Investors have been treading lightly around ether this year, optimistic about what the Shanghai upgrade (or “Shapella” in deeper crypto circles) would ultimately mean for the crypto asset, but cautious about its near-term implications. The latest technology upgrade for the Ethereum network was completed late Wednesday night as planned, which led to a nice jump over $2,000 for ether Thursday. Market participants say that with all the uncertainty out of the way, ether may finally catch up with bitcoin. “ETH is outperforming BTC here because it has quite a lot of catching up to do and traders, seeing that there was no adverse reaction to last night’s upgrade, are now feeling more confident about coming back in,” said Noelle Acheson, economist and author of the “Crypto is Macro Now” newsletter. Initially, many worried the upgrade would unleash a wave of negative sell pressure on the market, as previously locked-up funds on Ethereum are released. At the same time, there was never likely to be a wave of unlocks on the day of the change; it could take as long as 30 to 60 days for participants to exit their staked positions. ETH.CM= BTC.CM= YTD line Ether (ETH) and bitcoin (BTC) YTD Rob Ginsberg, a chart analyst at Wolfe Research, said ether “continues to look quite compelling,” after punching through the key $2,000 level, “as the base that it has been carving out is starting to resolve higher.” “[It’s] overbought in the near term, so some digestion wouldn’t be a surprise,” he added. Following a successful breakout through $2,000, ether’s “next stop is $2,500,” Ginsberg said. Ether is up more than 65% in 2023, but has been upstaged by bitcoin for much of the year. While investors stepped aside for the pre-Shanghai action, the banking crisis in the U.S. and Europe also unfolded, opening investors’ eyes to the diversity of bitcoin’s narrative. Bitcoin is currently up 83% this year, according to CoinMetrics. It posted a gain of more than 70% in the first quarter, while ether advanced 52%. After Shanghai Investors can now withdraw staked ether from the network for the first time ever: This is one of the biggest attractions of the Shanghai upgrade. It’s meant to strengthen Ethereum’s proof-of-stake consensus mechanism, which it migrated to in September’s “Merge” event . This Merge ultimately made more liquidity available to ether investors and stakers. “Post-update, Ethereum can be staked and unstaked at will, and we have remarkably seen deposits of staked Ethereum outpace withdrawals so far, which not many expected,” said Conor Ryder, research analyst at crypto data provider Kaiko. “This is a huge positive for ETH, as investors are clearly more buoyed by the prospect of liquidity in Ethereum staking, and less worried about cashing in their staked ETH.” Ryder said there looks to be about $300 million in ether that will be withdrawn. The cryptocurrency averages about $3 billion of daily volume, so it can handle that amount of sell pressure, he added. Christine Kim, vice president of research at Galaxy, said more than 70,000 withdrawals have been processed and 161,168 ETH distributed on Ethereum. Network health, as measured by network participation rate, has remained strong, above 95%. “I expected a large influx in the number of exiting validators, which we’ve definitely seen, but I have been surprised by the number of new validators being activated on Ethereum over the past 24 hours. Over 76,000 ETH has been newly staked on Ethereum over the last day.” When you stake your crypto, you contribute to the proof-of-stake system that keeps decentralized networks like Ethereum running and secure; you become a “validator” on the blockchain, meaning you verify and process the transactions as they come through. The lock-up of your funds serves as a sort of collateral that can be destroyed if you as a validator act dishonestly or insincerely. For more information, check out our staking primer here . An emerging divergence? For much of 2023, ether has largely been moving differently compared to bitcoin. The two tend to trade in tandem with each other, being the two “blue-chip” assets in the crypto market and sensitive to macroeconomic data and developments. Bitcoin’s market dominance has been climbing all year and just hit its highest level since spring 2021, according to crypto data provider Kaiko. “Dominance” measures how a crypto asset like bitcoin is performing relative to its peers in the crypto market. When bitcoin’s dominance climbs, it implies the cryptocurrency is doing well and outperforming altcoins. Meanwhile, ether – which is more of a platform play – has been surrounded by uncertainty on both the technological and regulatory fronts. “Bitcoin and ether move together in general,” said Julio Moreno, senior analyst at CryptoQuant. “Their 14-day daily return correlation is historically high – above 0.6.” That correlation has declined, however, in part because market participants have favored bitcoin over ether ahead of the Shanghai upgrade. However, Moreno said he expects the bitcoin-ether correlation to increase again when the technical transition is complete, especially since the relative performance of ether against bitcoin has been negative lately. Next stop: Cancun Shanghai brought more liquidity to Ethereum, which could be a catalyst for a change in institutional participation . The market expectation is that participation will more than double from the current 15% staked prior to Shanghai, according to JPMorgan. The Shanghai uncertainty may be out of investors’ way, for now, but ambiguity around regulation still lingers. “One of the other ongoing headwinds to more institutional investment and involvement in staking on Ethereum is regulatory uncertainty around staking-as-a-service and taxation of staking rewards,” Galaxy’s Kim said. “Regulatory clarity on these matters would significantly help lead to greater institutional activity in staking now that staked ETH withdrawals are enabled on Ethereum.” Staking has been seen widely as a catalyst for mainstream adoption of crypto and a big revenue opportunity for exchanges like Coinbase. A clampdown on staking, and staking services, could have damaging consequences not just for those exchanges, but also for Ethereum and other proof-of-stake blockchain networks. While September’s Merge upgrade was about energy efficiency, Shanghai was about liquidity. Next stop for Ethereum is “Cancun,” the tech upgrade expected at the end of the year that will target Ethereum’s scalability potential. —CNBC’s Michael Bloom contributed reporting.
