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Unlike Merge, Ethereum's Shanghai Upgrade Could Bring Ether Price Volatility
Institutional liquidity provider OrBit Markets suggests buying an ether volatility swap to profit from an expected increase in price turbulence after the Shanghai upgrade.
The next major catalyst for the crypto market is Ethereum's Shanghai upgrade scheduled in March, which will open up withdrawals of more than 16.5 million ether (ETH) staked in the blockchain.
The impending upgrade comes months after the Ethereum blockchain underwent a technological overhaul, dubbed the Merge, switching to a proof-of-stake consensus mechanism from a proof-of-work setting.
Traders might remember that ether, the second-largest cryptocurrency by market value, did not see much volatility after the Merge took place on Sept. 15 and conclude that the upcoming upgrade will be a non-event.
However, such conclusions may prove inaccurate, according to OrBit Markets, an institutional liquidity provider in digital assets options.
"This time could be different though. While the Merge was a pure technological shift with no direct economic impact, the Shanghai upgrade will change the supply and demand of ETH both in the short term and long term, and therefore capable of having a significant impact on the ETH price," Yang Zhiming, co-founder of OrBit Market and former head of currency derivatives for Asia Pacific at Deutsche Bank, told CoinDesk.
The Merge, as the name suggests, combined Ethereum's then-proof-of-work blockchain with the proof-of-stake Beacon chain. While the pivotal upgrade made Ethereum more environmentally friendly and put ether on the path to becoming a deflationary currency, there was no immediate impact on the supply-demand dynamics of the cryptocurrency.
Ether's price dropped 10% to $1,472 on the day of the Merge but volatility quickly faded, with prices trading in a narrow range of $1,300 to $1,400 during the following four weeks. Ether's 30-day realized volatility fell from an annualized 85% to nearly 60% in the four weeks following the Merge, according to data sourced from Amberdata. Realized volatility is a backward-looking metric measuring the degree of price turbulence observed over a specific period in the past.
The upcoming Shanghai upgrade could affect the demand-supply balance in the ether market right away, keeping the cryptocurrency more volatile than it was in weeks after the Merge.
"Some $25 billion worth of ETH will become available for withdrawals and sale. With the staking yields expected to decrease following the upgrade, investors who previously staked may unstake and move to other assets offering better yields. This would create large selling pressures on the ETH price," Zhiming said.
While the entire staking balance of more than 16.5 million ETH cannot be withdrawn on the Shanghai upgrade day, the total staking rewards of more than two years, equating to around 1 million ETH, can be instantly taken out, according to Saxo Bank.
These ETH could be liquidated into the market, bringing price volatility, as Saxo Bank's Mads Eberhardt wrote last month.
Besides, ether could turn volatile in the days leading up to the event in a sign of the market endorsing fears of post-upgrade price turbulence.