Markets
How the Launch of the Spot Ether ETF Could Impact the Broader Cryptocurrency Market (Cryptocurrency: ETH-USD)
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Ethereum spot (ETH-USD) exchange-traded funds are expected to begin trading on Tuesday, July 23. The long-awaited launch is poised to generate outsized gains in the price of ether, as many proponents have predicted, although cryptocurrency market traders appear to be underestimating the overall impact.
In fact, starting from Friday afternoon trading, the ether (ETH-USD) has slipped 1.3% from a month ago. But it is still up about 49% so far this year, amid a broader rally among major token prices. Its performance has been poor relative to peers in the current cycle, which Seeking Alpha analyst Richard Durant attributed to “competition, scalability issues or [tighter] monetary policy.”
In May, the U.S. Securities and Exchange Commission Key regulatory requirements approved from potential ETF issuers that invest directly in ether (ETH-USD). But the regulator still has to approve applicants’ S-1 filings before the products can launch. A number of investment giants, such as BlackRock (BLACK), VanEck and Ark Investment Management are working to gain a fundamental first-mover advantage in the race to introduce a spot ETH ETF.
“The launch of an ETH ETF would be an injection of validation into the cryptocurrency ecosystem at a time when the industry is trying to gauge the potential impact of this year’s U.S. election,” said Darius Tabai, CEO of Vertex and a former trader at Merrill Lynch and Credit Suisse.
Given the uncertainty surrounding both developments, he added, “it appears that the market is not yet fully pricing in the impact of the ETF and that we could easily see 25%+ gains in price if a spot ETF were to be approved.”
With the ether (ETH-USD) as the leading smart contract platform in the crypto world, any post-approval price gains would likely have a more direct impact on the decentralized finance (DeFi) ecosystem, he said. “If a move is sustained, I would expect a potential larger halo effect for [alt coins] in contrast to the (BTC-USD exchange rate) launch where alts really struggled to maintain a bid.”
Recall that Spot BTC ETFs debuted in the United States in January. Since then, the price of bitcoin (BTC-USD exchange rate) jumped by more than 40%, a trend partly driven by strong and persistent inflows (until recently) into such products.
Mara Schmiedt, ETH expert and CEO of Alluvial, laid out the key parallels and differences between BTC and ETH spot launches. “While BTC spot ETF inflows have reached a higher-than-expected value of around $60 billion [assets under management] target in the US this year, we can expect ETH ETF inflows to reach about 30% of the total BTC market size, or about $20 billion at current prices.”
He argued that inflows into ETH ETFs could amount to well over $20 billion in the first few months after launch, as they are expected to drive greater price sensitivity than BTC.
In line with Schmiedt’s assessment, funds holding ether, once authorized for trading, will likely attract slower demand compared to spot BTC peers, in part due to the “lack of an ETH staking feature in the ETF,” Bernstein wrote in a June note.
While inflows are likely to support the ether (ETH-USD) price, Grayscale Ethereum Trust outflows (OTCQX:ETHE) could initially put downward pressure on it, analyst SA Durant warned. “A similar dynamic occurred with Bitcoin, where Grayscale saw $6.5 billion in outflows in the first month. The fact that Ethereum ETFs will not offer staking rewards to investors could also limit their appeal.”