The US Securities and Exchange Commission (SEC) approved the spot Ethereum exchange-traded fund (ETF) on Thursday.
Among the approved applications are those from prominent names such as Grayscale, Bitwise, iShares, VanEck, ARK 21Shares, Invesco, Fidelity, and Franklin Templeton. These ETFs will allow everyday investors to buy shares that track Ethereum”s price via brokerage accounts in a familiar way.
While Ether futures ETFs are currently trading in the market, the spot ETF will allow investors to hold the digital asset itself, which is a big moment for Ethereum and the entire crypto industry.
What Went Down?
Up until Monday this week, the crypto market was preparing for an Ethereum Spot ETF rejection when suddenly sentiments took a turn, and the market went green. Much like how Bitcoin Spot ETF approval sent the broad crypto market upwards, including ETH, which surpassed $4k for the first time since the 2021 bull market in March, we are seeing green across the market.
With Ether leading the narrative, the renewed bullishness had Bitcoin climbing to $71,500, close to its all-time high (ATH) of $73,740 in mid-March this year. The total crypto market market cap meanwhile hit $2.748 trillion. With that, the Crypto Fear and Greed Index has entered the “Extreme Greed” zone having a reading of 76, up from 43 at the beginning of this month.
As crypto prices surged, Ether rallied significantly after a long time. At the beginning of this week, ETH was trading around $3,000, only to surpass $3,800 on Tuesday. With that, ETH’s yearly gain increased to almost 106%, and year-to-date gains (YTD) at 63.8%. Unlike Bitcoin, however, ETH has yet to make a new high, with its ATH being $4,880.
ETHBTC ratio, however, finally got some much-needed relief as it went from 0.0447 last week to 0.055 on Tuesday.
At the same time, the Ethereum open interest (OI), which is the total number of outstanding derivative contracts, rose to a new $15 bln peak on May 22, up from $11.21 high from Nov. 2201, as per the data from Coinglass. Binance currently leads the Ethereum derivatives market with OI on the exchange at 1.56 million ETH (worth $5.86bln) which is followed by Bybit 843.78K ETH and then OKX 579.78K ETH.
While CME leads Bitcoin OI at 156.62K BTC ($10.98 bln), the global derivatives marketplace ranks fifth in ETH futures open interest at 301.88K ($1.13bln). All of this, however, was before the approval of the Ethereum Spot ETF.
Rapid Turnaround
So, up until this week, the market was out of any narratives after the Bitcoin halving passed and Bitcoin ETFs launched in the US and Hong Kong. The market was anticipating a boring summer, with many expecting the SEC to reject Ethereum ETF due to concerns over Ether’s regulatory status.
Not to mention, SEC Chair Gary Gensler has been stressing compliance with securities laws. He has also been emphasizing that “the vast majority of crypto assets are investment contracts and thus subject to the federal securities laws.” The SEC, under Gensler’s guidance, has actually been investigating ETH as a potential security.
Just a month before, there had been strong pessimism with CoinShares CEO Jean-Marie Mognetti saying, “I don’t see anything being approved this side of the year” with PoS blockchains being difficult to get regulatory approval.
VanEck’s CEO also noted complete silence from the SEC regarding the ETF applications, which usually involve a long legal process. Even JPMorgan analysts called for a rejection this month, though they expected an approval ultimately after a legal battle.
However, things suddenly flipped on the back of speculation that the SEC is actually planning to approve the Ethereum Spot ETF. This followed analysts in crypto and the traditional financial world voicing their high expectations on a potential approval that would send ETH upwards and altcoin skywards.
This was further fueled by the securities regulator asking exchanges Nasdaq, CBOE, and NYSE to update their 19b-4 filings, which inform the SEC of changes, on an accelerated basis. While this did not guarantee that the Ethereum ETF would, in fact, be approved, it did give a big green signal to the market as it was just ahead of the deadline for VanEck’s proposed Ether ETF on Thursday and Ark/21Shares on Friday.
So, while there has been nothing from the SEC’s side until this week, the call for revised Form 19b-4s resulted in a flurry of submissions from Fidelity Ethereum Fund, Franklin Ethereum ETH, Grayscale Ethereum Trust, Invesco Galaxy Ethereum ETF, Vaneck Ethereum ETF, Bitwise Ethereum ETF, ARK 21shares Ethereum ETF, Ishares Ethereum Trust, and Hashdex Nasdaq Ethereum ETF. The amendments submitted by issuers involved removing Ethereum staking-related text.
This isn’t enough, though; for the Ethereum Spot ETF to start trading, the issuers need to have their S-1 applications approved, which is the initial registration form for new products to be listed on a national exchange. Moreover, S-1 documents are not bound by a deadline, and as such, the agency can take its sweet time with that.
Bloomberg ETF analyst James Seyffart noted on May 22 that while “all of the rumors and speculation and chatter have been accurate,” it could be weeks or months potentially before ETFs actually launch.
Meanwhile, Scott Johnsson of Van Buren Capital noted:
“Nothing about this situation is straightforward, so difficult to know how quickly they try to push forward this process.”
Such a sudden, hurried, and uncoordinated move by the SEC is seen as politically motivated. Some believe that 2024 presidential candidate Donald Trump’s recent expression of support for crypto has the current Biden administration turning crypto positive after being anti-crypto throughout his tenure.
With all these developments going on, the crypto industry’s expectations for approval rose as Bloomberg Intelligence ETF analysts increased their odds of a Spot Ethereum ETF from a mere 25% to a whopping 75%, citing the SEC’s positive stance.
“This was a shock, a “holy sht” moment yesterday even for ppl inside the process,” posted Bloomberg’s senior ETF analyst Eric Balchunas, on X (previously Twitter). He then goes on to say that the silence from the agency has been deafening so far, which at one point had him wanting to lower the odds below 25%.
The decentralized prediction platform Polymarket also saw a jump in the Ethereum ETF approval before May 31, with the yes side surging from 10 cents on May 20 to 69 cents on May 22.
Bitcoin ETF Paving the Way for Ethereum ETF
While a big movement for the industry, it all started more than a decade ago when Grayscale Bitcoin Trust filed for a Bitcoin Spot ETF, only to be rejected by the SEC. After the bull market of 2021, the crypto market experienced the debacle of 2022, which saw the crash of FTX and then the SEC’s legal battle with Coinbase and Binance.
But then, in October 2023, Grayscale secured a win against the SEC when the D.C. Circuit Court of Appeals ruled that the regulator had to reverse its rejection of the asset manager’s spot Bitcoin ETF application, which was “arbitrary and capricious.”
Then in Jan. 2024, the SEC, though unwillingly, finally approved 11 Bitcoin ETFs, which have been a great success. In less than five months, these investment vehicles have recorded tens of billions of dollars in inflows from the likes of retail investors, hedge funds, and wealth advisers. In fact, within a week of their launch, two of these ETFs managed to attract over $1 bln.
Mainstream asset manager giant BlackRock’s IBIT is currently leading the Spot Bitcoin ETF race, having $18.5bln in assets under management (AUM). This is followed by Fidelity’s FBTC at $10.58bln, ARk’s ARKB at $3.17bln, and Bitwise’s BITB ($2.39bln).
However, Grayscale, which had nearly $29bln in AUM, ended up seeing significant outflows, as much as $12bln, as investors finally got the chance to get their money out of this product, which was closed prior to being turned into an ETF and trading at a steep discount to BTC’s price. GBTC now has just over $20bln in AUM, as per YCharts.
GBTC was a major problem for Bitcoin, acting as an anchor on the ETF and price performance. But when it comes to Ethereum, Grayscale’s Ethereum Trust (ETHE) might not be as big of a problem due to having only $10.89bln in AUM.
In fact, ETHE’s AUM jumped over the last few days as investors rushed in to get their hands on ETHE at a discount before its potential conversion into an ETF. The ETHE discount has already been contracting, currently at 6.66%. In April, ETHE was trading at a 26% discount to spot ETH price, and right at the end of 2022, the discount was at its highest at 59.6%. So, if ETHE pulls a similar move like GBTC, this discount will narrow even further.
Additionally, while Grayscale didn’t launch its Bitcoin Mini Trust until after converting its Trust into an ETF, the asset manager has already submitted a Form S-1 for its new spot Ethereum ETF, Grayscale Ethereum Mini Trust, as well as filed Schedule 14C for its existing ETHE and how it will seed the new mini trust.
While Bitcoin ETF has clearly paved the road for Ethereum ETF, now all the speculation and activity surrounding Ethereum ETF is helping the largest cryptocurrency with Spot Bitcoin ETFs resuming their inflows. On Tuesday, all 11 ETFs saw a total of $305.7mln in inflows, with BlackRock’s IBIT accounting for 95% of it — the highest since April 5. Even GBTC has been seeing inflows for the last few days.
Ethereum co-founder and CEO of Consensys Joe Lubin sees Ethereum ETF approval as a “floodgate” of demand for the second largest crypto that will then lead to a supply crunch. “There’s going to be a pretty large amount of natural, pent-up pressure to purchase Ether” through the ETFs, said Lubin in an interview with DL News, adding that this could be a “profound watershed moment” for the entire industry.
Expected ETH ETF Flows
ETH enthusiasts are excited for obvious reasons, and the market has begun forecasting just how much a Spot Ethereum ETF can really see in inflows. Bloomberg’s Balchunas sees Ether ETFs getting “10-15% of the assets of the BTC ETFs.” With Spot Bitcoin ETFs having accumulated over $35bln in total AUM, this puts ETH ETF inflows at about $3-$5bln. Standard Chartered anticipates even bigger demand.
“As a percentage of market cap, it is similar to our estimates of inflows to Bitcoin ETFs, which are proving accurate.”
– Geoff Kendrick, Head of FX Research and Digital Assets Research at Standard Chartered, in an interview with The Block
During the interview, he also said he is “80% to 90%” of Ether ETF approvals this week.
In a report earlier, which called for Spot Ethereum ETF approval on May 23, Standard Chartered analysts predicted an estimated inflow of 2.39-9.15 million ETH, which amounts to between $15 and $45 billion in its first year.
But this isn’t all. They also projected ETH prices to maintain a 5.4% price ratio with BTC this year. Based on their Bitcoin price prediction of $150,000 by the end of 2024, Ethereum’s price can rally as high as $8,000. For next year’s end, the bank estimates an even higher price for BTC at $200K, which would imply an ETH price of $14K by the end of 2025.
On Tuesday, Bernstein analysts also called for a similar jump in ETH prices to Bitcoin’s since its ETF approval, noting the former’s free float and supply as more attractive than the trillion-dollar asset. The analysts said:
“ETH supply remains constrained by sticky investors and utility locking supply in financial smart contracts.”
Talking about this supply crunch, Bernstein analysts explained in their report that since ETH’s transition to Proof-of-Stake (PoS), the crypto asset has been deflationary. On top of that, 66% of ETH hasn’t moved in the last year, while ETH exchange supply is at an all-time low. Then there is 38% of ETH locked in staking, L2s, and smart contracts — something that is “unique to programmable ETH and not seen with Bitcoin.”
According to Standard Chartered’s Kendrick, the news of Ether ETF “comes at an opportune moment for BTC,” as the approval of Spot Ethereum ETF will not “further legitimize the sector” but will also be positive for BTC and will send its price to fresh highs as early as this weekend.
Concluding Thoughts
The SEC’s approval of several spot Ethereum ETFs marks a significant milestone in the cryptocurrency market. Major players like Grayscale, Bitwise, iShares, VanEck, ARK 21Shares, Invesco, Fidelity, and Franklin Templeton are now set to launch these ETFs, making it easy for investors to invest in Ethereum. However, the SEC has stipulated that these ETFs can’t start trading until their registration statements are officially declared effective. This rule ensures that all regulatory standards are met before the ETFs become available to the public.
Overall, this approval is expected to boost market activity and confidence in the digital asset space. And as the ETFs begin trading, the impact on Ethereum’s price and the broader crypto market will be closely watched.
