How does the rise of staking affect the price of Ethereum

2023-08-22, 12:28

TL; DR

Since the launch of the Shanghai upgrade there has been an increase in staked ETH on Ethereum 2.0 staking.

If the current staking trend continues the price of ETH may fall further.

ETH is likely to drop below $1,700 in the near future.

Introduction

The Shanghai Upgrade was one of the most important events in the history of the Ethereum blockchain. The reason is that it set a stage for the growth of the blockchain and it has a strong bearing on the current and future price of ETH. This analysis covers the Ethereum network growth and the short-term price prediction of the Ethereum coin.

Ethereum Staking Skyrockets

After the launch of the Shanghai Upgrade, also called Shapella, on 12 April this year there has been a remarkable increase in the amount of staked ETH. Basically, this upgrade has allowed Ethereum validators to withdraw their staked ETH for the first time and it was a key step in transforming the blockchain into a full proof-of-stake network.

As expected, the Shanghai Upgrade resulted in key changes in Ethereum’s transactional activities. The ETH price increased significantly after the launch as it traded at $2,120 on 17 April, which became its peak price within an 11-month period.

Nevertheless, that price spike was contrary to the investors’ belief that its value would fall soon after the upgrade due to a possible sudden rise in its supply. The logic was that many validators would unstake their ETH which would increase the selling pressure. However, the major impact of the upgrade was a sharp increase in the amount of staked ETH.

Data on Glassnode shows that 37,8 million ETH, about 34% of the total supply, is currently locked in DeFi smart contracts. However, there is a negative correlation between the amount of ETH staked and its price. Normally, an increase in amount of staked coin should result in a rise in its price. However, the value of ETH has remained stagnant for much of the time despite a surge in its staking.

Let’s illustrate the above development with the figures for the period 25 July to 10 August. The Ethereum supply in smart contracts increased from 31.08% to 31.4%. However, 432,547 ETH coins worth around $800 million were removed from supply due to staking. The following graph shows the change in ETH supply within the stated period.

Ethereum Supply in Smart Contracts Increased - Glassnode

The graph above shows the total percentage of ETH supply which is locked in smart contracts. As you can see, there has been a sharp increase in the amount of staked ETH. Since the rise in staked ETH reduces its circulating supply this should result in a short-term ETH price increase.

Nonetheless, during period the price of ETH fluctuated within a small channel between $1.850 and $1,890.

Ethereum Price Stagnates

Now, about 4 months after the Shanghai upgrade the continued increase in ETH staking seems to have a negative effect on its price. According to the official Ethereum mainnet data, 22.9 million ETH coins, about 60.58% of total ETH staked, have been deposited in ETH 2.0 staking contracts.

Nevertheless, there has been a shift in the behavior of many Ethereum investors who prefer to invest in Ethereum 2.0 staking to DeFi protocols. As such, this reduces liquidity in the DeFi protocols that exist on the Ethereum network which has resulted in stagnation of ETH price.

The decrease in the transactional volume on the Ethereum blockchain as a result of a rise in ETH staking is contributing to low ETH price volatility. The next chart shows the fall in the transactional volume on the Ethereum network.

Decrease in Transactional Volume on the Ethereum Network - Santiment

The diagram shows a gradual decrease in the transactional volume on the Ethereum network during August. According to the above chart, the transactional volume fell from 2.53 million to 955,000 ETH, representing a 62% decrease. Notably, this fall in transactional volume is a negative effect of ETH 2.0.

A persistent decrease in a network’s transactional volume is a bearish signal as it indicates waning interest in the coin. Therefore, if the current staking trend continues the Ethereum price is likely to stagnate for a long time.

ETH Price Prediction

Based on the staking trend we discussed above, the Ethereum price may continue to fluctuate around $1,900. This is because 8.94 million wallets acquired around 36.16 million ETH coins at a minimum price of $1,904. If these investors exit their positions around that price there may be a retracement.

On the contrary, it may require much bearish pressure for the ETH price to fall below $1,700. The reason is that a cluster of 7.32 million investors acquired around 9.8 million coins at a maximum price of $1,841. These ETH holders may mount a strong support which is likely to prevent its value from falling further. However, if the price breaks below the $1,700 level it may slip down to $1,650.

Conclusion

The increase in ETH staking that started after the Shanghai upgrade has resulted in Ethereum price stagnation. In fact, the value of ETH is fluctuating within a small channel. However, there are signs that it may fall further if the bearish pressure increases. There is a negative correlation between the change in the amount of staked ETH and the fall in its price.

Author: Mashell C., Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment suggestions.

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