Services like crypto staking could be a boon for Coinbase as it looks to diversify from trading.Dreamstime An upgrade is coming to the Ethereum blockchain network.Investors should be prepared for it to potentially disrupt cryptocurrency markets and be a tailwind for the business of digital asset broker Coinbase Global .
Ethereum’s “Shanghai Hard Fork” is expected to occur next month, marking the latest major upgrade to the ecosystem of Ether—the second-largest digital asset—since the transformation to the blockchain known as the “Merge,” which occurred last year.
This fundamental upgrade changed the mechanics of securing and processing transactions on Ethereum from “proof of work”—the energy-intensive system used by Bitcoin involving “crypto miners” that utilize computers to solve complex puzzles—to “proof of stake.” Under proof of stake, participating holders of Ether lock up their tokens as collateral while they validate transactions and secure the network, earning yield in the process.Current yields for staking Ether are upwards of 5%.
The Merge both slashed Ethereum’s carbon footprint and made it a more attractive investment, boosting Ether prices .It won’t be until the Shanghai Hard Fork that the transition will be complete.After the Shanghai upgrade, validators who staked their Ether finally will be able to withdraw.There are two major implications of this.
The first is that it could cause disruptions to markets , particularly by introducing selling pressure on the price of Ether, which is both widely held by traders and used for a variety of purposes—including as collateral for loans—across the crypto landscape.
Once validators who have already earned yield can finally withdraw their tokens, the logic goes, they will sell their Ether.
More than 16.4 million Ether is currently staked, worth almost $27 billion, and another 1 million Ether, or $1.6 billion, has been earned in yield that will be freed up.
Therefore, there is the potential that the market will be hit with selling that could cause prices to drop.
“Given holders of staked-Ether have been locked up for approximately two years, there are concerns that Ether holders will sell their Ether when given the opportunity, which could pressure Ether’s token value,” analysts led by Kenneth B.Worthington at J.P.Morgan wrote in a note.
It’s impossible to know exactly how traders will react after the Shanghai upgrade—but there is reason to believe that technical factors could prevent excessive disruption.
“Precautions are in place to prevent significant selling following the implementation of the Shanghai Fork,” Worthington and his team wrote.“Once the upgrade is complete, staked-Ether will become eligible for withdrawal, but not all at once,” they added, detailing how only a small number of withdrawal requests can be processed at a time.
The second major implication of the Shanghai upgrade is that it may spark a boom in the popularity of staking among investors looking to earn yield.Traders may sweep in to buy Ether to stake after Shanghai, which could offset selling pressure.Broker Coinbase (ticker: COIN), which offers staking services to users , also stands to benefit.
Those wishing to stake with Ethereum have to lock up 32 Ether, or around $52,000.
Coinbase is one group that offers a solution to smaller investors, allowing customers to stake however much Ether they have, while collecting a healthy fee in the process .
“The immediate impact we see of the Shanghai Fork is the potential for growth in staking revenue for intermediaries such as Coinbase,” Worthington’s team wrote.
“Given validators can earn 20%+ of customer staking income, we see meaningful revenue potential for intermediaries such as Coinbase.”
And Coinbase needs diversification.
The broker’s stock has plunged 66% in the last year amid a bear market in crypto prices, which has driven away the core group of retail investors that it counts on for trading revenue.Analysts have identified staking, in addition to other crypto financial services like subscriptions and a business aimed at professional investors, as avenues for this much-needed diversification .
J.P.Morgan rates Coinbase at Neutral with a price target of $60.Coinbase stock—which has seen intense volatility in recent weeks amid dynamics indicative of a “short squeeze”—was down 6.6% on Tuesday to $69.70.
Write to Jack Denton at [email protected]
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