March 30, 2022

Defining crypto and the future of finance

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Welcome to Crypto for Advisors! In this week's newsletter:

Ethereum's Shanghai upgrade will unlock ether that has been staked since the "Merge," potentially leading to selling pressure that market participants could ride out or take advantage of - and that advisors can help them navigate, as Jackson Wood writes today.

Also in today's newsletter, given that XRP has surged to a five-month high as a court case involving the cryptocurrency is expected to end soon, we share a primer from Mason Marcobello on Ripple and XRP.

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How Advisors Can Prepare for Ethereum's Unlock

(Otran95/GettyImages)

The Ethereum network is set to undergo its next upgrade, the Shanghai Upgrade, on April 12, 2023. When the Shanghai upgrade is implemented, this will effectively unlock the ETH that has been staked since the "Merge."

The downside to staking Ethereum after the upgrade was that those staking (or those running validator nodes) were required to stake their ETH until the next upgrade. This lack of liquidity for ETH holders created an illiquid amount of ETH that was unable to be sold during the last few months.

Many critics of Ethereum have said that this has created false supply and demand levels and liquidity on the network. While Ethereum has rallied over the last few months, many investors are concerned that when the staked Ethereum becomes liquid, the selling pressure (due to an increase in liquid ETH) will drive down the price of Ethereum.

There are currently 16 million ETH staked, which will be available for withdrawal once the Shanghai upgrade is live. Not all of these 16 million ETH will be liquid at the same time, as developers have implemented a queue for withdrawals. ETH will be available for withdrawal every 12 seconds, and only 16 withdrawal requests can be met at each opening.

Those wishing to withdraw have two options. First, they may request to withdraw only the rewards they've earned from their validator nodes. Second, they may request to exit their validator nodes entirely, withdrawing the 32 ETH that is required to run a validator.

While analysts have attempted to determine the demand for ETH withdrawal, it's nearly impossible to predict with accuracy. Human emotion, often driven by price and market sentiment, will come into play when the ETH is unlocked.

Some believe that the Shanghai upgrade will cause an increase in selling pressure as the 16 million "locked" ETH becomes liquid, while others believe that the new liquidity options will increase the demand to stake ETH.

Those who are looking to trade the price of Ethereum may be encouraged by the Shanghai upgrade, as it will surely increase volatility, at least temporarily. Others may choose to ride out the volatility, believing that this upgrade strengthens Ethereum's investment thesis and likelihood of growth.

– Jackson Wood

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Decrypting Crypto

What Is Ripple and the XRP Cryptocurrency?

The concepts behind Ripple reportedly predate Bitcoin by four to five years. In 2004-2005, Ryan Fugger, a Canadian computer programmer, developed RipplePay as a way to provide secure payment options to members of an online community via a global network.

But it would take another six years before the blockchain-based payment system known as XRP and its founding fintech company, now known as Ripple, were started.

XRP is now at the center of a legal battle between the company and the U.S. Securities and Exchange Commission (SEC), which alleges that the asset is an unregistered security that Ripple sold in violation of federal law.

Backing up: The XRP Ledger is an open-source, public blockchain that was first created in 2011 by developers Arthur Britto, Jed McCaleb and David Schwartz to solve the inefficiencies of cross-border remittance and payments in traditional banking. (The three, along with the addition of Chris Larsen as CEO, would later found the company now known as Ripple.) The XRP Ledger serves as the rails on which the decentralized XRP cryptocurrency runs.

– Mason Marcobello

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Disclaimer: The information contained in this newsletter, and any information linked through the items contained herein, is not intended to provide sufficient information to form the basis for an investment decision. You should seek additional information regarding the merits and risks of investing in any cryptocurrency or digital assets.