Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Unstake Ethereum: The fear of 17.2mn unlocked Ether
Cryptocurrencies
Mads Eberhardt
Cryptocurrency Analyst
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.
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