Ether (ETH) has underperformed bitcoin (BTC) this year by 14% but it is now breaking out ahead of the Ethereum blockchain’s planned Shanghai upgrade, Bernstein said in a research report on Wednesday.

With Ethereum's Shanghai upgrade scheduled for April 12, ether has gained 6% in the last 24 hours, and the cryptocurrency is showing early signs of relative strength versus bitcoin, analysts Gautam Chhugani and Manas Agrawal wrote.

The move higher is reminiscent of when ether rallied into the Merge, the most recent upgrade of the Ethereum blockchain which took place in September, Bernstein said.

The Shanghai upgrade will enable the withdrawal of staked ether (stETH). The Merge involved the transition from proof-of-work (PoW) to proof-of-stake (PoS) consensus mechanism.

The broker notes investor concerns that post the Shanghai upgrade there would be a supply overhang as stakers can now withdraw their ETH deposit and rewards.

However, as the upgrade approaches there will be an “increased realization” that nearly 70% of staked ether is via liquid staking protocols such as Lido and they allowed investors to sell their stETH regardless, “so liquidity for 70% of staked ETH is now new, they could do it anyway,” the note said.

The remaining staked ether has been directly staked into the beacon chain, and therefore is unlikely to be short-term holders given they deposited their ETH in December 2020 when there was significant uncertainty of whether the transition to proof-of-stake would succeed, the note added.

The ability to deposit and withdraw ether easily gives more confidence for holders to stake, and those on the sidelines are more likely to stake now, the report added.

Read more: Ether Jumps to Nine-Month High Ahead of Shapella, Liquid Staking Tokens Jump

CORRECTION (April 5, 2023, 10:35 UTC): Corrects fourth paragraph to say the transition was from PoW to PoS.