Ethereum’s staking mechanism has effectively locked up almost a third of its supply – about 29%. In total, over $40 billion worth of ETH has been taken out of circulation forever. Like De Beers’ diamond shortage, this produces a supply shock, but the results are far more uncertain. Or is this an absolutely genius plan to catapult Ethereum to the moon? Or is it an inherently unstable house of cards, destined to collapse at the first politically unfavorable wind?

Staking: A Double-Edged Sword?

On the surface, the narrative is compelling: less ETH available, increased demand (potentially fueled by staking ETFs), and a price surge towards that mythical $10,000 mark. The persistent ETH withdrawals from exchanges, averaging a staggering 140,000 ETH daily, paint a picture of institutional accumulation and dwindling liquidity. There’s something fascinating about a reservoir slowly draining. You can touch the excitement, fully aware that the value of what remains will soon be worth far more—unless that dam bursts.

This is where the good news rug gets pulled out from under us. Though certainly profitable, this created scarcity comes with real risk. Record-high leveraged short positions in Ethereum futures, largely fueled by the basis trade strategy, are another red flag.

This “basis trade” consists of shorting futures and longing spot ETH to earn staking rewards. In other words, it’s a wager on the price gap between the two coming together. It’s a pretty elaborate game that’s mainly played by hedge funds, and the goal is to try to capture that juicy ~13% staking yield. Then what do you do when everyone’s just agreed to play the same game? It turns into a crowded trade, prime for a nasty snap back surprise.

The "Black Thursday" Echo

The piece only woodsheddingly refers to the “Black Thursday” crash of 2020. Yet, perhaps this is the takeaway; it’s a frightening testament even the best-laid plans can fall apart under unprecedented market instability. Consider a situation in which a black swan event leads to a large sell-off. Those short leveraged positions would all need to cover, pushing the price higher in a cascading effect and a violent, painful, short rescue squeeze. The market equivalent of pouring gasoline on an inferno.

Think of it like this: you're holding a coiled spring, compressed by immense pressure. The potential energy is massive and even a slight release could shoot it upward. What if the spring snaps? The ensuing confusion might devastate wealth and destroy faith in the market.

Are Staking ETFs a Ticking Time Bomb?

The prospect of Ethereum staking ETFs being approved by year’s end complicates matters further. That, in turn, could raise additional demand and further exacerbate the supply. As a tradeoff, it would create a lot of power among only a few players. This is why these ETF providers will be the gatekeepers to the staking ecosystem. Their power would be sufficient to corrupt the governance process and grant them unjustified domination over the network. As such, it’s a centralization risk masquerading as a democratization opportunity.

Consider this: if a major ETF provider decides to change its staking strategy or encounters regulatory hurdles, it could trigger a massive liquidation event, sending shockwaves through the market. Are we really ready for that degree of concentrated risk?

The scattered supply-demand relationship is worsened by the introduction of staking. A sudden, unforeseen demand could lead to a very quick spike in costs. If sentiment were to turn on a dime it could lead to prices crashing. That prospect of a $10,000 Ethereum sure sounds nice. Do remember that markets almost never go in a straight line.

Before you jump headfirst into the staking frenzy, take a step back and ask yourself: are you truly comfortable with the level of risk involved? Have you thought about the possibility of a “Black Thursday” type ordeal? Are you ready to ride out the storm if the market goes south on you?

Don't let the hype cloud your judgment. As with any investment, do your own due diligence, consult with a trusted financial advisor, and proceed cautiously. Staking ETH might be a long-term winner. It has major risks in the near term. The stakes are significant, and only the savvy will make it out alive.