Analysis

Is the Ethereum ETF Happening?

Ethereum bulls want their own spot ETF... will they get it?
Jack Inabinet Jack Inabinet Jan 18, 20245 min read
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Is the Ethereum ETF Happening?

After a decade of delay and denial, last week, the razor-close approval by the SEC to list spot Bitcoin ETFs on American stock exchanges led the entire crypto industry to rejoice!

Spot BTC ETF products began trading last Thursday and while Bitcoin hasn’t put in the God candles some in the crypto industry hoped would result from TradFi aping our bags, inflows into the ETFs have lived up to analyst expectations, with nearly $2.9B in inflows to newly established instruments.

While $1.2B in GBTC redemptions and crypto traders unwinding from bullish BTC ETF approval bets are two factors that have resulted from BTC ETF approval that are currently suppressing price, the long-term implications of ETF approval cannot be overstated.

For the first time in history, pure crypto exposure is now accessible through every (or at least most) American's traditional brokerage account, unlocking the ability for an entirely new cohort of capital to purchase crypto assets. Better yet, the titans of traditional finance serving as the issuers of these new BTC ETFs now have a monetary incentive to shill our bags – or at least BTC – as they attempt to balloon the AUM held by their products to generate more fee income!

With spot BTC ETFs having arrived, traders are now eyeing Ether and attempting to front-run its impending spot ETF, which has a final approval deadline of May 23rd.

There's always a bull market somewhere in crypto, and the shift in narrative attention back to Ethereum has resulted in the birth of a healthy bid that has uplifted ETH/BTC by 25% this week out of a 1.5-year downtrend that has plagued holders since the Merge!

While traders have begun positioning in earnest for the arrival of spot Ether ETFs, not everyone is convinced their arrival is a given.

Why would spot ETH ETFs get denied?

Bloomberg Senior ETF Analyst Eric Balchunas places the odds of approval at only 70%, down from the 90% chance he assigned to Bitcoin's spot ETF.

More pessimistic yet is JPMorgan's Managing Director of Global Market Strategy for Alternatives and Digital Assets, Nikolaos Panigirtzoglou, who sees the need for the SEC to classify Ether as a non-security prior to spot ETF approval and doesn't give more than a 50% chance of the agency doing so before May.

SEC Chair Gary Gensler, the deciding vote to approve spot BTC ETFs, has been consistent in his views that Bitcoin is not a security under federal securities laws, but he has refused to provide any regulatory clarity on Ether.

Some are concerned that Ethereum's proof of stake design and ability to produce yield mean it will automatically qualify as a security!

Are spot ETH ETFs getting approved?

It can feel like doubters of ETH ETF approval are numerous online. Thankfully, they're also probably wrong.

Many in crypto are concerned that the SEC will deny spot ETH ETFs by classifying ETH as a security, given the fact that the agency has stated it believes that the vast majority of crypto assets are investment contracts subject to federal securities laws. Nonetheless, Ether's status as a non-security appears solidified.

The SEC has sued multiple crypto exchanges for listing crypto assets they consider to be securities, including the tokens of other L1s like SOL, NEAR, and ATOM. Not a single one of these enforcement actions has called out ETH as a potential security.

JPMorgan's Panigirtzoglou sees the need for the SEC to provide a decision on ETH's security status, but the agency already provided clarity on Ethereum's status as a non-security by voting to approve ETH ETFs that hold commodity futures contracts last October.

 While the SEC maintains that their actions to approve spot BTC ETFs do not indicate the Commission's willingness to approve ETFs for other crypto assets, it is this very approval that has cleared the way for spot Ether ETFs!

Core to Chair Gensler's approval of spot BTC ETFs was the decision by a US Court of Appeals that a proposed spot BTC ETF from Grayscale would be sufficiently similar to two approved BTC futures ETFs and, therefore, should have received similar regulatory treatment.

With futures ETFs approved for ETH, as they were for BTC, the US Court of Appeals decision creates a precedent that would likely prohibit the SEC from denying an Ether ETF over concerns of fraudulent or manipulative trading practices, the reasoning that had allowed them to deny prior BTC ETF applications.

Further, the legal precedent established by SEC vs. Ripple, which found that digital tokens themselves do not satisfy the Howey test and are only securities when sold as investment contracts, nullifies concerns over whether ETH's ability to generate yield from staking constitutes an investment contract become irrelevant to the approval of a spot ETH ETF, as this transaction type has nothing to do with the staking aspects of Ether that risk implicating securities laws.

Are spot ETH ETFs bullish?

The approval of spot ETH ETFs may bring with it bullish long-term implications, but it also carries a high probability of being a sell-the-news event… Even Bitcoin, whose ETF debut largely lived up to analyst expectations, has sold off 12% from its listing peak!

Demand for Ether futures ETFs disappointed when the products launched last year, with the entire group only managing to do $1.7M in volume within the first hours of listing, compared to the hundreds of millions generated during the opening hours of trading for BTC futures and spot products.

While futures products are inferior to spot products, as they expose investors to contango and backwardation effects (i.e., that the price of the following month's contract may be respectively higher or lower than that of the expiring contract), the near total lack of demand for Ether exposure from TradFi market participants could be telling of a future lack of demand for spot products.

Issuers will need to attract organic demand for their spot ETH ETF products to succeed, and it's not clear where they intend to find it! Perhaps TradFi intends to create it by shilling ETH to normies on CNBC… 

While it is unclear how much demand Ether spot products will receive, market participants are decidedly less optimistic on the odds of approval for spot ETH ETFs than they were for spot BTC ETFs.

Unexpected approval could cause investors to realize they are offsides and lead them to ape ETH, meaning Ether’s spot ETF debut – unlike Bitcoin's which had been frontrun by six months of aggressive inflows from traders positioning for approval – has the potential to be a bullish unlock 🐂🎯

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