Right now, Ethereum (CRYPTO: ETH) is on a roll. The crypto is up about 3% over the past week, 19% over the past 30 days, and a whopping 55% for the year. Better yet, Ethereum is almost ready to lift the veil on Shanghai, its first major upgrade to the blockchain since The Merge last September. Investors are understandably excited.
However, there is one aspect of the technological upgrade that is starting to concern some crypto investors: the potential for intense selling pressure as soon as Shanghai goes live on April 12. But don’t panic — it will just give investors one more opportunity to buy the dip.
Shanghai selling pressure
Intense selling pressure? What? Isn’t Ethereum going like gangbusters right now? Well, Shanghai is not like any other technical upgrade you might expect from a blockchain. It is a direct result of Ethereum’s transformation from a proof-of-work blockchain into proof of stake as part of The Merge last year.
As soon as Ethereum officially became a proof-of-stake blockchain, it needed to address staking, which is the process of locking up crypto on the blockchain in exchange for rewards. At the time of The Merge, Ethereum did not include a way to unlock any coins that had already been locked up via staking. The idea was that Ethereum would let The Merge take place, figure out what issues might need to be fixed, and only then roll out an upgrade to take care of this.
Thus, the new Shanghai upgrade is really all about making it possible for Ethereum investors to withdraw staked ETH tokens for the first time ever. So when all of that staked crypto suddenly becomes available on April 12, there could be a rush to liquidate positions. After all, some Ethereum investors have now had their crypto locked up since December 2020, which is when Ethereum launched its test version of the new proof-of-stake blockchain.
Potential impact on Ethereum
By some estimates, there are 1.1 million Ethereum coins available for instantaneous unlocking as soon as Shanghai goes live on April 12. At current market prices, that’s a nearly $2 billion overhang. But that is just the Ethereum available for instantaneous unlocking.
All told, there are now 19.1 million coins staked. If you compare the market cap of this staked Ethereum to the crypto’s overall market cap, that’s about 15% of all Ethereum.
Image source: Getty Images.
There’s no guarantee that there will be a rush to the exits. But we do know of some people and companies who might be selling.
Some of these are the early adopters of the new Ethereum. They took a big gamble on its transition from proof of work to proof of stake, and they have a right to take a profit. The minimum amount required to become an original Ethereum validator was 32 ETH, or about $60,000 at today’s prices. Some of these validators might be tempted to cash out some of their Ethereum.
And then there are those who have to sell. Remember the crypto meltdown from last year? There are some bankrupt firms that have agreed to use their staked Ethereum in order to pay off creditors. For example, Celsius, a crypto lending firm, has a reported 158,176 ETH tokens that have been staked, and that can soon be used to repay debts.
The cryptocurrency exchange Kraken has been ordered by the Securities and Exchange Commission to unstake all Ethereum related to U.S. investors, and this can finally take place on April 12. Kraken has a reported 1.2 million ETH that can be unstaked.
Buy and hold Ethereum?
So, as you can see, the Shanghai upgrade is not an insignificant issue. There is likely to be some selling pressure, and this might continue for a period of weeks. But as noted above, this is really due to a technical issue, and not any loss of faith in Ethereum.
If anything, the new upgrade should be a positive event. It finally makes staking on Ethereum “normal.” Shanghai is just the result of a unique situation: the transformation of a blockchain from proof of work to proof of stake for the first time ever.
The big takeaway, then, is to buy the dip. Don’t get spooked by selling pressures, because you will undoubtedly see quite a bit of hand-wringing, especially as the April 12 target date nears.
Ethereum is still a fantastic long-term investment. It has the support of institutional investors, and it has a remarkably diverse, robust ecosystem. Best of all, it has a very detailed road map for future development, so it’s possible to see how all the strategic pieces fit together.
Once the staking upgrade is done, then Ethereum can move on to new initiatives related to making the blockchain faster, cheaper, and more efficient.
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Dominic Basulto has positions in Ethereum. The Motley Fool has positions in and recommends Ethereum. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
