Ether Withdrawals Won’t Crash ETH Price After Ethereum’s Shanghai Upgrade, Crypto Analysts Say

Ethereum’s Shanghai upgrade, which will allow withdrawals for about $29 billion of fenced ether (ETH) previously locked up starting next month, is unlikely to cause major selling pressure and crash ETH’s price, crypto analysts told CoinDesk.

The analysts say that investors’ fears that the improvement will cause prices to fall by flooding the market with ETH are misplaced. They say the volume of ether outflow will be less significant than many observers predicted.

“I think withdrawals and inflows from new stakers will balance out,” Nick Hotz, vice president of research at investment firm Arca, told CoinDesk.

Many crypto investors worry that the event could potentially create a significant overhang for ETH’s price, which is currently trading at $1,645, research firm Bernstein, among others, recently noted, as long-term players could choose to lock up a large chunk of 17.5 million ETH worth $28 .8 billion in striking contracts and dumping it on the market to realize a profit.

Still, Arcas Hotz said the impact of ETH outflows will not be immediate, because withdrawals will have to endure a so-called queue. “This means that only 10 percent of the total amount of ETH can be removed from the pool in a month,” he said. “So you want a churn.”

John “Omakase” Lo, head of digital assets at investment firm Recharge Capital, said people will not rush to stop investing as they will need time to understand how Shanghai works. “There will be a period while investors will digest how withdrawals work,” he said.

Rich Falk-Wallace, CEO of institutional crypto data platform Arcana, said the key driver of ETH price action will be the narrative the market creates about the long-term outlook based on short-term behavior.

“If stakers keep pulling back and show no interest in validating the network, it will be bearish,” he said. “If the ETH stake rate continues to grow after Shanghai, it’s a net positive.”

Many market observers don’t understand how severely Ethereum’s withdrawal system limits the amount of ETH withdrawn at a time, Falk-Wallace said.

Ethereum’s Shanghai upgrade will implement a two-tier withdrawal system. Partial withdrawals, amounts above 32 ETH, will usually be made immediately, but initially Arcana expects them to be distributed within three days due to the queue. Full withdrawals, which are the minimum stake amount of 32 ETH, will take longer and will be released gradually.

There is $1.2 billion of ETH in the partial withdrawal bucket, according to Arcana’s analysis, which suggests that at worst only 6% of the average daily ETH trading volume could hit the market in each of the first three days after withdrawals are allowed. Later, the maximum daily amount of ETH potentially dumped on the market will drop below 1% of daily trading volume over the next six months.

In a report published Thursday, crypto research firm CryptoQuant predicted modest selling pressure for ETH from stake withdrawals. According to the report, around 60% of all ETH stakes are currently at a loss at current prices relative to the price at the moment each token was staked.

“Selling pressure occurs when market participants are sitting on extreme profits, which is not the case right now,” CryptoQuant said.

The rise of liquid stake derivatives (LSDs), which allow ETH players to keep their investments floating and trade by issuing derivative tokens like stETH, will also dampen outflows.

Most investors stake ETH using liquid staking platforms like Lido or Coinbase, Hotz said, and thus don’t need to withdraw and sell to get liquidity.

“Those who stake privately and run their own validation nodes are die-hard fans,” he added. “Putting out when withdrawals are allowed is probably not the first thing on their mind.”

Arcana’s Falk-Wallace expects Ethereum’s stake ratios to converge toward other proof-of-stake blockchains after Shanghai as new stakers come online, outnumbering takers.

“We believe that ETH share percentage is likely to increase secularly from 14% today to the 30-50% range in the next 18 months to get closer to parity with other proof of blockchains,” he said.