How Advisors Can Prepare for Ethereum’s Unlock

The Ethereum network is set to undergo its next upgrade, called Shanghai, on April 12, 2023. When the Shanghai upgrade is implemented, this will effectively unlock the ether (ETH) that has been staked since the “Merge.”

In September, when Ethereum underwent the Merge, a significant upgrade to its blockchain, it switched from a proof-of-work (PoW) blockchain to a proof-of-stake (PoS) blockchain.

A key benefit of the upgrade is the new Ethereum network allows individuals to run a validator node, staking their own ether in order to help secure the network in the absence of the traditional mining infrastructure that had secured Ethereum since its original launch.

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Market participants are motivated to stake their ether because they are now able to generate rewards, paid in ETH, from the network for their staking contributions. It no longer requires significant upfront investment into mining hardware and software to reap the blockchain rewards from the Ethereum network.

The downside to staking Ethereum after the upgrade was that those staking (or those running validator nodes) were required to stake their ETH until the next upgrade. This lack of liquidity for ETH holders created an illiquid amount of ETH that was unable to be sold during the last few months.

Selling pressure?

Many critics of Ethereum have said that this has created false supply and demand levels and liquidity on the network. While Ethereum has rallied over the last few months, many investors are concerned that when the staked Ethereum becomes liquid, the selling pressure (due to an increase in liquid ETH) will drive down the price of Ethereum.

There are currently 16 million ETH staked, which will be available for withdrawal once the Shanghai upgrade is live. Not all of these 16 million ETH will be liquid at the same time, as developers have implemented a queue for withdrawals. ETH will be available for withdrawal every 12 seconds, and only 16 withdrawal requests can be met at each opening.

Those wishing to withdraw have two options. First, they may request to withdraw only the rewards they’ve earned from their validator nodes. Second, they may request to exit their validator nodes entirely, withdrawing the 32 ETH that is required to run a validator.

While analysts have attempted to determine the demand for ETH withdrawal, it’s nearly impossible to predict with accuracy. Human emotion, often driven by price and market sentiment, will come into play when the ETH is unlocked.

Some believe the Shanghai upgrade will cause an increase in selling pressure as the 16 million “locked” ETH becomes liquid, while others believe that the new liquidity options will increase the demand to stake ETH.

The advisor takeaway

In general, the shift to proof-of-stake has caused the fundamentals of Ethereum significantly. The ability to stake ETH has created a new opportunity to earn rewards.

Advisors and those managing crypto portfolios can look at the Shanghai upgrade, in particular, in a few different ways.

The upgrade makes the Ethereum network more efficient and cost effective to use – gas fees are set to decrease significantly. The long-term outlook of Ethereum has increased, as the usability and costs have gone down significantly. Many believe that this increases the likelihood that Ethereum will continue to grow and strengthens the investment thesis of Ethereum.

Others who are looking to trade the price of Ethereum may be encouraged by the Shanghai upgrade, as it will surely increase volatility, at least temporarily. If you’re looking to trade the crypto markets, be prepared to navigate the market because this is a significant change and will likely have many moving parts.

For advisors, I believe that the upgrade is a significant positive change to Ethereum. During the bull market of 2020 and 2021, many competitors to Ethereum gained market share as a result of Ethereum becoming difficult and expensive to use. Other layer 1 smart contract blockchains grew tremendously compared to Ethereum as users and investors flocked to coins they viewed as better opportunities.

It would be wise to remember that Ethereum is still the second largest blockchain network – and after the successful upgrade, many of the reasons individuals used to justify investments into other coins may be challenged. Ethereum is now an incredibly secure and efficient smart contract cryptocurrency and, in my opinion, the roadblocks that pushed investors away from Ethereum have been rectified and removed.