26.5 billion worth at today’s price of around $1,600. Now, the total market value of ether is about $200 billion, meaning about 13% of it is currently locked up. In other words, there’s a big stash of ether that could be sold after Shanghai, that can’t be sold before it. And, sure, that sounds mega-bearish for the price of ether. But here are three reasons why I don’t think it will be.

First, not all 16.6 million ethers can be withdrawn straight away – they’ll be released in smaller chunks over time. So although there could be some selling pressure from stakers after the upgrade, it’s bound to be muted.

Second, just because stakers can withdraw some of their ether and sell it, doesn’t mean they will. They’re earning a decent yield, after all, so unless they really need the money, it wouldn’t make sense to pull their funds from the goose that lays their golden eggs.

And third, most of the big validators who’ve been staking ether are die-hard Ethereum believers: they were willing to lock their coins away to earn a yield (in ether). So you could say they’re in it for the long haul.

What’s the long-term opportunity here?

Shanghai could actually make ether even scarcer in the long run, with a lot more than 13% of the supply being staked on any given day – and that could put more upward pressure on its price.

See, investors have no problem staking their crypto to earn a yield. But what they do have a problem with is locking it up for a long time until they can get paid. There’s a lot of risk in that, as they have no idea what the price will be when they finally regain access to their funds. But after Shanghai, that won’t be a problem for ether validators. So, it’s going to make staking ether less risky – especially for institutional investors, who’d sleep a lot better knowing they can withdraw their coins at any time. That means more big investors will likely start staking ether after Shanghai.

Sure, decentralized solutions like Lido Finance (LDO) and Rocket Pool (RPL) do make it easy to stake ether right now without locking it up. But these are staking derivatives, which offer short-term liquidity for their users. That all works fine when prices are stable, but as crypto investors know all too well, things can quickly turn south when prices go down, and you end up with a “bank run” scenario. But if staking derivative platforms can also access ether right away from the source, they’ll become safer platforms too.

What about the short-term opportunity?

Ether’s rallied almost 40% since the start of the year. And while that sounds meteoric, it’s still lagged bitcoin, which is up almost 50%. You can see how ether (top chart) is only now trading near its pre-FTX collapse high of November. Meanwhile, bitcoin (bottom chart), is about 15% above it, trading near its August high of around $25,000. So with ether getting off to a slower start than the OG crypto this year, it could be poised to catch up as Shanghai approaches – and perhaps reach its August high of around $2,000.

Chart drawn with TradingView.

You’ll want to keep your wits about you on this one, though. Recall that with the September merge, ether dropped like a stone around the time it happened. So if ether does rally over the coming weeks, I wouldn’t be surprised to see the same thing happen again. It’s typical in crypto, after all, because traders buy in while the hype builds in anticipation of a big event. But then when the event actually happens, the hype quickly dies down, and they begin to offload their positions and move on to the next big thing.

On the flip side, if you do see ether trending down between now and the event, it could offer up a nice long-term entry point.