“That’s Our 2 Satoshis” — The Shanghai ETH Rally & Contrarian Investing

• The consensus view heading into 2023 was that digital asset investing was dead amidst a regulatory crackdown and a string of high-profile bankruptcies. 
• The consensus view from a macro perspective was higher rates for longer, a drop in stocks, and an imminent recession.
• The consensus heading into early March was that a banking crisis would be bearish for risk assets, including digital assets. 
• The consensus view within digital assets was that Bitcoin was dead and would continue to underperform ETH and other assets.
• And the consensus heading into the Ethereum Shanghai fork this past week was that ETH would fall precipitously once early stakers could unlock and sell
  

The contrarian trade has worked all year. While some of the contrarian success has been due to the unwind of crowded trades, most of it was due to consensus just being flat out wrong, especially regarding interpretation of investor behavior around key events.

This past week, the Ethereum blockchain successfully completed its 15th hard fork—Shanghai—which primarily activated staked ETH withdrawals and marked the completion of Ethereum’s transition to a proof-of-stake (PoS) consensus protocol. For some reason, there were numerous claims that 1 million ETH (~$2B) would be sold instantly and it would be bearish for ETH. This analysis never made sense for a variety of reasons. First, it is impossible because Lido (which controls 30% of staking rewards) isn't unstaking until next month. Second, it assumed that individual home stakers who locked up ETH in late-2020 for an unknown amount of time would suddenly dump all of their ETH (and forgo future yield) at a loss and convert into fiat or stablecoins (which became even more unlikely post the March banking crisis of confidence). Further, these claims didn’t recognize that stakers cannot withdraw ETH instantly; staked ETH takes 4-5 days to access. 

Expectations of large outflows did not materialize. As Galaxy Digital wrote in their weekly note to clients:

“Deeper analysis of withdrawal activity on Ethereum since Shanghai indicates that the vast majority of withdrawals processed are partial, representing Beacon Chain issuance rewards, not full, which would conversely represent validators exiting the network and unstaking their principal balance of 32 ETH. Of the full withdrawals process on Ethereum in the first 24 hours after Shanghai, 97% of them have been initiated by cryptocurrency exchange Kraken, which earlier this year was forced to shut down their staking-as-a-service product due to enforcement actions by the SEC. Therefore, contrary to some Ethereum critics’ expectations, it is clear that Ethereum validators have not been ardently waiting for the activation of Shanghai to dump their ETH. Rather, the vast majority of Ethereum validators are continuing to stake, and the ones that are not are predominantly validators operated by a crypto exchange retiring their staking operations.”