1. Just a short one for this Black Saturday newsletter folks, as I’m sure many of you (myself included) would rather be introspecting (?) than talking about crypto right now. Ethereum’s next big upgrade, informally called Shapella, is scheduled for April 12th* (coincidentally on my birthday) and the market has feared its arrival for quite some time. Let’s dive in.

2. In 2020, Ethereum implemented a system where people could lock up their ETH in exchange for staking rewards, which has now settled at around 4% per annum. This lock-up was interesting in two ways: (1) there was no guarantee about when the coins could be unlocked, and (2) it was done in preparation for the incoming transition to proof-of-stake, where those depositors would then be able to participate in safeguarding the blockchain. The biggest part of that transition happened in September 2022 with the Merge, however, it did not have one key feature. The depositors (“stakers” is the preferred nomenclature) were still locked up, and could not withdraw any of the ETH they had staked. The ability to unlock and withdraw their funds is finally being made available next week.

3. Why does that matter? Well, because when those coins went into the vault in December 2020, the price of $ETH was still in the $200 range. $ETH has gained 10x since then, and at the time of writing is sitting at around $1850. Conceivably, there will be at least some people who would want to realize those gains, since 1000%+ profit absolutely crushes the single-digit staking rewards even after 2.5 years. How much $ETH is actually locked up in the staking pool? The answer to that is 18 million ether ($34B), or about 15% of the circulating supply.

4. It’s impossible to tell how many of those stakers will choose to sell off their holdings, but I think we can assume that it’s a non-zero amount. On any given day, about $2-5B worth of Ether gets traded in spot markets around the world, so if we assume that 5% of the stakers decide to withdraw and liquidate on April 12th, that will create some sell pressure. However, if it turns out that the number is more like 20%-30% of the stakers, then we’ve got some serious market movements on our hands.

5. To complicate that calculation further, even though all the staked $ETH has been frozen since late 2020, there have been decentralized markets that allow you to trade your staked ETH in exchange for normal ETH, basically selling its earning potential to someone else. Lido Finance is the biggest of these, and current estimates tell us that nearly 70% of the “frozen” ETH has actually been made liquid through this and other similar exchanges. In other words, there’s never really been a liquidity problem with the staked ETH, because you could always trade out of it at a small loss whenever you wanted. That being said, it’s not obvious that the mainstream crypto market is aware of this, and it’s even less obvious whether it’ll have an impact on the April 12 release.

6. Indeed, it does feel a bit like the market is priming itself for some massive sell-offs, with Ethereum rallying +7% over the last two weeks. I haven’t decided if I want to be trading this scenario — mostly because I don’t want to be staring at a chart on my birthday — but it seems like there are some fairly obvious trading strategies if you’re inclined to bet one way or the other.

Keep safe out there, cryptofam!

*Technically the upgrade will take place on April 13th at 6:30am Manila time, but hey, I’ll pretend it was on my birthday anyway.