Ether hits nine-month high ahead of Shapella upgrade

Ethereum underwent a huge network upgrade called the merger, which proponents say will make transactions much more energy efficient. After the merger, airtime prices have fallen after a huge rise in the run-up to the event.

Jakub Porzycki | Nurphoto | Getty Images

Ether has surged this week to a nine-month high, ahead of a major network upgrade that some crypto enthusiasts say will make the digital currency a more profitable long-term investment.

The world’s second-largest cryptocurrency has risen about 6% over the past three days, surpassing $1,900, while bitcoin is roughly flat over that stretch.

Starting next Wednesday, an upgrade to the blockchain, called “Shapella,” will allow owners of ether to withdraw their holdings. Up until this point, investors had to use centralized exchanges like Coinbase or decentralized finance (DeFi) protocols like Lido, to essentially exchange the locked ether for a token of equivalent value.

The recent rally has followed a similar pattern to previous bouts of enthusiasm around network upgrades. In September, ethereum ran up ahead of a historic transition to a more energy-efficient way of securing the network, called proof-of-stake.

Ethereum

previously had a vast network of miners across the planet running highly specialized computers that crunched mathematical equations to validate transactions. After the so-called “Merge” upgrade in September, ethereum migrated to a proof-of-stake system, replacing miners with validators. Instead of running large banks of computers, validators leverage their existing cache of ether as a means of verifying transactions and creating new tokens.

“Ether itself becomes a productive resource,” Danny Ryan, a researcher at the Ethereum Foundation, said of the September upgrade. “It’s not something you might just speculate on, but it’s something that can make money.”

In the time since the merger, ether has acquired some characteristics of a traditional financial asset, and pays interest to its owners.

“It’s probably the lowest risk return in the ethereum ecosystem,” Ryan said, adding that returns in other corners of DeFi involve smart contracts and other types of counterparty risk.

So far this year, ether has underperformed bitcoin, but recent gains have helped close the gap. Ether is up nearly 59% this year, versus bitcoin’s 70% gain in 2023.

Currently, over 18 million Ether tokens worth around $32.5 billion have been staked, meaning 15% of Ether’s total supply is considered locked-in assets.

While the upcoming upgrade will unlock much of this value, giving holders more control over their holdings, there is some concern that the release of so many tokens will have a kind of flood effect on the market. Even with limited withdrawals, roughly $2.4 billion worth of ether could hit the open market, K33 Research said in a note Tuesday.

“A drop is likely to happen shortly after the upgrade is completed, as a huge amount of ETH will be unlocked, and many people will also sell their ETH,” said Ilya Volkov, who runs a blockchain-based fintech platform. Volkov said he is bullish on the long term.

The ratio of open interest in ether put and call options hit its highest level since May on Tuesday, according to data presented by crypto data analysis and news firm The Block. It could signal a build-up of bearish bets leading up to the network upgrade.

According to research by Bernstein, of the 18 million ether tokens locked on the blockchain, nearly 70% are staked through protocols like Lido, creating a measure of liquidity for investors.

“Liquidity for 70% of ETH is not new, they could do it anyway,” Bernstein wrote. The firm described the remaining 30% of holders as “original believers”, who are unlikely to abandon their positions at this price.

Having the ability to deposit and withdraw tokens could encourage more investors to stake ether, and some analysts said they expect a significant influx of capital into the network once it proves that money staked can be withdrawn relatively easily.

SEE: Bitcoin climbs as investors shrug off regulatory concerns