Ethereum (ETH) climbed to an impressive eight-month high of $1,925 on Wednesday, driven by anticipation of the upcoming Shapella network upgrade.
Shapella upgrade explained
Shapella network upgrade is a crucial step in Ethereum’s roadmap. Like with each upgrade, Ethereum’s price rises thanks to people’s expectations. The Shapella upgrade, also known as the Shanghai upgrade, signifies the completion of the second-largest blockchain’s shift to a proof-of-stake (PoS) consensus mechanism.
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This transition from the energy-intensive proof-of-work (PoW) model is expected to enhance Ethereum’s energy efficiency, reduce transaction fees, and improve overall scalability.
With the Ethereum’s Merge last September, this major update will permit users to withdraw their staked ETH (stETH) for the first time since the last upgrade. The Ethereum network is scheduled to go live with Shapella on April 12th.
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To encourage security professionals and researchers to identify and resolve any potential vulnerabilities before the Shapella upgrade is implemented, Ethereum Bug Bounty rewards for Shapella-related issues have been doubled through April 5th.
What happens after the upgrade?
Market analysts are concerned that the imminent release of ETH deposited in the network to improve security in exchange for rewards may trigger some holders to dump their tokens for liquid assets.
This could create massive selling pressure. The crypto market may encounter over $2.3 billion worth of potential sell-side pressure as nearly 1.3 million ETH is about to enter the market. 1.1 million ETH connected to partial reward withdrawals will be freed and Celsius’ 158,000 stETH is expected to become available for sale.
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Ever since the Beacon Chain launched in December 2020, the network has seen over 18 million ETH being staked. While the entire balance cannot be unstaked immediately after the upgrade, approximately 1.1 million ETH obtained as rewards for staking can be withdrawn instantly.
Will there be a selloff?
While many investors may worry this will result in a strong selloff, the $2.3 billion that will be unlocked represent only 1% of Ethereum’s market cap. Although the price could drop, it shouldn’t be that significant.
Moreover, Ethereum’s daily trading volume is $10 billion, meaning there is enough liquidity to cover the $2 billion sell orders. Needless to say, this won’t all happen within one day, but in a matter of days or weeks. There won’t just be one big $2 billion sell order.
“Thanks to the modest daily limit on the original 16.27m 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,” Saxo Bank’s crypto analyst, Max Eberhardt, explained.
Ethereum may fall in the next couple of months after reaching a crucial resistance of $2,000 because there has been a notable price recovery. However, it shouldn’t be caused by the Shanghai upgrade. Instead, higher crypto prices despite extremely high interest rates are the problem.
Ethereum daily chart, source: tradngview.com
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