What impact will Ethereum’s Shanghai upgrade have on the ETH and crypto markets?
Ethereum’s Shanghai upgrade is upon us, and for the first time, individuals who have “staked” their ETH as part of the network’s security mechanism will be able to withdraw their holdings. Will this create huge selling pressure for the second largest cryptocurrency? Hardly.
After the Shanghai upgrade (or “hard fork”), users who had locked up a minimum of 32 ETH to secure a 4-5% APY stake reward will be able to withdraw part of their stake immediately. But those who want to withdraw their entire stake must wait one to 36 days, which dampens potential selling pressure. Furthermore, only 16% of ETH players are in profit, so why would they sell now?
In fact, for rational investors, it would probably make little sense to sell ETH now. And the investor profile for ETH holders leans towards rationality and a long-term perspective. It is arguably one of the world’s premier risk assets, and the only reasons investors are still on the sidelines may be because they don’t understand it, they fear its extreme volatility, or they find the regulatory uncertainty unnerving.
But the answer to the first objection also answers the second, and will go a long way to answering the final objection. Finally, you can ponder the thesis that Ether – in crypto parlance – is not just “sound money”, it is “ultrasound money”.
Ethereum is a blockchain that sells block space to apps. The apps must pay for transactions with the blockchain’s native currency: ETH.
The demand side of the trade relies on simple network effects, the more apps, the more users, the more demand for ETH. And this is because the Ethereum network is the oldest and most established decentralized smart contract ecosystem out there.
Ethereum and Bitcoin networks were analyzed by researcher Ken Alabi in a 2017 paper. “The analysis shows that the networks were fairly well modeled by Metcalfe’s law, which identifies the value of a network as proportional to the square of the number of nodes, or end users.” This means that adoption can increase the value of a given network exponentially.
On the supply side, ETH is issued as compensation to independent actors who operate network nodes, and this currently amounts to 671,000 ETH per year. But thanks to a new burning mechanism that destroys a small amount of ETH per transaction (by sending it to a wallet from which it can never be withdrawn), the supply of ETH is actually shrinking despite token issuance.
Ultrasound.money is a dashboard that tracks the burn rate in real time and shows that the supply of ETH has been shrinking for months – and it’s in the middle of a raging bear market, imagine what would happen when demand picks up again. In fact, despite the bear market, transactions on Ethereum still maintain a solid uptrend thanks to innovations such as NFTs and decentralized finance.
Volatility should smooth out slowly as the effects of network adoption take place. The more people join the Ethereum network, the more the value of ETH increases, leading to more adoption. As the market value increases, it will require larger and larger market movements to rock the boat, reducing the large deviations in price.
The best crypto-bashing regulators can hope for is to slow the pace of adoption. But there isn’t much incentive for most governments to support this approach because a) crypto, on the retail side, is driven by Millennials and Generation Z, so it will be a voter issue in the coming years, and b) it will only move innovation offshore.
Even as the US clamps down on crypto, Dubai, Hong Kong and the UK are already preparing to acquire exiled crypto companies. And even if regulators shoehorn ETH into the obsolete category of a security – so what? Anyone could buy securities in minutes using an app on a phone.
The upcoming Shanghai upgrade will be followed by a more complex upgrade that will reduce fees on the Ethereum network, making it faster and even more user-friendly. The duck is well and truly out of the bottle, and investors may well find a magic carpet to entice.
Disclaimer: Nothing herein shall be construed as investment advice or any offer or solicitation to offer or recommendation of any investment product.
