Ethereum’s staking contracts have reached a significant milestone, holding nearly one-third of the total ETH supply, which amounts to 29%. This substantial lockup has created a supply shock, tightening the market and causing a decrease in liquidity on exchanges. Major ETH withdrawals have persisted, further exacerbating the situation. The current market conditions are tense, with a high level of leveraged short positions and dwindling liquidity on exchanges.
Basis trades by hedge funds, which exploit the price discrepancy between futures at CME and the spot market, have contributed to the supply crunch. These trades involve shorting futures and going long on ETH spot to earn staking rewards, which are approximately 13% per annum. This strategy has led to a sharp increase in leveraged short positions, reaching a high of -13,291 contracts, the steepest decline since the beginning of 2025.
Data from the Ethereum blockchain reveals that 121,000,000 Ether is currently staked, representing over 29% of the total supply. This significant lockup has reduced the circulating money supply, making liquidity scarce and putting upward pressure on prices. On average, more than 140,000 ETH are withdrawn from exchanges daily, equivalent to around 393 million dollars in value, further constricting supply.
The supply shock is being reinforced by large holders and institutional investors who are accumulating ETH off exchanges. This trend has contributed to Ethereum’s recovery to near its current price of $3,000, although it remains 38% below its all-time high from November 2021. The impact of the supply shock is expected to intensify as Ethereum staking ETFs are likely to be approved by the end of the year, potentially pushing more capital into staking and further reducing liquidity.
The current level of staking, combined with record short positions, creates the potential for a short squeeze. As prices begin to rise sharply, short sellers may rush to cover their positions, fueling a rally. The supply constraints and staking rewards could propel Ethereum to new heights during this cycle, with some analysts estimating a price target of up to 10,000 dollars. However, the basis trade strategy carries risks, as market volatility could lead to a loss of investor confidence and a crash similar to the one witnessed on Black Thursday in 2020.
The current market dynamics suggest that the relationship between supply and demand is becoming increasingly fragmented, with stakers acting as a major sink. This aspect could also drive a bullish Ethereum market if demand remains steady or increases. The overall market outlook is tense, with the potential for significant price movements as the supply shock continues to unfold.
