Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
Unstake Ethereum: The fear of 17.2mn unlocked Ether
Summary: In late March or early April, Ethereum is expected to be subject to a hard fork opening the floodgates to 17.2mn staked Ether, some of which have been locked for over 2 years. Although the actual selling pressure might be negligible as most stakers are long-term holders, the fear of the wide-open floodgates may as a matter of fact be the main cause for poor short-term Ether sentiment.
In September 2022, Ethereum transitioned from proof-of-work to proof-of-stake in an event known as the merge. The proof-of-stake framework allows Ether holders to verify transactions in the role of being a staker. Nearly two years before the merge, on the 1st of December 2020, the staking contract launched, allowing holders to stake Ether by that time. To date, staking has been a one-way street, so stakers have not been able to stop staking and thus make their Ether accessible again, not even following the merge. From a total supply of 120.5mn, around 17.26mn Ether is at this time in the staking contract, of which some have been staked since the 1st of December 2020.
Thanks to the modest daily limit on the original 16.27mn Ether, this potential selling pressure is evenly distributed over a long time. This should allow buyers to match the selling pressure without much impact on the price. As stakers have been aware of this multiple-year lock-up of staked Ether, they are largely long-term holders, so few may unstake at all.
The sentiment leading up to the hard fork may have an even more negative impact. If the market anticipates heavy selling pressure at the time of the hard fork, holders simply hedge themselves by selling non-staked Ether or shorting Ether futures before the hard fork, while traders try to turn the hard fork into profit by likewise shorting Ethereum.
Due to the speculative nature of crypto assets, the market is often severely sentiment-driven, so a given sentiment about an event often initiates more selling pressure than the event itself. This was evident as late as November 2022, at which time FTX was hacked following its bankruptcy filing. The hacker traded every asset into Ether to own over 250,000 Ether. A week later, the hacker swapped a portion of the Ether into Bitcoin. Upon the anticipation that the hacker was about to liquidate the whole position of 250,000 Ether, holders sold Ether, causing the price to tumble by 10% in the span of two days, although the hacker altogether hardly sold 65,000 Ether.
As the Shanghai hard fork approaches, it appears that the market has already endorsed this sentiment of potential upcoming selling pressure. Ether has lost over 3% against Bitcoin year to date, yet it was up by as much as 8% two weeks ago. Traditionally, Ether has gained versus Bitcoin in times of broad risk-on sentiment, which has undoubtedly been the case so far this year. This sentiment about upcoming selling pressure is likely to be more powerful, as the Shanghai hard fork comes closer, particularly from the day on which Ethereum core developers set an official date for the hard fork, probably in late February or early March.
The outlook for Ethereum until Shanghai
Although this poor short-term sentiment for Ethereum likely amplifies over the coming months, it may have little or no impact on the Ether price, depending on the broader risk sentiment in other crypto assets and equities in the next couple of months. The hard fork may, though, increase the volatility in Ether if the market have a difficult time pricing what to expect.
Since we mostly expect the short-term Ethereum outlook to be sentiment-driven rather than driven by heavy selling pressure from unstaked Ether, the hard fork puts an end to this sentiment shortly after it has been implemented. If the hard fork is successful, it will be a risk-off event for Ethereum, as it is the last factor to come into effect for the merge to be fully finalized. In such a manner, it may contribute to short-term selling, but the aspect that holders can then stake and unstake as they see fit is positive long-term.
Ethereum leaves for Shanghai
In late March or early April, Ethereum is expected to face a hard fork known as Shanghai. The most notable feature of the hard fork is the opportunity to unstake Ether. However, the whole staking balance of 17.26mn Ether cannot be unstaked on the day of the hard fork. Only 43,200 Ether can be unstaked per day of the original 16.27mn staked Ether, whereas the total staking rewards of the past more than 2 years will instantly be withdrawable. The latter equals around 1mn Ether.Thanks to the modest daily limit on the original 16.27mn Ether, this potential selling pressure is evenly distributed over a long time. This should allow buyers to match the selling pressure without much impact on the price. As stakers have been aware of this multiple-year lock-up of staked Ether, they are largely long-term holders, so few may unstake at all.
All eyes on the 1mn instantly withdrawable Ether
However, the 1mn instantly withdrawable Ether is more of a concern. This amounts to around 1% of free-floating Ether, in other words, not staked Ether. In a matter of minutes, the whole stack gets withdrawable, potentially causing holders to rush to exchanges to liquidate the Ether as soon as the floodgates are open, pushing down the price. This will particularly be true if they expect others to do so.The sentiment leading up to the hard fork may have an even more negative impact. If the market anticipates heavy selling pressure at the time of the hard fork, holders simply hedge themselves by selling non-staked Ether or shorting Ether futures before the hard fork, while traders try to turn the hard fork into profit by likewise shorting Ethereum.
Due to the speculative nature of crypto assets, the market is often severely sentiment-driven, so a given sentiment about an event often initiates more selling pressure than the event itself. This was evident as late as November 2022, at which time FTX was hacked following its bankruptcy filing. The hacker traded every asset into Ether to own over 250,000 Ether. A week later, the hacker swapped a portion of the Ether into Bitcoin. Upon the anticipation that the hacker was about to liquidate the whole position of 250,000 Ether, holders sold Ether, causing the price to tumble by 10% in the span of two days, although the hacker altogether hardly sold 65,000 Ether.
As the Shanghai hard fork approaches, it appears that the market has already endorsed this sentiment of potential upcoming selling pressure. Ether has lost over 3% against Bitcoin year to date, yet it was up by as much as 8% two weeks ago. Traditionally, Ether has gained versus Bitcoin in times of broad risk-on sentiment, which has undoubtedly been the case so far this year. This sentiment about upcoming selling pressure is likely to be more powerful, as the Shanghai hard fork comes closer, particularly from the day on which Ethereum core developers set an official date for the hard fork, probably in late February or early March.
The outlook for Ethereum until Shanghai
Although this poor short-term sentiment for Ethereum likely amplifies over the coming months, it may have little or no impact on the Ether price, depending on the broader risk sentiment in other crypto assets and equities in the next couple of months. The hard fork may, though, increase the volatility in Ether if the market have a difficult time pricing what to expect.Since we mostly expect the short-term Ethereum outlook to be sentiment-driven rather than driven by heavy selling pressure from unstaked Ether, the hard fork puts an end to this sentiment shortly after it has been implemented. If the hard fork is successful, it will be a risk-off event for Ethereum, as it is the last factor to come into effect for the merge to be fully finalized. In such a manner, it may contribute to short-term selling, but the aspect that holders can then stake and unstake as they see fit is positive long-term.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)