Ethereum’s Historic Leap: ETF Approval Imminent?

Hey anon!

The market is absolutely buzzing right now.

Nearly $400 billion has been added to the crypto market cap in the last two weeks. As of now, the market cap is quickly approaching the $2.8 trillion mark. 

The reason? The apparent upcoming approval of a spot Ethereum ETF. Let’s look at ETH’s price action.

On May 20, ETH jumped from $3,047 to $3,694, skyrocketing 21% in just one day. This is the single largest daily candle in ETH's history.

In fact, the public generally believes that the chances of an Ethereum spot ETF getting approved have reached 74%.

Let’s take a look at what’s going on with the spot Ethereum ETF.

If you prefer your alpha via Telegram 👇

What are Ethereum ETFs?

An Ethereum Spot ETF aims to offer exposure to the price of Ethereum (ETH) in a format that can be bought and sold on traditional exchanges, similar to shares. This allows investors to gain exposure to Ethereum without needing to manage crypto portfolios or worry about the technical aspects of holding cryptocurrencies, such as private keys and portfolio security.

An Ethereum Spot ETF pools investors' money to buy ETH, which the fund holds directly. Each share in the ETF represents a portion of these ETH holdings, providing shareholders with indirect exposure to its market price. 

The value of the ETF shares fluctuates with the market price of Ethereum. Fund managers, such as BlackRock and Ark Invest, are responsible for asset selection, security, storing the ETH tokens, and potentially making decisions about staking and other investment opportunities within the Ethereum ecosystem.

The Context: A History of Setbacks and Breakthroughs

In August 2023, the landscape for cryptocurrency ETFs changed dramatically when Grayscale won a pivotal court case against the SEC, which was forced to reconsider its rejection of Grayscale Bitcoin Trust's (GBTC) conversion into a spot ETF. 

This victory sparked a wave of applications from major financial entities like BlackRock and Fidelity, eager to launch their own Bitcoin spot ETFs. After months of adjustments and discussions, the SEC approved these Bitcoin spot ETFs on January 10, 2024. 

Spot ETF approval was ultimately responsible for kickstarting the bull market, which ultimately pushed BTC past $70,000.

This success inevitably turned the spotlight on Ethereum. Major players in asset management submitted applications for Ethereum spot ETFs, hoping to replicate the success of Bitcoin ETFs. 

However, unlike Bitcoin, Ethereum faced unique challenges, including regulatory scrutiny and a lack of engagement from the SEC, especially as the May 23 decision deadline for VanEck's application loomed.

Security or Not?

The case against Ethereum ETFs is a lot more nuanced than Bitcoin. Bitcoin is by far the most accepted digital asset in the world. It is the safest option when it comes to regulatory acceptance. 

On the other hand, accepting Ethereum opens Pandora’s box for the SEC. For the longest time, the SEC tried to label “ETH” a security. The SEC had previously issued subpoenas to several US-based companies related to Ethereum, seeking documents and financial records in an effort to classify ETH as a security. This push follows Ethereum's transition from proof-of-work to proof-of-stake in 2022. 

The SEC's actions have raised concerns within the industry, prompting major DeFi entities like Uniswap Labs to challenge the SEC's stance. Uniswap Labs recently filed a 40-page document arguing against the SEC's potential legal action, emphasizing that tokens should not be classified as securities.

Now, if the SEC approve Ethereum ETFs, does this mean the scale they use to determine whether certain tokens are securities or not is faulty? Does this make a case for Solana ETFs? Toncoin ETFs? 

Recent Developments: A Sudden Shift in Sentiment

On May 20, the situation took an unexpected turn. Analysts Eric Balchunas and James Seyffart from Bloomberg reported a "180-degree" shift in the SEC's stance, raising the likelihood of Ethereum spot ETF approval from 25% to 75%.

This optimism was fueled by several key developments, including the SEC's invitation to exchanges to update critical documents, signaling a possible imminent approval.

This news led to a rapid 20% increase in Ethereum's price, underscoring the market's reaction to the potential approval. CoinDesk further reported that the SEC had accelerated the update process for Form 19b-4, a crucial document for listing and trading spot Ether ETFs. 

Reasons Behind the Turnaround

While nothing is certain, several factors could explain this unexpected change:

• Political Influences: The SEC's move might reflect a broader shift in US crypto policy. Approving Ethereum spot ETFs could signal a more favorable regulatory environment for cryptocurrencies, possibly influenced by political considerations and the need to adapt to an evolving financial landscape.

• Regulatory Dynamics: The SEC's previous actions against Ethereum-related entities, such as its foundation and ConsenSys, had suggested a hostile stance. However, the recent request for document updates indicates a potential softening of this stance. Keep in mind that the SEC Chair Gary Gensler has recently been battered by the US Senate regarding his rather heavy-handed approach to crypto regulations.

• Market and Technological Confidence: Despite Ethereum's recent underperformance relative to Bitcoin, analysts remain optimistic about its long-term prospects. Ethereum's unique advantages, including its robust DeFi ecosystem, extensive developer community, and upcoming advancements in scalability and tokenization, contribute to its strong positioning in the market.

The Election Angle - Is This A Ploy?

With the US elections around the corner, one can't help but view any policy changes with a sense of skepticism. Our last email discussed how crypto could play a major role in the upcoming elections. Here is a brief summary:

• The Biden government has been very heavy-handed with its crypto regulations. While Biden has never been on “Team Crypto,” powerful Democrats such as Elizabeth Warren have seemingly led a crusade against the sector.

• The Republicans have taken a friendlier approach. The likes of Senator Cynthia Lummis have openly supported crypto. Despite being negative about crypto in the past, Donald Trump has recently taken a much friendlier approach. In fact, the Trump campaign is now accepting crypto donations.

So, keeping all this in mind, the SEC approving Ethereum ETFs could be a ploy by Biden and the Democrats to swing votes in their favor. Perhaps crypto is a significant enough issue in these elections to justify such a quick 180-degree turn.

The Broader Implications

The approval of Ethereum spot ETFs would mark a significant milestone for the cryptocurrency industry. It could potentially open the floodgates for institutional investment and further legitimize digital assets. It could also pave the way for regulatory clarity and enhanced investor protection, aligning with the SEC's broader objectives.

Moreover, the approval could have profound implications for Ethereum's market position. By enabling access to the same capital pools as Bitcoin, Ethereum could see substantial growth, driven by increased demand and market confidence.

As we approach the SEC's decision deadline, the anticipation surrounding Ethereum spot ETFs is palpable. While uncertainties remain, the recent developments suggest a promising outlook. 

Approval of these ETFs could herald a new era for Ethereum and its overall ecosystem. Equally interesting is the potential approval of more crypto spot ETFs.

Finally, there is the price angle. Can Ethereum ETF approval push the price into the exalted “five-figure” territory? Will we see $10,000 ETH? Can Ethereum’s marketcap cross $1T as well?

This is definitely going to be an interesting topic for weeks to come.

That wraps up today's insights! We hope you enjoyed today’s issue! Till next time anon.

Before we part ways today, why not join our Telegram community? Engage with our researchers ready to address your queries and connect with like-minded enthusiasts! 👇