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Trading View (next 2-4 weeks): We like to be slightly bearish ethereum.

Investment View (next 1-3 years): We like to hold ethereum.

Trading View (next 2-4 weeks): We like to be slightly bearish ethereum.

Investment View (next 1-3 years): We like to hold ethereum.

In our last Ethereum update, we identified three possible scenarios that could play out after the much-awaited Shapella upgrade completed on 12 April:

Now a month on from the successful upgrade, we investigate how ethereum has performed since and any changes in the staking landscape.

Ethereum price little changed. Ethereum rallied +12% in the days after the upgrade, followed by a decline in tandem with the broader crypto market (Chart 2). Currently, it is down around 2% since the upgrade, so overall there has been little movement since Shapella. Notably, several significant macro events have impacted crypto markets over the period, too (CPI, NFP, and central bank rate hikes to name a few).

What sell-off? One scenario was a sell-off induced by validators claiming their staking rewards and offloading them onto exchanges. Around 119,000 ETH entered exchanges a day after Shapella, before settling at a lower daily rate (Chart 3). This is a relatively small spike in the exchange deposits and within range of typical exchange flow patterns.

How many validators exited the validator pool? There are two types of withdrawals: partial and full. Partial withdrawals allow validators to periodically withdraw their staking rewards over time. Full withdrawals occur when a validator withdraws their entire staked ETH and any accumulated rewards and stops participating in validation. We saw a spike in full withdrawals a day after Shapella, with around 14,249 validators exiting the validator pool (full withdrawal, Chart 4).

Staking deposits rise. One possible scenario was the Shapella upgrade making more people willing to stake ETH. This seems to have played out, with the number of new 32 ETH stake deposits made into the staking contract rising exponentially post Shapella (Chart 5).

Overall, the completion of the Shapella upgrade saw staking rewards withdrawn, but with little direct impact on ethereum prices. Our original estimate of a limited impact on prices in the short to medium term seems to have played out.

The Federal Reserve (Fed) hiked 25bps, in line with market consensus and our expectations. Fed Chair Jerome Powell did not rule out a June hike and sees financial instability impacting Fed policy through a credit crunch, if at all.

April CPI showed no incremental progress on disinflation, as a large increase in used car prices offset slower inflation in other categories. Additionally, the ongoing recovery in rental indices suggests the progress on shelter cost inflation (+42bps MoM vs +56bps MoM for March) could turn out to be transitory.

April nonfarm payrolls (NFP) at +253,000 exceeded expectations of +185,000.In line with labour market tightness, wage pressures are starting to show with average hourly earnings (AHE) accelerating +0.5% MoM against expectations of +0.3% MoM. This acceleration occurred alongside a decrease in overtime hours (which tends to weigh on average wages as overtime work is paid more), suggesting a strong underlying trend in wage growth.

Markets are under-pricing the risk of a 25bp hike at the June FOMC meeting. Despite ongoing banking turmoil, the Feds assessment of the economy was unchanged: the labour market remains very tight, inflation is well above target, and the process of getting inflation back down to 2 percent has a long way to go. Should the current inflation and growth dynamics continue, and barring a debt ceiling crisis, we believe the Fed could hike 25bps in June, in contrast to a virtually 0% chance of a hike currently priced in by markets.

We have two bullish signals this week:

We have two bearish signals:

The remaining two signals are neutral:

On balance, on-chain/flow metrics are giving a neutral signal for ethereum. Here are the details of each metric (with explanations in the Appendix).

Our preferred metric to track institutional demand is flows into ethereum ETFs. The year so far has had a bias for outflows, though flows have been small in magnitude compared to recent history (Chart 6). More recently, there have been around $6mn of outflows from the ethereum ETFs we track over the past five days. This is bearish.

On exchange flows:

On balance, the bias for exchange outflows is bullish for ethereum.

On futures markets:

Futures open interest has not moved meaningfully on a MoM basis and despite funding rates remaining positive on average, their magnitude has been decreasing. Overall, this is neutral for ethereum.

On HODLer metrics:

A significant proportion of the ethereum supply remains dormant which points to a strong investor base that continues to hold despite ongoing macroeconomic and regulatory headwinds. This is bullish for ethereum.

On profitability of the coin supply:

The profitability of the coin supply has taken a small hit recently but realised profits on-chain (SOPR > 1) still dominate. Overall, this is neutral ethereum.

Of the top five DeFi protocols by total value locked (TVL), ethereums TVL is up the second highest at +5% WoW, after Trons TVL which is up +6% WoW (+1% WoW, Charts 16 and 17). All other chains in the top 5 by TVL are also up in terms of their TVL between 2% and 4% each. The increase in ethereums TVL is bullish.

Perhaps the largest institutional vehicle for ethereum is the Grayscale ETHE Trust, with over $27bn in assets. It invests solely in ETH, and so many investors, notably institutional, who cannot hold ETH directly can get exposure through investing in Grayscale. Consequently, if the trust trades at a premium to ETH prices, it may imply excess demand from institutions, but excess supply if it trades at a discount. Alternatively, the discount may suggest investors have found other ways to get exposure to ETH, whether through ETFs or directly holding ETH. We therefore focus on how the discount has changed in recent months to gauge investor interest. Alternatively, investors may be using other vehicles to get exposure such as ETFs or holding ETH directly. We put more weight on ETF flows than the Grayscale premium.

Another measure of cryptocurrency bullishness is whether investors are willing to hold it in illiquid form (e.g., a private wallet) or prefer a liquid form (e.g., on an exchange). The former would suggest investors are bullish, as they are comfortable with being unable to sell easily. Conversely, holding it in liquid form would suggest investors are bearish, as they prefer being able to sell easily.

Therefore, large flows onto crypto exchanges would suggest investors want to convert their holdings to a more liquid form, implying more bearishness.

We track the growing market of ethereum futures. Open interest the sum of long and short contracts is a good measure of investor interest.

Perpetual funding rates reveal the directional bias of investors. Exchanges set funding rates to prevent a lasting divergence in the price of the futures contract and the underlying since perpetual contracts have no expiry date so never settle in the traditional sense. Consequently, we can interpret funding rates as the cost of holding ethereum via perpetual futures. Positive funding rates imply longs pay shorts and vice versa. We use it as a proxy for trader sentiment since a positive funding rate implies traders are paying a premium to keep open long positions.

In our introductory bitcoin flow framework, we explained HODLers and HODLing. HODLing refers to buy-and-hold strategies in the context of bitcoin and other cryptocurrencies. Those who HODL for extended periods are die-hard adherents.

We can categorise HODLers by the length of time they have held ETH. We define long-term or staunch HODLers as those who bought ETH five or more years ago and have held it ever since, medium-term HODLers as those who bought 6-12 months ago, and short-term HODLers as those who bought 3-6 months ago.

The coin days destroyed (CDD) metric is defined as the number of coins in a transaction multiplied by the number of days since the coins were last spent. So, increasing CDD suggests older coins are being spent (more coin days are destroyed) and vice-versa.

When SOPR is rising, sellers are increasingly realising profits. The opposite is true when it is falling. A price rally with a flatter SOPR trend indicates investors are not yet realising their profits with the rally. The reluctance of investors to sell and realise a profit may be because they believe the price will increase further, which would be bullish. At the same time, more profit taking could precede a correction. Typically, buying as SOPR moves around one during bullish periods has proven to be a profitable strategy.

Computing power is central to the crypto market. Miners use advanced computing hardware to solve complex problems that confirm ETH (and other coins) transactions on the public ledger or blockchain. The miners are rewarded with new coins for their efforts. A measure of the complexity of the problems and so the computing performance required to solve them is the hash rate. The higher this rate, the more computing performance is needed to maintain the blockchain. The rate can fluctuate depending on demand for crypto.

We track the total value locked (TVL) in decentralized finance (DeFi) the sum of all assets deposited in DeFi protocols, many of which use ethereum as the underlying protocol. The more DeFi products are created, the more ethereum gets locked into the DeFi system and removed from the broader market. This reduction in supply should lead to higher ethereum prices.

Excerpt from:

How Has Ethereum Performed Since the Shapella Upgrade? - Macrohive