How Does the Green Light of Spot Ethereum ETFs Impact the Future Market?

[TL；DR]:

The US Securities and Exchange Commission (SEC) approved the Ethereum spot ETF trading plan on May 23, which is widely interpreted by the market as a political driving force in the context of this year’s presidential election.

The approval of Ethereum spot ETFs will undoubtedly stimulate the value discovery of Ethereum and its eco tokens, and from a longer-term perspective, it will also pave the way for the adoption of more high-quality cryptocurrencies.

Referring to the impact of converting GBTC to spot ETF on the price of Bitcoin, although Ethereum may face downward pressure in the short term, it will have a more positive impact in the long run.

Introduction

Several months after the listing of Bitcoin spot ETFs, the cryptocurrency market has made another breakthrough. The US Securities and Exchange Commission (SEC) approved the Ethereum spot ETF trading plan on May 23, which will be implemented by the New York Stock Exchange (NYSE), Chicago Board of Options Exchange (CBOE), and Nasdaq. Trading is expected to begin later this year, with potential issuers including BlackRock, Fidelity Grayscale, VanEck, and Franklin Templeton, among others.

The article will provide an in-depth interpretation of the twists and turns experienced by Ethereum’s ETF approval process, from initially being strongly undervalued to a sudden shift in SEC attitude, and what impact it will have on the future market.

Spot ETF Approval Embraces “Green Light”, Ethereum Soars 20%

Against the backdrop of the widespread market belief that the US Securities and Exchange Commission (SEC) was unlikely to approve Ethereum spot ETFs, this pessimistic expectation was completely overturned in the early hours of May 20.

Previously, the controversy over whether Ethereum is a security has hindered the approval process of spot ETFs. At the time of approval, the Grayscale withdrawal of the Ethereum futures ETF application was even speculated to be “in order to increase the probability of spot ETF approval.” On May 20, the US SEC required the stock exchange to update the 19b-4 filing documents of the Ethereum spot ETF, which sparked positive speculation in the market.

Source: @EricBalchunas

Interestingly, even the first batch of applicants did not have much hope before. Van Eck CEO Jan van Eck stated last month that he is prepared to be rejected.

For investors, what is important is not when to approve, but approval. After the positive news was announced, Ethereum prices, which were originally in a sluggish decline, quickly rebounded, with a daily increase of 20%, breaking the record for the largest daily increase in nearly 4 years, approaching $4000 at one point, and driving Layer2. The rise of Layer1, MEME, AI and other sectors has led to a resurgence of bullish sentiment in the market.

Source: Gate.io

According to CoinGlass data, on this highly volatile day, the clearing amount of the entire leveraged crypto derivative position in the market surged to over $360 million, the highest level since May 1. Among the liquidated positions, the majority are short positions with a value of approximately $250 million, indicating that highly leveraged traders are concentrated in betting on the immediate surge of ETFs. ETH traders were hit the hardest, with a clearing amount of $132 million.

In the early morning of May 24, the SEC has finally approved the 19b-4 form applications for Ethereum spot ETFs submitted by multiple institutions, including BlackRock, Fidelity, and Grayscale.

Although these forms have been approved, ETF issuers still need to wait for the S-1 registration statement to take effect before trading, which may take several weeks to five months. However, spot ETFs are already a certainty.

According to some sources, as the election approaches, the SEC may have changed its previous negative attitude due to political motives. Former President Trump has frequently expressed support for cryptocurrencies in the past month, while the current President Biden’s campaign team has also begun recruiting MEME managers. The Democratic Party may demonstrate its support for innovative technologies by approving spot Ethereum ETFs to win over cryptocurrency voters.

It is worth noting that with the rise of market sentiment, Ethereum has not continued to rise but has entered a strong and volatile state, and many giants and institutions have begun to adjust their investment strategies. Some institutions and individuals who short Ethereum have sold off their Ethereum holdings, indicating market concerns about the volatility and uncertainty of Ethereum prices.

Behind the Approval, the Potential Challenges and Opportunities of Ethereum

The main reason for the approval of Ethereum spot ETFs is currently attributed to the political drive received by the SEC, but it is also due to the combined influence of many practical factors.

Firstly, the successful launch of Bitcoin spot ETFs provides a precedent for the approval of Ethereum spot ETFs, where the SEC previously approved futures ETFs for Bitcoin and Ethereum.

Secondly, in the previous lawsuit against Grayscale, the SEC lost. In order to avoid legal conflicts, the SEC may choose to use Ethereum spot ETFs to avoid further litigation.

Furthermore, the approval of the FIT 21 bill has clarified the jurisdiction of the cryptocurrency industry, creating a clearer legal environment for the approval of Ethereum spot ETFs. Meanwhile, The SAB 121 policy bill previously formulated by the SEC has been repealed, reducing strict regulation of crypto and creating favorable conditions for the approval of Ethereum spot ETFs.

Last but not least, during the US election, both parties are actively seeking votes from the cryptocurrency community, which undoubtedly increases the political pressure on the SEC to passively respond to the Ethereum ETF.

Source: @matthew_sigel

Anyway, the approval of Ethereum spot ETFs will undoubtedly stimulate the discovery of the value of Ethereum and its eco tokens, and from a longer-term perspective, it will also pave the way for the adoption of more high-quality cryptocurrencies in general.

Firstly, the adoption of Ethereum spot ETFs will increase the exposure of institutional and retail investors to Ethereum, without the need to directly purchase and manage ETH, which may significantly increase the overall demand for Ethereum and further enhance its market position.

Secondly, the trading volume on the Ethereum network may increase, leading to increased gas fees and network congestion, which will encourage investors and developers to pay more attention to solutions such as Layer2 and modularity. This may bring more new narratives to the Ethereum market. Of course, there is also regulatory pressure to curb potential innovation risks.

Finally, this positive development will help the SEC shelve controversies such as whether Ethereum is a security, alleviate regulatory pressure on Ethereum eco innovation, and also contribute to the active promotion of other cryptocurrencies. For example, we have observed that some even proposed SOL XRP‘s spot ETF concept.

Is It Possible to Achieve New Highs in the Future with the Arrival of Grayscale Selling Pressure?

In the long run, the launch of Ethereum spot ETFs will attract more traditional funds to enter the cryptocurrency industry, driving the entire industry towards a larger scale and higher compliance direction, and the coin price will naturally rise.

If compared to the successful experience of Bitcoin spot ETFs, Ethereum ETFs also have a strong “gold suction” effect and are expected to bring significant capital inflows to the industry.

It is widely believed that although the market size of Ethereum spot ETFs may not be comparable to Bitcoin spot ETFs, there is still significant room for growth. It is predicted that Ethereum spot ETFs may receive 10% to 15% of the assets acquired by Bitcoin spot ETFs, reaching $5 billion to $8 billion. According to Geoff Kendrick, head of forex and digital asset research at Standard Chartered Bank, he is more optimistic that after the approval of the spot Ethereum ETF, it is expected to bring in approximately $15 billion to $45 billion in asset inflows within 12 months.

Considering the changes in ETHE similar to GBTC before and after the spot Bitcoin ETF, The premium of ETHE relative to its net asset value (NAV) has significantly narrowed from -20.52% on May 17 to -1.27% today, and the premium rate even expanded to -26% last month.
From this perspective, the market has quickly begun to price Ethereum’s positive sentiment.

Source: THE BLOCK

As Grayscale converts trust products into ETF products, the market may face some arbitrage and selling pressure. For example, Kaiko’s analysts believe that Grayscale ETHEs may have an average daily outflow of $110 million in the first month after being launched as spot ETFs.

After the successful conversion of Grayscale GBTC to Bitcoin spot ETF, although the outflow of funds from GBTC has brought some selling pressure to Bitcoin and led to a short-term decline in coin prices, it has now been digested by other Bitcoin ETFs. From this perspective, although there may be downward pressure on Ethereum prices in the short term, the long-term impact is more positive.

We have previously written several articles suggesting that Bitcoin and Ethereum have their own core functional attributes, and market recognition and acceptance of them are expected to continue to rise. Especially Ethereum, it is expected that its price will continue to increase in the future, especially as institutional investors gradually enter the market, and its growth momentum will be more significant.

In summary, this milestone event will undoubtedly have a profound impact on the cryptocurrency market, indicating further development and maturity of the cryptocurrency market in the future. It not only promotes the compliance process of the encryption industry, but also attracts a large amount of traditional funds to enter the market, providing investors with more diverse investment choices. At the same time, this also provides solid support for the price growth of encrypted assets such as Ethereum.

It should be noted that in the context of favorable policies and rapid industry development, the short-term market may experience overheating, with significantly increased leverage levels, which to some extent increases the risk preference of some investors. As investors, we should always maintain rationality and objectivity, comprehensively uate market environment, investment preferences, and risk control factors, avoid blindly following the trend, and make rational investment decisions.