Coinbase Research has published a detailed report, written by David Han, emphasizing that the market significantly underestimates the probability and timing of a spot ethereum (eth) exchange-traded fund (ETF) approval in the US. possible approval of said ETF will bring profound changes to the dynamics of the ethereum market.
The Case for Approving a Spot eth ETF
He report delves into the critical importance of a spot eth ETF, drawing parallels with the successful approval of spot btc ETFs in the US. The introduction of spot bitcoin ETFs has provided regulatory clarity and attracted significant inflows from capital, reinforcing bitcoin's status as a macro asset. Similarly, a spot ETF would open ethereum to the same equity funds that currently favor bitcoin, fundamentally altering investment patterns within the crypto ecosystem.
Han highlights the central argument in favor of a spot eth ETF: the high correlation between CME eth futures and spot prices. This correlation was a key factor in the approval of btc spot ETFs.
“The correlation between CME's futures product and spot exchange rates is high enough that CME's oversight can reasonably be expected to detect misconduct in the spot market,” Han says. reasoning is equally applicable to ethereum, given that CME eth futures were launched just a month before the correlation study period used for btc ETF approvals.
Despite significant market potential, the report highlights differences with bitcoin and acknowledges regulatory uncertainties, particularly around ethereum's proof-of-stake (PoS) mechanism. The complexities of staking (such as drawdown conditions, differences between validators, and the liquidity risks of not staking) introduce additional levels of consideration by regulators. “The complexities of staking present unique challenges, but these should not impact the status of eth without staking,” Han notes.
Market sentiment, as reflected on trading platforms like Polymarket, currently values the odds of a spot approval of an eth ETF before May 31, 2024 at 16%. However, Coinbase analysis suggests that these probabilities are significantly higher, close to 30-40%. This divergence indicates that the market may not fully appreciate potential regulatory and market changes in favor of ethereum.
Han also notes that even if the initial deadline of May 23, 2024 is rejected, there remains a high probability that litigation could reverse such a decision. “Cryptocurrencies are becoming an election issue, and the SEC may not be willing to spend the political capital necessary to support a denial,” Han argues, suggesting that political dynamics could also play a role in the regulatory process.
Approval of an eth spot ETF would not only align ethereum with bitcoin in terms of regulatory clarity and access to institutional capital, but would also disrupt traditional capital flow patterns within the cryptocurrency market. Historically, capital has rotated from bitcoin to ethereum and then to higher beta altcoins. A spot eth ETF would potentially streamline this flow, directly funneling institutional investments into ethereum.
This approval would also mitigate one of the biggest problems for eth, especially in a challenging regulatory environment. “The potential approval of a spot eth ETF removes a major barrier, opening eth to new capital inflows and regulatory clarity,” Han emphasizes.
ethereum's long-term positioning
Beyond the immediate implications of a spot ETF, the Coinbase report delves into ethereum's strong long-term positioning. Despite facing competition from other Layer 1 networks like Solana, ethereum's advantages—such as the maturity of its developer ecosystem, the proliferation of its EVM platform, and its role as a DeFi collateral—remain unmatched, according to Han.
The growth of ethereum's layer 2 solutions and the reduction in eth consumption after EIP-1559 stand out as factors improving its value proposition. Additionally, ethereum's historical trading patterns reveal its dual role as a store of value and technology token, adding to its unique positioning in the market.
In conclusion, Coinbase's analysis makes a compelling case for the near-term approval of a spot eth ETF in the US. The report suggests that market participants may be underestimating the likelihood and timing of such approval, leaving room for possible bullish surprises.
“We believe the market may be underestimating the timing and probabilities of a possible approval, leaving room for upside surprises,” says Han. Additionally, he predicts that eth may “have the potential to surprise to the upside in the coming months.” . eth does not appear to have major sources of oversupply, such as token unlocking or selling pressure from miners.”
At the time of this publication, the price of eth stood at $3,028.
Featured image created with DALL·E, chart from TradingView.com
