Ethereum (ETH) is stirring up some spirited discourse on the Web3 front. Analysts and investors are extremely interested in its price movements and market dynamics. Lim Wei Jian, a seasoned blockchain analyst, has been keenly observing the interplay of staking, supply reduction, and leveraged trading activities surrounding Ethereum. His analysis goes deep into what could cause the big, upcoming price increase, citing these points as the main drivers.

The Impact of Ethereum Staking on Circulating Supply

One key factor driving Ethereum’s price upward is the staking mechanism. When users stake their ETH, they are effectively removing their coins from circulation by locking them up. This reduction in the circulating supply leaves Ethereum with a greater ability to enjoy increased demand, driving up the price. It's a basic principle of economics: when supply decreases and demand remains constant or increases, prices tend to rise.

It’s not a one-way relationship between staking and supply. Each staker is rewarded with additional ETH, which can eventually lead to a gradual overall increase in circulating supply, over time. Yet, these incentives are often insignificant relative to the value of ETH that is already staked into contracts. Combined, the compounded effects result in a net reduction of supply made available. On top of this, the introduction of withdrawal mechanisms like the one specified in EIP-7251 and EIP-7002 offers another layer of complexity. In each of these mechanisms, it allows stakers to exit and withdraw their staked ETH. Should a significant amount of stakers decide to unstake their holdings, the circulating supply would increase substantially.

The real impact on price movement is dynamic and shaped by a multitude of broader market and economic conditions. Yet, the very act of reducing circulating supply, when paired with high demand, can create a perfect storm for the price to increase significantly.

The Potential for a Short Squeeze

Adding fuel to the fire is the overwhelming amount of leveraged short positions now held on Ethereum futures. Funds that could be leveraged are deeply lacking in the market. Further, they currently hold 12,374 short contracts (51.7% of total open interest) and only 1,275 long contracts (5.2% of open interest). This significant imbalance shows just how much these funds are betting on a huge fall in the price of Ethereum.

These leveraged short positions just reached an all-time low -13,291 in total OTC and cash contracts. This is a reflection of the increasing bearish sentiment for Ethereum. This reality leaves open the possibility for a short squeeze. A short squeeze occurs after the price of an asset unexpectedly jumps. This makes it difficult for these short sellers to pay back the asset, assisting them in covering their positions and lessening their losses. This new buying pressure can then further pump the price, resulting in a self-reinforcing cycle.

Some analysts, including Limit Wei Jian, think a short squeeze may be set off if ETH price can get back above $3,000. Should that come to fruition, it may very well drive ETH back over $3,333 and further. The current short interest and recent price action urge all traders to pay special attention to Ethereum’s price action. They need to follow the direction and pace of weekly fund positioning changes among leveraged funds. Watch out for quick, large price jumps. A heavy short squeeze would send those prices skyrocketing in a hurry.

The Viability of a $10,000 Price Target

Given these factors, the question arises: is a $10,000 price target for Ethereum realistic? Several factors support this possibility. Well, first, all the ongoing innovation and increasing usage on the Ethereum network, that’s the major factor for long-term bullishness. For reference, the Dencun upgrade by March 2024 would improve scalability by 74%. It drastically reduced transaction fees, making Ethereum the most attractive blockchain to users and developers alike.

The Total Value Locked (TVL) in Ethereum Layer 2 solutions is growing like never before. It’s jumped to $41.2 billion, a whopping 18% spike just in the last month. Such a reduction would reflect increasing confidence from the market in the Ethereum ecosystem and its capacity to scale and accommodate accelerated transaction volumes. Third, whale addresses hoarding more than 10,000 ETH are increasing. In July alone, they grossed over 240,000 ETH! This accumulation represents newfound confidence by the big boys and indicates they’re looking for more price appreciation to come.

While a $10,000 price target is certainly ambitious, it's not entirely out of the realm of possibility, especially considering the following:

  • Continuous development and adoption: Crypto experts suggest a rapid climb, with Ethereum possibly reaching around $11K by 2026, driven by continuous development and adoption.
  • Whale accumulation: Sustained whale accumulation could propel Ethereum toward the 0% retracement level around $2,879, representing the previous significant high before the major correction phase.
  • ETF staking approval anticipation: The potential approval of Ethereum ETFs that allow for staking could attract significant institutional investment, further driving up demand and price.

With that excitement, we must recognize the risks. The second major risk is basis trading strategies that exploit price discrepancies across exchanges or markets. While most of these strategies are technically legal, they significantly increase volatility and likely serve to destabilize the market. A second danger is centralization. Today, one liquid staking solution, Lido, represents nearly a third of all ether deposited as stake. This unprecedented level of concentration is raising red flags around potential vulnerabilities and governance challenges.

If whale buying pressure pushes the Ethereum price above $2,800 resistance, first targets are up to $3,000-3,200. Whale accumulation accelerates as Ethereum price surges. Following several years of relatively muted growth, this new trend reflects robust demand and further cements Ethereum’s position as a flagship institutional asset. Ethereum whales just started their most aggressive accumulation campaign since 2018. On June 15, they removed 818,410 ETH – $2.5 billion worth – in a single day. Trend of accumulation continues to look like accumulation seen as recently as 2017, illustrating the magnitude and ferocity of buying by large-holders recently. Another risk occurs when two interrelated prices do not move together. This is possible even under the assumption that both prices move as expected. This might diminish the power of a hedge.

Lim Wei Jian underlines the need to know these risks and do careful and adequate research before pursuing any investments. It’s no secret that the cryptocurrency market provides an amazing opportunity for massive returns. Yet, it’s incredibly volatile, so investors need to be prepared for significant losses.