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In this blog, we explore the unexpected rise of Ethereum ETFs following the SEC's request for stakeholders to update their 19b-4 filings, indicating a possible approval of these ETFs. This move, which contrasts with prior expectations of denial, has led analysts to revise their predictions, causing significant market activity and a sharp rise in Ethereum's price.
In a surprising twist, the SEC has requested that stakeholders update their 19b-4 filings for their Spot Ethereum ETFs. This unexpected move suggests that the SEC might be gearing up to approve these ETF applications ahead of a crucial deadline on Thursday.
Previous filings from the regulator, statements from SEC Chair Gary Gensler, and reports of investigations had indicated that the commission was likely to deny spot Ether ETF applications. However, in their May 20 posts on X, Bloomberg ETF analysts James Seyffart and Eric Balchunas suggested that the SEC might be reconsidering - revising their prediction for the odds of spot Ether ETF approval from 25% to 75%.
This sudden shift in the SEC's approach has caught many market participants off guard, as evidenced by recent market data:
For these ETFs to enter the market, the SEC must first approve the S-1 applications. Historically, the SEC has been slow to act on Bitcoin and Ethereum ETF applications. However, reports from early Monday suggest the regulator might be accelerating its review process. With this unexpected shift, Ethereum ETFs could be approved much sooner than previously anticipated.
There are nine participants in the race for a spot at Ethereum ETF. VanEck, ARK/21Shares, and Hashdex have applications with their final decision deadlines approaching later this month. Earlier this month, Grayscale withdrew its application for an Ethereum Futures Trust and now aims to convert its existing Grayscale Ethereum Trust into a spot ETH ETF. Meanwhile, BlackRock's iShares Ethereum Trust is also awaiting a decision, with their third deadline set for June 8.
Given that the SEC is unlikely to give any single applicant or subset of applicants an early approval advantage, it is probable that the regulatory body will issue approvals for all applicants simultaneously. Of the nine applicants, five of the ETFs are set to launch on CBOE, while the rest are to be live on Nasdaq and NYSE. Of the named custodians, Coinbase is the popular choice, with six of the applicants opting for the US Custodian as their Ether Custodian.
In the initial filings, many stakeholders expressed interest in incorporating staking rewards into their ETFs, allowing investors to earn an annual yield from staking Ethereum, which is around ~4%, according to our Staking Yield Indices, created in partnership with Blockdaemon. However, it now appears that the SEC has decided on this issue: staking will not be permitted in the initial ETFs.
As a result, any entity holding a potential ETH ETF, rather than the native asset, will miss out on the annual yield from Ethereum staking. To illustrate the impact, comparing Ethereum's performance as a native asset without staking yield to its performance with yield in 2023 reveals a significant difference.
Hypothetically, if you had opened a 1000 ETH position on January 1st 2023 with an ETF provider, instead of holding native Ether, which accrues staking rewards, you would have missed out on gains of over $200,000. Over time, as staking rewards compound, this disparity would only become more pronounced. Assuming Ethereum maintained its growth over the past four years, and staking rewards remained consistent, this could result in substantial losses over a ten-year period.
Ethereum has struggled over the past year, hitting its local high against Bitcoin around the Merge in late 2022. In contrast, while Ethereum saw a 60% gain from 2024, Bitcoin surged by 69%, while Solana outperformed significantly, rising 84%. Binance Coin was also outperforming Ethereum, even despite the overshadow from Binance’s regulatory struggles.
The trading activity around Ethereum pairs on centralised exchanges has also dropped significantly since the start of 2023, as a result of the increased popularity of other altcoins. ETH trading pairs now account for only 15.0% of the total trading activity on centralised exchanges, similar to the levels seen in 2022.
The on-chain activity on Ethereum has also struggled in recent months as a result of the rising popularity of alt-layer 1s such as Solana and layer 2 scaling solutions including Base and Arbitrum. The major DEXs on Solana, Orca and Raydium have surpassed the monthly trading volumes on Uniswap on Ethereum for the first time in March, largely due to the memecoin frenzy that saw a surge in interest in tokens such as Bonk and Dogwifhat. The lack of trading activity is reflected in the average gas fees dropping to the lowest levels last seen since 2020.
The approval of the spot Ethereum ETF is likely to result in heightened interest in the Ethereum ecosystem, leading to an increase in network usage. Unlike Bitcoin, Ethereum has the added advantage of more Ether being burned with higher network usage, further supporting the blockchain’s deflationary status. This, coupled with a likely surge in demand for the asset from the spot Ethereum ETF, could result in favourable supply dynamics, helping to drive the price of Ethereum to new highs.
However, in the short term, it is likely that the asset might struggle with the outflows from Grayscale Ethereum Trust, as we have observed after the approval of the spot Bitcoin ETFs. Nevertheless, this is likely to be short-lived as market sentiment and the positive inflows from the ETFs will likely be the catalyst for Ethereum to reach new all-time highs.
The recent surge in Bitcoin's price has been closely linked to renewed interest in the US spot Bitcoin ETF market. Recent data reveals that spot Bitcoin ETF flows are continuing to attract the interest of market participants, recently experiencing their largest week of inflows in two months.
Looking at Ethereum, we can take inspiration from the market share of the existing Ethereum ETPs in comparison to Bitcoin ETPs to gauge the potential inflows. Despite the emergence of Bitcoin ETFs over the past two years, Ether ETFs have held their ground in the market. In 2022 and 2023, they maintained a robust market share of 23%, which increased to 25% when considering only the Bitcoin and Ethereum markets. If Ethereum ETFs were to capture a 25% share similar to Bitcoin ETFs, the inflow could be substantial given the total funds attracted by Bitcoin ETFs since their inception.
Assuming Ethereum will be able to attract 50% of Bitcoin funds ETF flows, which recorded a total inflows of approximately $13 billion on May 21st since their inception in January, this would equate to $3.9 billion. According to a linear regression analysis of the relationship between Bitcoin ETF flows and Bitcoin’s returns, this shift would result in a 30% appreciation in Ethereum's price, bringing it to approximately $4,953 within the next 100 days.
**This analysis is an approximation based on extrapolating Bitcoin’s performance and inflows post the launch of its spot Bitcoin ETF. This only accounts for the direct relationship between inflows and price.
A regression on BTC indicates that about 10.7% of the variability in BTC returns is explained by net inflows into Spot BTC ETFs, with a positive correlation of a 0.0465% price increase for every additional 1,000 BTC inflow. This suggests other significant factors at play beyond just inflows.
For Ethereum, unique factors potentially impacting ETH ETF net flows and prices include:
Despite the price of Ether underperforming compared to multiple Layer 1 blockchains, Ethereum’s network has demonstrated robustness with a relatively stable increase in daily transactions and active addresses. The Dencun upgrade, which took place last March, has also aided Layer 2 adoption due to significant fee reductions.
Looking forward, the launch of spot Ethereum ETFs could bite into the popularity of spot Bitcoin ETFs by offering investors a higher risk-to-reward ratio due to its smaller market capitalisation and distinct value proposition compared to Bitcoin. The approval could also open the door for other crypto assets to have spot ETFs, depending on the interest of issuers and investors - something which seems highly probable given the fees generated by the spot Bitcoin ETFs YTD.
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