Institutional interest in crypto has been on the rise in the last couple years. Unlike the more common retail investor, institutional investors, such as hedge funds and investment firms, are usually loaded with capital and are viewed as catalysts to increased mainstream adoption of cryptocurrencies.
Currently institutional adoption and interest in Ethereum (ETH -1.25%) lags behind that of Bitcoin, the world's most valuable and longest tenured cryptocurrency. But that could be on the verge of changing thanks to a recent update to the blockchain.
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The upgrade before the upgrade
To better understand how institutional interest could be evolving we need to go back to September 2022, when Ethereum unveiled one of the most impactful and momentous upgrades in cryptocurrency history. Known as The Merge, this update effectively switched Ethereum from the bulky and gluttonous energy-consuming proof-of-work methodology to the more streamlined and energy-efficient proof-of-stake.
By moving to proof-of-stake, instead of miners securing the network, Ethereum holders could pledge or "stake" their holdings and earn interest. But there was one catch: Those who chose to stake their funds could not withdraw them. Ethereum developers did this to ensure there wasn't a mass exodus once The Merge went live.
But this has changed with the Shanghai upgrade, which launched on April 12. Now those who decide to stake are able to withdraw their funds if they choose to do so.
While the unveiling of Shanghai led to a rally in Ethereum's price in the last couple weeks, there is potentially a more lucrative future ahead.
A new opportunity for institutional investors
Before the Shanghai upgrade, most institutional investors held on to their Ethereum and didn't stake it. With large sums of capital involved, institutional investors shied away due to the risk of not being able to withdraw.
But with the arrival of Shanghai, there is new access to liquidity. As a result, optimism is growing that Ethereum could grab interest from capital-heavy institutional investors who are looking to earn interest on their Ethereum holdings and implement new trading strategies.
Crypto analysts believe that with staking looking more attractive, hedge funds can now utilize a method that ensures profits can be made even if they are short-selling Ethereum, betting that its price decreases. With staking withdrawals allowed, institutions can theoretically short Ethereum and will still be able to earn generous returns on their staked holdings.
For the more common retail investor like you and me, institutional adoption should be welcomed and celebrated because it could lead to more demand -- and thus higher prices. But while price appreciation is certainly a priority, there is also another dynamic at play.
Continued network progress
If institutional investors decide to stake their funds, the health of the Ethereum network should increase. Simply put, the more stakers, the more secure and decentralized the network becomes.
Currently the percent of Ethereum staked relative to the total supply lags behind that of other major proof-of-stake blockchains. Today it sits at just under 15%, while other blockchains typically average about 60%. With additional institutional and even retail interest in staking, this number will likely increase over the coming years.
As developers continue to roll out effective and necessary updates in a timely fashion that prioritize the long-term success of the blockchain, it's becoming increasingly difficult to not be bullish on Ethereum.
Based on the current trajectory, Shanghai should further expand the percent of ether staked, which should not only lead to a healthier network but could also cause institutional investors with deep pockets to pour in. If this proves to be true, Ethereum's best days likely remain ahead of it. That makes an investment in the blockchain today look alluring as its price remains more than 60% below its all-time highs.
