Sell Pressure on ETH After Shanghai? Many Not Worried

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April 11, 2023
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Sell Pressure on ETH After Shanghai? Many Not Worried
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A smooth upgrade could be a bullish catalyst for Ethereum that overshadows potential short-lived selling pressure, industry watchers predict


APRIL 11, 2023

Satheesh Sankaran/Shutterstock modified by Blockworks

Ethereum’s long-awaited Shanghai upgrade is nearly here, and there’s little doubt from industry participants the shift will impact the asset’s price over the short and long term.

But as some analysts watch for selling pressure that could cause ETH’s price to dip, many don’t seem worried about such a scenario.

The Shanghai upgrade, slated for April 12, is set to enable withdrawals of ETH staked from the Beacon Chain — some since as far back as December 2020. Roughly 18 million ETH — about 15% of ETH supply, worth about $34 billion — are currently staked.

CoinShares Research Associate Marc Arjoon said the concept of unlocks leading to sell pressure could prove to be a headwind.

“But if the price doesn’t fall materially enough to match the narrative, then I presume this would have an uplift for the ETH price,” Arjoon said.

Matt Fiebach, an analyst for Blockworks Research, said while there is “substantial fear” that the $34 billion in ETH set to become semi-liquid will be extremely bearish, he disagrees.

“For starters, there is a plethora of ETH derivatives commonly available which would allow an ETH staker to hedge out their exposure prior to the unlock,” he explained.

Fiebach added that validators can opt to exit ahead of the upgrade to be first in line. Only 0.6% of validators have done so, and there is currently no wait time.

If an ether staker intended to sell, the logic goes, there would be no reason not to aim to be at the head of the line. The lack of a queue therefore implies there’s unlikely to be a rush for the exits.

Selling pressure could be minimal

Katie Talati, director of research at crypto-focused asset manager Arca, pointed out that following the upgrade, the withdrawal queue when unstaking is designed to prevent a massive one-day drop.

“Therefore, any initial sell pressure from users unstaking will likely be drawn out over a longer period of time,” she told Blockworks.

Because ETH stakers agreed to be locked up until the Shanghai upgrade is completed, Talati added, most are likely long-term holders of the asset and may choose not to sell.

A February survey by staking platform Kiln — which gathered responses from 117 brokers, market makers, exchanges, wallets and other industry participants — found that just 9% of respondents intend to unstake their ETH after Shanghai. Two-thirds of those planning to go that route intend to unstake less than 320 ETH.  

Some being forced to liquidate staked ether, however, such as crypto exchange Kraken, will likely be the largest contributors to the selling pressure, she said. Kraken revealed a settlement with the SEC in February related to its on-chain staking program, noting at the time it would unstake its staked ether after the Shanghai upgrade.

“If there is a decline in ETH price following Shanghai, I believe it will be short-lived since…the selling pressure might be much less than the market expects,” Talati said. “I don’t make price predictions, but ETH is still fundamentally set up to continue as the leading [layer-1] in the space.”

Short-term and long-term price projections

Matt Lason, chief investment officer at crypto hedge fund Globe 3 Capital, agreed that though an ETH price drop is possible, it should be temporary and less severe than what some are predicting.  

In addition to the staggered withdrawal process, Lason noted that about 57% of staked ETH is already with liquid staking derivative protocols — reducing the amount of staked ETH that is truly locked up.

Lason said he predicts ETH to hit $3,300 by the end of the year, citing expected increased institutional demand for the asset. While industry participants told Blockworks last year the Merge “completely changes” ETH’s investment case, some said certain institutions were likely waiting for the Shanghai upgrade.

“A smooth Shanghai upgrade process will be another bullish catalyst proving that Ethereum can make large upgrades without issue,” he said.

Analysts at Compass Point Research & Trading said in an April 10 research note that though the exact near-term price risk is hard to quantify, the upgrade should be viewed as a positive overall.

The withdrawal unlock could drive the upside of ether to above $2,000 in the intermediate term, the analysts said, adding that the asset’s latest surge to above $1,900 is largely due to the upcoming upgrade.

“Based on our modeling we currently see potential selling of [about] $500 [million] per day in the [five] days following the upgrade, which would imply only a fraction of ETH’s normal daily volume, and should be easily absorbed,” the analysts wrote.

A report by Galaxy published last week estimates that validators could sell half of staked ETH rewards they earned from validating, amounting to 553,650 ETH. This amounts to about 1% of daily ETH volume of selling per day for a week, the report adds — a total that ranges from “inconsequential to slightly bearish.”

ETH’s price was just above $1,900, as of about 11:00 am ET on Tuesday — up 2.8% in the past 24 hours and up roughly 60% year to date.

Two-fifths of 200 surveyed institutions — managing a combined $2.85 trillion in assets — expect ether’s price to be above $2,000 by the end of the year, according to a February survey by crypto hedge fund firm Nickel Digital Asset Management.

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