The cryptocurrency market cycle is currently in the midst of another bull run, with Bitcoin breaking $70,000 to new all-time highs in March 2024. Other major coins like Ethereum and Solana have also kept pace with strong price action. While there are several reasons to explain the recent surge, one definite factor is the approval and operation of several spot Bitcoin ETFs created by major financial institutions such as Blackrock and Fidelity. With institutional money flooding into the Bitcoin market, prices have been granted upward buy pressure, and as Bitcoin rises it brings the entire crypto market up as well. To get an idea of how significant of an impact the Bitcoin ETFs have had, look no further than the BlackRock IBIT ETF which was the fastest to amass over $10 billion in asset value. Within just 2 months of launch, the BlackRock ETF has accumulated more Bitcoins than Microstrategy, which has been steadily purchasing Bitcoin since 2020.
With the powerful effects of ETFs seen firsthand, it comes as no surprise that many in the crypto community are now hotly anticipating an Ethereum ETF. After all, Ethereum is the second largest cryptocurrency by market capitalization and has held that title for multiple cycles now. The Ethereum network sees tremendous activity due to smart contracts enabling applications in DeFi, NFTs, GameFi and more. If large financial institutions have seen strong demand for crypto via their BTC ETFs, then logically the next step would be to apply for and operate Ethereum ETFs as well. Such a trend could lead to mass adoption of Ethereum, and the blockchain-enabled dApps on the network. However, the short-term prospects of an ETH ETF remain unclear especially due to recent SEC activity.
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Impact of an Ethereum ETF
An Ether ETF offers investors exposure to Ethereum's price fluctuations without the need to directly purchase and hold the cryptocurrency. This is accomplished by the ETF investing in Ethereum or Ethereum-based assets on behalf of its investors.
In terms of structure and application process, an Ethereum ETF is established by a fund manager who creates a fund designed to mirror Ethereum's price movements. Investors can purchase and sell shares of this ETF on conventional stock exchanges, similar to trading stocks. This method is more straightforward and familiar to many investors compared to using cryptocurrency exchanges. The value of an Ethereum ETF is directly correlated with the price of Ethereum. As the price of Ethereum rises or falls, the value of the ETF is anticipated to increase or decrease by a similar percentage. This arrangement enables investors to speculate on Ethereum's price without possessing the actual cryptocurrency.
If an Ethereum ETF is approved, it may trigger a notable upward movement in Ethereum's price. Comparable to the reaction seen with the Bitcoin ETF, this surge will likely be fueled by speculative enthusiasm and improved accessibility for both individual and institutional investors, resulting in heightened demand.
In the broader context of market development, the approval of an Ethereum ETF could signify Ethereum's integration into institutional investment circles, potentially drawing in steady, enduring investment and mitigating price volatility over time. It would signify a regulatory endorsement that can pave the way for clearer guidelines, laying a robust groundwork for Ethereum's expansion and fostering further advancements within the DeFi sector, bolstered by heightened investor trust.
Some believe that an Ethereum ETF would have slightly different results than what Bitcoin ETFs have seen, mainly due to the ability of ETH network to support smart contracts. A financial analyst explains: “Ethereum’s Layer 2 solutions enhance scalability by enabling faster, cheaper transactions outside the main blockchain, fostering growth. Unlike bitcoin’s security focus, Ethereum’s L2 solutions prioritize rapid expansion, potentially attracting institutional investment and broadening application scope.” For these reasons, an Ethereum ETF can lead to sustained rather than explosive market growth.
One project that exemplifies Ethereum’s rapidly expanding use cases is Ether.fi. It’s a decentralized, non-custodial delegated staking protocol featuring a Liquid Staking Derivative token. One notable feature of ether.fi is that stakers maintain control of their keys. Additionally, the ether.fi mechanism establishes a node services marketplace, enabling stakers and node operators to register nodes for offering infrastructure services. The revenue generated from these services is distributed among stakers and node operators. Ether.fi shows that vibrant activity on the Ethereum blockchain leads to constant innovation in decentralized finance, which would have a self-sustaining effect once institutional money flows in via ETFs.
Is an Ethereum ETF Likely?
The path to securing approval for cryptocurrency ETFs in the United States has been characterized by a mix of anticipation and obstacles. The SEC's initial strides towards greenlighting spot Bitcoin ETFs represented a pivotal moment in the regulatory terrain for cryptocurrencies. It set a precedent that may have implications for the approval process of Ethereum ETFs. Bloomberg ETF Analyst James Seyffart echoes this sentiment, expressing optimism that the regulatory groundwork laid by Bitcoin's journey could facilitate a smoother path towards ETF approval for Ethereum. Here are some key events in the journey toward an Ethereum ETF approval:
- Blackrock files application: On November 9, 2023 one of the largest financial institutions in the world Blackrock filed for an Ethereum ETF. Theoretically the SEC would have up to 240 days to evaluate the application. Blackrock, however, is not the first to submit an ETF application for ETH. Notably, in September 2023, Ark Invest and 21Shares collaborated to submit a joint application for such a fund to the U.S. Securities and Exchange Commission (SEC). Subsequently, Grayscale disclosed its application to transform its existing investment trust for Ethereum into a comprehensive ETF.
- Fidelity files and amends application: Another Ethereum ETF applicant in November 2023 was Fidelity. The asset management firm recently (on March 18, 2024) added staking to its ETF application, meaning after approval Fidelity may use a third-party staker to stake its ETH. Its proposal amendment reads, “The Sponsor may, from time to time, stake a portion of the Fund’s assets through one or more trusted staking providers, which may include an affiliate of the Sponsor (“Staking Providers”).” Following this news, Lido Finance (LDO) rose by 9% because although it was not stated which staking provider Fidelity plans to use, Lido is one of the largest ETH staking services, along with RocketPool and StakeWise.
- Blackrock applies for Tokenized Investment Fund: Blackrock has filed a form with the U.S. Securities and Exchange Commission (SEC) to launch a tokenized investment fund. Furthermore, Etherscan data indicates the introduction of a token called Blackrock USD Institutional Digital Liquidity Fund (BUIDL). A specific address holds 100 BUIDL tokens, which were issued on March 4, 2024. As outlined in Blackrock's prospectus, the fund pools investments, with a minimum entry requirement of $1001,000 for participation. Essentially, the Blackrock ICS US Dollar Liquidity Fund functions as a short-term money market fund managed by the financial giant. Its investment strategy primarily targets short-duration securities, such as commercial paper, certificates of deposit, and floating rate notes, with a notable portion of its assets allocated to cash reserves.
The Bearish Case against Ethereum ETF
While the prospect of prominent funds launching Ethereum ETFs is exciting for the crypto industry, because it would represent another stamp of legitimacy to the space, there is no guarantee that ETH ETFs will be smoothly approved. Very recently on March 20th, it was reported that the SEC is leading an effort to classify Ethereum as a security, initiating an investigation after Ethereum transitioned to a proof-of-stake network in 2022. Labeling ETH as a security could add complexity to the process of establishing Ether ETFs in the U.S. The SEC faces a May deadline to make a decision on approval. An analyst at Bloomberg Intelligence remarked on Tuesday that he anticipates no approval for such a fund by May, citing the regulator's limited interaction with potential issuers. This stands in contrast to the active discussions surrounding spot bitcoin ETFs before their approval in January.
Indeed, just two days after this report on March 22, the SEC released a statement that it has decided to postpone decision on the Grayscale Ethereum Futures Trust ETF from March 31st to May 20th. Some believe that Grayscale’s futures ETH application represents a ploy to gain an easier approval, and leverage it to have a stronger argument for approval of a spot ETH ETF. Around the same time, the SEC also announced that it would delay the deadline for review of the VanEck spot Ethereum ETF to May 23rd. These are just the latest in a string of delays, as on March 4th the SEC declared that it would postpone decisions on the Blackrock iShares Ethereum Trust and Fidelity’s Ethereum Fund. Since Blackrock tries to maintain a collaborative relationship with regulatory bodies, some analysts believe the financial behemoth will temporarily withdraw its application to appease the SEC. Such setbacks show that positive regulatory momentum has now met a roadblock within the SEC, and with the organization’s investigation into whether to classify ETH as a security, ETF approval for the second largest cryptocurrency might not be smooth sailing.
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