Excitement is building for the new Ethereum (ETH 0.74%) upgrade, known as Shanghai, which is tentatively planned for March. However, investor anticipation of this new Ethereum tech upgrade reminds me a lot of what happened with the Merge in 2022. This turned out to be a case of "buy the rumor, sell the news" -- the price of Ethereum increased briefly over the summer but began to slide as we got closer to The Merge. The big returns investors had hoped for never materialized, and Ethereum is now up less than 5% since the day of The Merge.
Will the same thing happen with the Shanghai update? If you're thinking of buying Ethereum now, here's what you need to know.
The Ethereum roadmap
The first thing investors need to understand is that the Shanghai update is just one in a long series of updates that Ethereum has planned over the next few years. To get the Shanghai update to ship on time, Ethereum developers have agreed to delay some planned improvements and enhancements to focus on just a single vital feature: the enabling of staking withdrawals.
Image source: Getty Images.
The new Shanghai update is really all about unlocking the Ethereum that validators have staked on the blockchain. In some cases, early validators have had their crypto locked up for years, which is why Ethereum's developers have prioritized this update. As one prominent developer involved with The Merge points out, the ability to withdraw this staked Ethereum does nothing to make the blockchain better.
The really exciting stuff will happen later this year and into 2024. According to the official roadmap that Ethereum co-founder Vitalik Buterin has posted online, the next big upgrades will include improvements related to rollups and sharding. These important upgrades will make Ethereum more scalable and boost overall capacity. With rollups, for example, it will be easier to bundle up a large number of Ethereum transactions and process them all at once instead of dealing with them on a one-by-one basis. This helps make Ethereum cheaper, faster, and more efficient to use.
Short-term versus long-term outlook
In many ways, the decision of whether to buy Ethereum should hinge on your long-term determination of value and not on the potential for a short-term price spike. According to the Ethereum roadmap, numerous changes are coming, so there is reason to be excited about Ethereum for the long haul. Developers are clearly committed to making Ethereum as fast, scalable, and secure as possible. This both benefits users and helps to improve the whole Ethereum ecosystem.
From my perspective, The Merge was a major technological achievement. Some have likened it to changing the engine on a jet airplane in midflight. Shanghai, by comparison, is similar to making a few repairs to that same jet after it has already landed safely. All the heavy lifting has already been done. If Ethereum didn't get a huge bounce after The Merge, then why would it get one after Shanghai?
Moreover, the planned fix to staking withdrawals could actually end up hurting the price of Ethereum in the short term. The thinking here is that all of this Ethereum -- previously locked up and unavailable for trading -- will suddenly hit the market all at one time. If validators decide to sell their Ethereum, it could push down prices.
Recalibrate your expectations
I'm bullish on Ethereum for the long term, but it's important to pump the brakes a bit when it comes to getting too excited about this next tech upgrade. Buterin has promised more significant upgrades for Ethereum later in 2023 and into 2024. He has also hinted that the full transition to Ethereum 2.0 could take years, not months. By some estimates, we're only halfway there. So if you are thinking about buying Ethereum, focus on the long term, not on the constant flow of upgrades and updates that Ethereum will get this year and beyond.
