Ethereum’s highly anticipated Shanghai upgrade, also known as the Shanghai-Capella hard fork, is set to occur on Wednesday. The upgrade will give users access to the $31 billion worth of ether (ETH) staked in the blockchain since December 2020. While the upgrade has been widely hailed as long-term bullish for Ethereum’s native token, Bitcoin’s dominance rate continues to rise, and concerns among investors have been raised about the potential sell-off of unlocked tokens following the upgrade.
Bitcoin’s dominance rate, which measures the largest cryptocurrency’s share of crypto’s total market valuation, rose to 48.5% early Tuesday, the highest since July 2021, according to data tracked by charting platform TradingView. The metric has risen by 15% this year. In contrast, Ethereum’s dominance rate remains stagnant between 19% and 20%, despite its upcoming upgrade.
The Shanghai upgrade will unlock more than 18 million ETH, of which only partial withdrawals of 1.1 million ETH, the coins earned as staking rewards, will be withdrawable immediately. The market is worried that the unlocking may bring about a sell-off, causing uncertainty in the market.
Investor caution in pricing ether ahead of Shanghai stems from several factors, including concerns about regulatory issues and flooding the market with unlocked tokens. Analysts have recently said that the partial withdrawals will take several days to process and the resulting selling pressure is unlikely to be significant.
Lucas Outumuro, head of research at IntoTheBlock, wrote in a note published on Friday that if all partial withdrawals are attempted just after the Shapella fork, it would take around four and a half days for these ETH profits to enter the market. According to Outumuro, full withdrawals representing most of the ETH staked will take longer, approximately 100 days, for one-third of validators to exit if they all attempt to exit simultaneously. This would make up about 1% of ETH’s daily trading volume, though it is unlikely that all withdrawals will be sold.
Despite this, the market remains unconvinced, as evident from ether’s underperformance relative to bitcoin and ether put options, or bearish bets, drawing higher prices than call options. Regulatory concerns are also weighing on investors, as the U.S. Securities and Exchange Commission alleged in February that Ethereum staking services offered by centralized exchanges amount to selling unregistered securities in the U.S.
Griffin Ardern, a volatility trader at crypto asset-management firm Blofin, noted that ETH faces relatively higher regulatory risks. The SEC has repeatedly stated that ETH is a security rather than a commodity, which differs from the CFTC’s opinion and means additional risk, so investors understandably prefer BTC.
Lastly, recent banking sector instability in the U.S. and the resulting sharp repricing of interest-rate expectations lower worldwide has benefited bitcoin. The cryptocurrency has evolved as a macro asset in the past three years and has a history of drawing safe-haven bids during banking crises.