Ethereum (ETH 2.04%) developers are planning another upgrade, set to be released sometime this March. Building off its previous upgrade, known as The Merge, this next one is being referred to as Shanghai and will allow users to withdraw staked Ethereum that was previously locked up on the blockchain.
There is some uncertainty what the Shanghai update might do to Ethereum's price in the short term, but over a longer time frame, it is considered a much-needed change for the crypto to finally reap some benefits that come with its move to proof-of-stake.
With users having the ability to withdraw their staked funds whenever they want, the blockchain will probably experience a surge of users looking to stake and earn interest on their Ethereum. But there is one other possible benefactor coming out of the Shanghai upgrade: Coinbase Global (COIN 2.80%).
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Diversifying business models
In the crypto winter, Coinbase's revenue took a serious hit due to decreased trading by users. And that is likely part of the reason its stock is down to over 70% in 2022.
However, executives at Coinbase have made it a priority to diversify their sources of revenue, and staking will play an integral role. In their most recent shareholder letter, they said they want Coinbase to "be the best platform to generate rewards on crypto."
While Coinbase currently enrolls users in automatic staking when purchasing cryptocurrencies like Cardano, Solana, Tezos, and many others, the number of Ethereum stakers is much lower. But the Shanghai update might bring a wave of Ethereum holders looking to earn interest on staked funds now that they know they can make withdrawals, a development that could give Coinbase a jolt in revenue. Somewhere around 25% of all assets on the Coinbase exchange are Ethereum.
It is estimated that Coinbase currently generates around $50 million from staked Ethereum. Currently, users must opt-in to stake Ethereum because withdrawals are not allowed, but that should change soon with Shanghai.
In a J.P. Morgan report, analysts surmised that if Coinbase implements automatic staking for users, like it does with other cryptocurrencies, the exchange could potentially increase its profits on staked Ethereum anywhere from $225 million on the low end, up to $545 million.
An increase of that size would represent a significant bolstering of Coinbase's revenue and represent a much needed breath of fresh air from the brutal crypto winter that has pummeled the company. If J.P. Morgan analysts are correct, the Shanghai upgrade could prove to be one of the most lucrative events for Coinbase. After only generating $576.4 million in profits in the third quarter of 2022, additional revenue from Ethereum staking could increase its bottom line anywhere from 39% to 94%.
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A valuable opportunity for long-term investors
Investors shouldn't expect these profits to be realized immediately after Shanghai's unveiling. It will likely take months -- and perhaps a few years -- before Coinbase can maximize profits from Ethereum staking, but that presents a potentially lucrative opportunity for the exchange's shareholders.
Since the beginning of the year, Coinbase's stock has rallied nearly 70% as the broader cryptocurrency market experienced a surge. But even so, Coinbase remains in rough shape. As of this writing, the stock costs about $55, a far cry from its $342 all-time high.
There is reason to believe the cryptocurrency market might have bottomed out. And as this crypto winter continues to thaw, Coinbase's stock will likely benefit due to its high correlation with the asset class.
An investment today seems plausible, depending on one's appetite for risk, but with the added potential of the Shanghai upgrade, Coinbase looks to be in a favorable position to reward investors in the coming years.
