Opinion: SEC is relentless in pursuit, Ethereum spot ETF faces many difficulties

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Griffin Ardern is the head of research at BloFin Academy . Here is his analysis of the current cryptocurrency market situation. Some of the content is translated by AI and may be biased.

Current progress on Ethereum ETF approval and why it matters

Compared to Bitcoin ETFs, especially those based on Ethereum futures, Ethereum ETFs are relatively small in terms of size and trading volume. The largest Ethereum futures ETF has less than $100 million in assets under management (AUM), which is significantly smaller than some Bitcoin ETFs. However, it is worth noting that this represents the largest AUM among Ethereum futures ETFs, and the AUMs of others are even lower and can be considered insignificant.

The approval of an Ethereum spot ETF could lead to increased investment, funding, and liquidity from the U.S. stock market, supporting the price of Ethereum. This could mimic the effect of Bitcoin, where external liquidity significantly boosted its price, leading to new all-time highs in a relatively short period of time. However, challenges and uncertainties regarding the approval of an Ethereum ETF remain.

If an Ethereum ETF is approved, it could set a new standard for other cryptocurrencies that share similar features to Ethereum, such as proof of stake and staking mechanisms, and provide examples for them to apply for their own ETFs, especially those seeking to launch spot ETFs.

Approval of an Ethereum ETF by an entity like BlackRock could pave the way for ETFs covering other cryptocurrencies, expanding the range of crypto assets available to investors through regulated financial products. Conversely, if the Ethereum ETF is rejected, it could mean that only cryptocurrencies that follow the same standards as Bitcoin, such as proof of reserves, will be considered for ETFs. This would exclude cryptocurrencies based on proof of stake (PoS) from ETF consideration.

All in all, the approval of the Ethereum ETF is seen as a critical and potentially transformative step in the future of cryptocurrency ETFs. Not only will it benefit Ethereum, it will also set a precedent for how other PoS-based cryptocurrencies can be integrated into mainstream financial products. The crypto community is eagerly awaiting this development as it could have a significant impact on liquidity, investment, and the broader acceptance of cryptocurrencies.

Given the current landscape and regulatory environment, the approval of an Ethereum ETF faces several significant challenges, especially from the perspective of the Securities and Exchange Commission ( SEC ). Under the leadership of Chairman Gary Gensler, the SEC has expressed a preference for cryptocurrencies that follow standards similar to Bitcoin. This poses a particular challenge to Ethereum due to its security and securitization risks. (The SEC was recently revealed to have begun investigating the Ethereum Foundation since Ethereum switched to POS)

Ethereum's initial coin offering (ICO) in 2014 and the way its assets were distributed raised concerns about centralization and security labels. A large number of Ethereum were sold during its ICO, and a significant portion is still held by the Ethereum Foundation and early investors. This concentration of holdings may be seen as a deviation from the decentralized characteristics that characterize cryptocurrencies like Bitcoin.

Additionally, Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS) introduces another layer of complexity. This transition could change Ethereum’s classification, moving it from a “commodity” category to something closer to a security, as the staking mechanism and the rewards it generates are similar to stock dividends.

The SEC has also expressed concerns about potential market manipulation within the Ethereum ecosystem, particularly given the influence that major holders and protocols involved in staking protocols could exert on the network. Despite its deflationary mechanism, Ethereum’s unlimited supply may also cause the SEC to hesitate, given its preference for assets with capped supplies or explicit deflationary policies.

Based on these considerations, it appears that the likelihood of the SEC approving an Ethereum spot ETF in the near term is relatively low. Concerns surrounding security classification, centralization, market manipulation, and the move to PoS pose significant obstacles. However, the future remains uncertain, especially as regulatory views may evolve if Ethereum's infrastructure and governance effectively address these concerns. The possibility of approval exists, but is overshadowed by significant regulatory challenges that would need to be navigated.

Will the SEC respect Greyscale’s arguments in its court order?

Greyscale’s legal challenge to the SEC for approving a Bitcoin ETF and rejecting a similar Ethereum ETF application has drawn significant attention to the regulatory environment for cryptocurrencies. The challenge highlights perceived inconsistencies in the SEC’s views on different cryptocurrencies and the criteria it uses to evaluate them.

The SEC’s concerns about Ethereum, particularly regarding its transition from Proof of Work (PoW) to Proof of Stake (PoS), the potential for market manipulation, and Ethereum’s overall security classification, are key to its hesitation to approve an Ethereum ETF. If Greyscale’s arguments effectively challenge the SEC’s position, and if the court supports Greyscale’s view, it could force the SEC to reconsider its position.

If the court sides with Greyscale, suggesting that there is a lack of consistency or fairness in the way the SEC handles Ethereum ETF applications, the SEC could come under pressure to be more consistent in its approval process compared to Bitcoin. This could involve re-evaluating Ethereum under its new PoS mechanism and addressing specific concerns about security, decentralization, and market manipulation risks.

However, it is important to note that the SEC’s approval decisions are complex and multifaceted, taking into account a range of regulatory, market stability, and investor protection concerns. The outcome of Greyscale’s challenge may indeed influence the SEC’s approach, but the extent of its impact on Ethereum ETF approval remains uncertain.

Prices before and after decision announcement

In the cryptocurrency options market, traders have begun factoring in the potential announcement of an Ethereum ETF approval or rejection. This anticipation is reflected in the implied volatility (IV) of Ethereum options, especially those expiring in May and June, which show higher IV. This suggests that traders expect greater volatility and price movement in Ethereum around the announcement.

According to the latest data, if the Ethereum spot ETF is not approved or rejected outright, it is expected that the price of Ethereum may fall sharply, more than 20% to 25%. On the contrary, if the ETF is approved, the price may rise by a similar amount, reflecting the market's reaction to positive news, similar to the situation of major cryptocurrency announcements in the past.

Interestingly, the options market skewness — which reflects the imbalance between call and put option prices — shows that options with near-term expiration dates, such as March and April, have a negative skewness. This shows that the market prefers to hedge the downside risk of a potential disapproval of the ETF. For longer-dated options, the skewness looks neutral to slightly positive, indicating a more balanced or slightly bullish view on Ethereum's future beyond the immediate announcement period.

Additionally, the Butterfly Index, which provides insight into the pricing of tail risk, shows that Ethereum is significantly higher than Bitcoin. This may even exceed the annual average of the index, indicating that traders, investors, and market makers are pricing in higher tail risk for Ethereum. This heightened concern may be related to the uncertainty of ETF approval and its possible impact on Ethereum's price.

What impact will the Bank of Japan's interest rate adjustment have?

The Bank of Japan (BoJ) rate adjustment is significant, especially in light of the yen carry trade, a popular strategy in global finance. The yen carry trade involves borrowing in yen at historically low interest rates and investing in higher-yielding assets elsewhere, usually denominated in U.S. dollars. The strategy profits from the interest rate differential between the two currencies and the potential appreciation of the invested assets.

Investors can borrow in cheap yen before the Bank of Japan is likely to raise interest rates, invest in high-yielding assets in the U.S. or other markets, and benefit as long as the yen remains weak against the dollar. Japanese government bonds (JGBs) used as collateral will retain their value, facilitating the trade.

However, the dynamics of this trade could change dramatically if the Bank of Japan decides to raise interest rates. Higher interest rates in Japan could strengthen the yen against the dollar, reducing the appeal of the yen carry trade. In addition, if the Bank of Japan ends its yield curve control (YCC) policy—which aims to keep long-term interest rates at a target level—it could cause JGBs’ yields to rise and their prices to fall, affecting the collateral value for those engaging in carry trades.

As a result of higher interest rates and the potential end of YCC, investors may be forced to liquidate their dollar-denominated investments to repay yen-denominated borrowings. This could lead to selling pressure in a variety of assets, including U.S. stocks, cryptocurrencies, precious metals such as gold and silver, oil, and other commodities. Essentially, assets that benefit from the inflow of cheap yen may see reduced demand and lower prices.

The impact of the Bank of Japan rate adjustment goes beyond the carry trade itself. It signals a shift in Japan's monetary policy stance and could lead to a stronger yen. A stronger yen would make yen-denominated assets more attractive and could reverse the flow of funds from dollar-denominated assets to yen-denominated assets, affecting global asset prices and potentially leading to a reassessment of risk in global financial markets.

Discuss the current cryptocurrency market

The volatility of the cryptocurrency market has led to significant price drops, forcing those who are unable to meet their debt obligations in a timely manner to face margin calls or even liquidation. This situation requires the sale of assets to repay debts, which may provide an opportunity to invest in undervalued assets such as the Japanese yen or the Nikkei 225. The strength of the yen suggests an improvement in the performance of yen-denominated assets, encouraging investors to switch from dollar-denominated assets to yen-denominated assets, thereby affecting the liquidity and value of the former.

Under these conditions, Bitcoin appears to have fared better, benefiting from more diversified sources of liquidity, including U.S. equities and cryptocurrency markets. Additionally, Bitcoin’s price has been supported by hedging activity from market makers during the market decline, unlike Ethereum, which is more dependent on the liquidity of the cryptocurrency market and lacks similar support, leading to a potentially larger price decline.

Observations of on-chain data show that despite recent price increases, large Ethereum holders ("whales") continue to sell, indicating a lack of confidence in Ethereum's short-term price stability. This selling pressure is exacerbated by panic selling during price declines. The exchange rate between Ethereum and Bitcoin has fallen, reflecting investors' expectations of Ethereum's underperformance compared to Bitcoin.

It is expected that Ethereum's performance may improve after the Federal Reserve rate cut, which may increase market liquidity. However, currently, Ethereum lacks diversified sources of liquidity and mainly relies on stablecoins such as USDT and USDC. In contrast, Bitcoin benefits from multiple liquidity channels, suggesting that the duration of any potential market correction may be shorter for Bitcoin, while Ethereum and other Altcoin may experience a longer downturn.

The approval and launch of a Bitcoin spot ETF has solidified Bitcoin’s position as a key global macro asset with strong links to traditional markets, unlike Ethereum and other Altcoin, which lack such connections. This distinction means that Altcoin can only perform better when market conditions, such as the Federal Reserve cutting rates, support increased liquidity in the cryptocurrency market.

Market inflow dynamics are changing, and despite outflows from products such as GBTC, Bitcoin asset allocation is driving continued interest, especially in ETFs like BITO and BlackRock. This continued inflow, even amidst overall market outflows, underscores Bitcoin's resilience and its appeal to investors in the U.S. stock market and institutional sectors, which are expected to receive continued support.

Altcoin vs Bitcoin

When discussing Altcoin vs. Bitcoin, we are essentially all looking for the most favorable outcome. However, focusing on more realistic scenarios, such as excluding rejection from external factors, reveals that the price movement of Ethereum and other Altcoin is mainly affected by two factors. First, the allocation of liquidity in the cryptocurrency market plays a key role. There is approximately $1.5 trillion in funds allocated in the crypto market, and Ethereum and Altcoin are competing for this liquidity. However, in the long term, the Federal Reserve is expected to implement interest rate cuts, with two to three cuts expected this year and possibly more next year. This adjustment may reintroduce liquidity into the crypto market, subsequently supporting the price of Ethereum and other Altcoin.

Currently, Bitcoin is expected to perform stronger as overall market conditions are bullish. At the same time, Altcoin may be relatively weak amid limited liquidity. This situation is particularly relevant for traders in the Asia-Pacific region, who play a major role in investing in lesser-known coins and Altcoin. Currently, these traders tend to buy more Bitcoin and other major cryptocurrencies such as Ethereum or Solana.

The crypto market is increasingly segmented into sub-markets. One focuses on Bitcoin and mainstream cryptocurrencies, where investment is driven by global macroeconomic changes. The other, which can be called the speculative market, includes Ethereum, certain emerging currencies, and meme coins. In this segment, traders, especially from the Asia-Pacific region, take advantage of limited liquidity by engaging in speculative trading.

Overall, while we are all exploring the best investment outcomes, Bitcoin and Ethereum, as well as other cryptocurrencies, will perform differently when considering various factors, including market liquidity, regulatory environment, and global macroeconomic impacts. Future market trends will be influenced by numerous variables, including regulatory decisions, technological developments, and changes in investor sentiment. In this ever-changing environment, remaining flexible and keeping a constant eye on market dynamics will be the key to successfully investing in the crypto market.

Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.
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