While bitcoin has gained nearly 43% this month, ether has appreciated by 36%.
Ether (ETH) turned deflationary two weeks ago, with its net supply increase turning negative for the first time in over a month.
The second-largest cryptocurrency’s net issuance or the annualized inflation rate dropped below zero on Jan. 15 and stood at -0.01% at press time, according to ultrasound.money. The data shows the leading smart-contract blockchain is now burning more ether than what’s being minted as opposed to bitcoin.
Still, the native token of Ethereum’s blockchain lags behind bitcoin (BTC) as January draws to a close.
While bitcoin has gained nearly 43% this month, ether has appreciated by 36%, CoinDesk data shows. The ether-bitcoin ratio, or ETH/BTC, is on track to post its second straight monthly decline.
Here are three factors responsible for ether’s underperformance:
Defensive positioning before Shanghai upgrade
“The most important [reason] is defensive positioning ahead of the Shanghai update. In a few months, this will enable withdrawals of ETH from the Beacon Chain. Some fear a share of these unlocked ETHs will get sold,” Ilan Solot, co-head of digital assets at financial firm Marex Solutions, said in an email.
Ethereum’s Shanghai upgrade, expected in March, will allow the withdrawals of 17.2 million ether staked or deposited in Beacon Chain since December 2020.
The whole staking balance of 17.26 million cannot be withdrawn on the day of the upgrade, and only 43,200 ETH can be unstaked per day. However, the total staking reward of the past two years, which equates to around 1 million ETH, can be withdrawn instantly.
The market is worried that the unlocked ether will be instantly liquidated into the market, pushing the price of the cryptocurrency lower.
“The 1 million instantly withdrawable ether is more of a concern. This amounts to around 1% of free-floating ether, in other words, not staked ether. In a matter of minutes, the whole stack gets withdrawable, potentially causing holders to rush to exchanges to liquidate the ether as soon as the floodgates are open, pushing down the price,” Saxo Bank said in a blog post.
“This sentiment about upcoming selling pressure is likely to be more powerful as the Shanghai hard fork comes closer,” Saxo Bank noted, adding some traders may hedge against an expected price drop by shorting the cryptocurrency in the futures market.
