Ethereum (ETH -4.47%) is up 60% for the year, and all eyes are now on the blockchain's pending Shanghai upgrade. This is the first major upgrade to Ethereum since The Merge, and has been highly anticipated for months.
The Ethereum bulls, of course, think that Shanghai will be a huge win for Ethereum, and are getting ready for a huge rally. Some are even predicting a $10,000 price for Ethereum by 2025. But just how realistic is that target? After all, the record high for Ethereum ($4,891.70) is less than half that level.
What happens to Ethereum after Shanghai?
Both bulls and bears agree that the Shanghai upgrade is pivotal to what happens next with Ethereum. The upgrade is directly related to Ethereum's transformation from a proof-of-work blockchain into a proof-of-stake blockchain last year. As soon as that change took place, Ethereum had to consider the implications for staking, which is the process of locking up crypto on the blockchain in exchange for rewards.
Currently, the lockup period for Ethereum is indefinite. You can stake your Ethereum and earn rewards, but you cannot unlock it and take it out of the blockchain. The primary purpose of Shanghai is to make it possible to withdraw this staked Ethereum, some of which has been locked up since December 2020.
Image source: Getty Images.
According to the Ethereum bulls, the Shanghai upgrade is going to result in huge new flows of capital coming into the blockchain. That's because Shanghai will de-risk staking on the blockchain and pave the way for more individual investors to get involved. If you look at how much Ethereum has been staked, it is only about 16% of the crypto's entire market cap, compared to levels of 60% to 70% found on other blockchains. So it does make sense that the Ethereum staking ratio will one day align with the percentages found on other proof-of-stake blockchains because investors no longer will face an indeterminate lockup.
However, that's over the long term. In the short term, the upgrade could spur a huge retreat from Ethereum as investor who have been locked up take flight. This could lead to a huge price dump. Nearly 1 million Ethereum tokens will be available for immediate unstaking in April, and this means that nearly $2 billion worth of Ethereum could be dumped on the market. That doesn't even take into account what happens to the other 18 million Ethereum tokens (worth an aggregate of $36 billion) that have been staked.
Will Ethereum finally get its promised upgrades?
What many investors don't realize is that Ethereum's digital transformation is really only halfway to completion. It did not end with The Merge. Vitalik Buterin, co-founder of Ethereum, originally promised 100,000 transactions per second. And he also promised that Ethereum gas, or user, fees would decline markedly after The Merge, making the blockchain much more attractive. But what's the reality? Ethereum still has a transaction processing speed of less than 50 transactions per second, which is glacially slow. And gas fees are not much improved, either.
So, it could take until 2025 before Ethereum reaches higher functionality. In November 2022, Buterin published an updated roadmap, and the future development of the blockchain consists of at least five more stages. Given how long it took to implement The Merge, and how many delays there were along the way, this could be a very long process.
Ultimately, these delays and accompanying uncertainty could have a negative impact on the price of Ethereum. Investors are going to get tired of waiting, and when people finally realize that Ethereum still relies heavily on Layer 2 scaling solutions by other cryptos even after The Merge, there could be a move to embrace other blockchain solutions that don't come with Ethereum's legacy proof-of-work problems.
What is a realistic Ethereum price target?
That said, I'm still bullish on Ethereum for the long haul. But not so much in the short term. It will take time to deal with the ramifications of Shanghai, especially if there is a short-term price dump. Any price volatility could panic investors if it lasts too long. And it will take time to push through all the really big blockchain innovations that are the keys to Ethereum ultimately boosting its transaction processing rate and lowering its transaction fees.
A more realistic price target, in my opinion, is $3,000. Ethereum last hit this price a year ago in April 2022. Based on today's prices, that represents a gain of more than 50%. If and when Ethereum ever hits that target, that's when investors can have a discussion about a $10,000 price target.
