The decision by crypto exchange Kraken to shut its staking business as part of a settlement with the U.S. Securities and Exchange Commission has added to the uncertainty around ether (ETH) supply dynamics ahead of the Ethereum blockchain’s next upgrade, the Shanghai Fork, Coinbase (COIN) said in a research report Tuesday.
Coinbase notes that Kraken’s staking pool on Ethereum makes up about 7% of total staked ether supply; however, not all of these assets will have come from U.S. retail clients.
“Unstaking by Kraken could result in a minimum of [350,000] up to a maximum of 1.145 [million] additional ETH that could potentially circulate in the market when the staked ETH withdrawals are enabled in the Shanghai Fork,” wrote David Duong, head of institutional research. The Shanghai Fork will allow ether that has been staked, and is currently locked, to be withdrawn for the first time.
It’s unclear if freeing this additional ether will be a catalyst for selling pressure, the report said, noting that in December, investors were worried that the upgrade “represented an important event risk to the downside,” but that view shifted as crypto market sentiment improved.
While the regulatory environment has clouded the outlook, selling pressure should be fairly limited because there are mitigating factors and “self-correcting mechanisms” that should help control the flow of ether on the open market, the note said.
Ether performance around the fork will be more dependent on what “risk does at the time withdrawals are enabled.” If the macro environment deteriorates and equity markets are weak in March, investors may decide to unstake and sell ether to reduce risk, while institutions may not step in as aggressively as buyers, the note added.
Conversely, if risk sentiment at the time is positive, Coinbase says it would expect demand to more than offset the amount of ether being unlocked on the open market.
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