Ethereum Taps $2K on Shanghai Upgrade: Is the Bull Market Back? 5 Key Considerations (Op-Ed)

by
Wesley Messamore
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Ether prices have kept pace with the crypto market rally this year. ETH posted big gains in January during the relief rally, then again from early March until now.

The world’s second most valuable cryptocurrency by market cap traded at a spot price of $1,429 on Mar 10. By April 13th, the day the Shanghai Upgrade took place, Ether was trading for $2,000. That’s a stout 36% increase in a month’s time.

Here are some important factors affecting the Ethereum price for the remainder of Q2.

1. Bullish: The Ethereum Shanghai Upgrade

The Ethereum Shanghai Upgrade may have had something to do with the rally thus far this spring. (Here’s why the term you might be looking for is actually “Shapella Upgrade.”)

The upgrade is creating a lot of positive sentiment for the network and ecosystem. It’s the achievement of another milestone in the cryptocurrency’s developmental roadmap.

EIP-4895 Caps Off The Merge

Ethereum Improvement Proposal (EIP) 4895 probably delivers the most impact on this update. It allowed validators who staked 32 ETH to unstake their Ether.

There’s a staggering 18 million ETH staked to secure the network at the moment. That’s a whopping sum of over $30 billion worth of Ether about to become liquid if the holder of the private keys chooses to unstake.

But it’s not looking like the liquidity event will trigger mass selling pressure on Ether’s price. Data from Parsec Analytics found only deposits in ETH staking flows Tuesday by the thousands of ETH, not a flood of withdrawals. Meanwhile, analysts of Bank of America say they expect no wave of selling pressure from Shapella.

Instead of selling pressure, the Shapella Upgrade is more apt (so far) to unleash demand from Ethereum enthusiasts and to lure more newcomers from the earned media attention in the press and on social media. It represents the capstone accomplishment of the Ethereum Merge to proof-of-stake consensus.

To top it all off, Shapella’s implementation of EIP-3651 should help reduce some gas fees during periods of high network activity. What’s not to be bullish about?

2. Bearish: U.S. Regulatory Threats

How the U.S. regulatory environment will ultimately shake out for cryptocurrencies is still up in the air. The open question and fierce debate over what crypto regulation in the U.S. will look like is a factor that has loomed over the still nascent industry for its entire existence.

Currently, there’s a debate over whose jurisdiction crypto belongs to most properly. Meanwhile, the debate has some of the elements of a turf war in a full federal three-branch scrum of members of Congress, the Securities and Exchange Commission, the Commodities Futures Trading Commission (CFTC), the IRS, and U.S. attorneys.

A central question of the debate: Whether authorities ultimately settle on regulating cryptocurrencies as commodities or securities or something else. The SEC especially has its sights set on Ethereum. The SEC Chair says every crypto other than Bitcoin is a security.

Is Ethereum a security like stocks or a commodity like oil?

Ethereum is especially susceptible to this argument because it executes contracts as one of its primary services. But Ether tokens don’t represent equity in a corporate profit-making enterprise.

They’re proprietary utilization tokens that increase with value as the ecosystem of apps they can be redeemed on for services increases in value. Ethereum likens them to oil, a commodity in the regulatory scheme.

Now, a startup could build an Ethereum app that becomes wildly profitable, incorporate, and IPO to the NYSE. If that happened, then the SEC would have clear jurisdiction over the exchange of shares in that company.

In any event, the regulation of Ethereum by the SEC may not turn out so bad for its fortunes. All exchanges of publicly traded companies’ shares are SEC-regulated. That represents trillions upon trillions of dollars of market capitalization. Regulation could even bring on a flood of institutional investors.

Moreover, investors are currently bearish on Ethereum because they don’t know how regulation could shake out. Institutional investors will not get on the wrong side of the SEC.

But if there was regulatory clarity so that investors would know one way or the other how the U.S. will factor into crypto’s future, this could change as fast as crypto markets are accustomed to seeing huge changes in capitalization.

3. Bullish: ETH Fundamental Analysis

Ethereum fundamentals are very bullish for the ETH price in Q2.

Ethereum Cumulative Unique Addresses continue to expand to new record highs. The network boasted 227 million cumulative unique addresses on Apr 11, according to Etherscan data. That represents a 17.93% increase over the figure for the same metric a year ago.

Furthermore, Glassnode data shows the daily volume of active Ethereum addresses as a sender or receiver in a successful transaction also remains healthy going into quarter two.

ETH has also become a deflationary asset in a recent trend. That’s very bullish for its prices, especially if the trend continues. Ironically, the network’s ETH tokens were an inflationary asset when it was proof of work. The supply experienced north of 4% inflation per year. Now that it’s proof-of-stake, Ethereum’s economics have changed.

That’s a result of EIP-1559:

“Typically, a user would have to send a gas fee to a miner for their transaction to be included in a block. What EIP-1559 proposes, however, is to send that gas fee to the network itself. Called basefee, this is a sort of a “burn” and there would only be an optional tip that’s paid to the miners.”

The original proposal is phrased:

“A transaction pricing mechanism that includes fixed-per-block network fee that is burned and dynamically expands/contracts block sizes to deal with transient congestion.”

Since it was implemented in July 2021, over 2 million ETH worth $6 billion have been burned. They’ve been removed from circulation forever:

“The biggest on-chain gas burner on the Ethereum network is the leading NFT marketplace OpenSea, followed by ETH transfers. Other gas guzzlers include Uniswap, StrongBlock, Tether, etc.”

This is a bullish design for the Ether price because the biggest earners on the network are now sending their fees back to supporting the price instead of to miners that sell some to keep up with operating expenses.

4. Bullish: Institutional Support for Ethereum

Institutional support for Ethereum is running strong here in Q2 2023. In a bullish portent for the entire crypto market, Fortune Magazine recently debuted the Fortune Crypto 40.

It’s a crypto benchmark list, curated by Fortune, of the top 40 crypto businesses in several categories. Under the protocols category, Ethereum came out at #1, ahead of Bitcoin at #2. The top two cryptos by market cap were followed by Polygon, Solana, and Arbitrum.

Meanwhile, because of the Shanghai Upgrade, risk-averse institutional investors are more likely to dip a toe in the Ethereal waters. Locking up their capital for an indeterminate amount of time in a high-risk asset with volatile price cycles at every pane was naturally a non-starter for hedge funds.

Now that the TBD period of unlocking staking to secure the network through its migration is over, an enormous amount of risk and downside of a long ETH position is gone from the equation.

5. Bearish: Macro Risks like Interest Rate Hikes and Recession

Finally, negative economic events and forecasts could create some global headwinds for asset prices in 2023. When the economy crashed in 2020, Ether’s price dropped with the entire asset basket. When prices recovered and rallied through 2021, true to crypto form, ETH rallied harder.

As the market cooled over 2022, ETH went down with it. Most recently, as equities got legs under them again this year, Ether surged back up again.

That strong correlation between major crypto prices and equities benchmarks is a very reliable trend for the time being. So, if the economy experiences macro headwinds this year, Ethereum is swimming in the same tides. There is a majority consensus in board rooms and economic bureaus that a recession is looming ahead.

Red minutes of late revealed the central bank expects recent failures in the banking sector to trigger the recession. These risks could be a factor in Ether’s price in Q2.