Since eight asset management firms submitted their S-1 filings for Ethereum ETFs to the SEC in June 2024, people have been eagerly anticipating the potential approval and trading start date. Various predictions have caused frequent fluctuations in ETH's price. Why do Ethereum ETFs impact market sentiment so much? Should we enter early or stay cautious?
ETFs: Moving Crypto into Mainstream
"What you're seeing is this sort of the birth of a new asset class," said Matthew Hougan, Chief Investment Officer of Bitwise Asset Management, in an interview with CNBC on July 8, 2024. Bitwise is among the firms planning to issue Ethereum ETFs in the U.S.
Hougan also noted that crypto ETFs will be a continuing story. The launch and successful trading of Bitcoin ETFs in January 2024 provide a strong indicator of future trends. Data from FactSet shows that U.S. Bitcoin ETFs are already among the top two in terms of fund inflows in the 2024 U.S. ETF rankings. Similarly, there are high expectations for the fundraising potential of Ethereum ETFs. However, industry experts generally believe that the amount of funds attracted by Ethereum ETFs will be smaller than that of Bitcoin ETFs.
However, as noted in an article on Bankless.com, Ethereum ETFs could see inflows reaching billions of dollars in their early years, which would be a robust start for any ETF. Matthew shared an even more optimistic view: "If we get five or 10 or 15 billion dollars in the first two years of these ethereum ETFs, that is a massive runaway success."
In addition to Bitcoin and Ethereum ETFs, there is also talk of Solana spot ETFs. On July 8, 2024, the Chicago Board Options Exchange (CBOE) submitted a 19b-4 filing to the SEC, confirming that VanEck and 21Shares plan to list Solana spot ETFs. The SEC must respond to the 19b-4 filing within 240 days, with a decision expected by March 2025.
Why Bitcoin ETFs Are Smooth Sailing While Ethereum ETFs Face Uncertainty?
The primary reason is regulatory disputes. In the U.S., there is ongoing debate about whether ETH, the native token of Ethereum, is a regular asset or an unregistered security.
If ETH is classified as a common asset or digital commodity, it would be regulated by the Commodity Futures Trading Commission (CFTC).
Conversely, if ETH’s staking model for generating returns is seen as similar to traditional investment contracts, it may be classified as a security and fall under SEC regulation. In the U.S., securities must be registered with the SEC before issuance. Failure to register, without meeting exemption criteria, could result in enforcement actions or penalties for Ethereum ETF issuers for issuing unregistered securities.
In contrast, Bitcoin (BTC) lacks an on-chain staking mechanism, which helps it avoid these regulatory challenges and provides greater clarity regarding its classification, leading to a smoother issuance process. Notably, the SEC has not commented on the classification of ETH or the issuance of Ethereum ETFs, and has not released any official statements.
What Impact Will Ethereum ETFs Have on Ethereum?
To minimize compliance risks, the first asset management firms planning to issue Ethereum ETFs in the U.S. have stated in their filings that they will not engage in Ethereum's on-chain staking with the ETH held in their ETFs.
Ethereum staking began on September 15, 2022, during the Merge, which marked a significant shift from a PoW to a PoS consensus mechanism.
For Ethereum 2.0, which fully adopted PoS, staking ETH is crucial for maintaining the security of the Ethereum mainnet and supporting the growth of ETH's price. On one hand, a larger amount of staked ETH means more validators are participating in the network, greatly increasing the cost and difficulty of potential attacks, thus creating a safer environment for on-chain transactions and smart contracts.
On the other hand, since the Merge, ETH's supply has decreased, with the gas fees burned exceeding the amount of new ETH issued. This supply-demand dynamic could theoretically lead to deflation, positively impacting ETH's price. However, due to Bitcoin's rapid price increase and the successful issuance of Bitcoin ETFs in 2024, ETH's market position in the crypto landscape appears to be facing significant challenges.
In discussions about the effects of Ethereum ETF issuance, most industry experts concentrate on ETH's price. They anticipate that if Ethereum ETFs are launched, ETH's price could rebound significantly, possibly exceeding its all-time high of $4,867.60 from November 2021.
Zach Pandl, Managing Director of Research at Grayscale Investments, noted that currently, less than 30% of ETH's total supply is staked, and around 10% is locked in smart contracts. This could limit the amount of new ETH available for ETFs, potentially increasing ETH's price due to supply-demand dynamics. Some reports indicate that, given ETH's tight supply and lower liquidity compared to BTC, the inflow of funds into Ethereum ETFs could have a more pronounced effect on ETH's price. This could explain why many are eagerly awaiting the swift launch of Ethereum ETFs in the U.S.
As of June 2024, data from Morningstar Direct showed that U.S. Bitcoin ETFs have attracted nearly $38 billion in inflows. In the two months after Bitcoin ETFs were issued, BTC's price surged from over $40,000 to a peak of $73,803.25. In contrast, while ETH has experienced some gains in 2024, it has yet to return to its previous price highs.
△ BTC Price History from January 1, 2024 – July 14, 2024 (Unit: USD)
△ ETH Price History from January 1, 2024 – July 14, 2024 (Unit: USD)
The potential increase in ETH's price is an optimistic expectation. However, since ETF funding in traditional finance is usually substantial, the structure and operation of U.S. Ethereum ETFs mean that a significant amount of ETH acquired by asset management firms will not be involved in staking. Could this affect Ethereum's security? Furthermore, if staking rewards differ from ETF returns, will many users who stake for rewards decide to stop participating?
Does the large amount of ETH held by asset management firms enable these firms to manipulate ETH's price? Could this lead to a new form of centralization, compromising Ethereum's vision as a "world computer"? These outcomes are uncertain and not guaranteed to be avoided. Given the global influence and capital-raising ability of the U.S. securities market, the issuance of Ethereum ETFs may be a double-edged sword for Ethereum.
If ETH ETFs Are Denied in the U.S., What Should We Focus On?
Outside the U.S. securities market, the UK, Hong Kong, and Australia are also issuing Bitcoin ETFs. The trend of crypto becoming part of mainstream finance is on the rise.
On April 15, 2024, Hong Kong's KraneShares and China Asset Management (Hong Kong) announced that they had received approval from the Hong Kong Securities and Futures Commission (SFC) to list the first Bitcoin and Ethereum ETFs on the Hong Kong Stock Exchange. With well-defined regulatory guidelines, the SFC has confirmed that these assets are not classified as securities, thus eliminating the regulatory uncertainty present in U.S. markets. Consequently, crypto asset ETF issuers will not face compliance risks related to issuing illegal securities.
On April 30, 2024, the Hong Kong Stock Exchange marked the first trading day for Bitcoin and Ethereum ETFs, which also permitted physical redemptions.
On May 24, 2024, breaking news from Yahoo Finance reported that the Hong Kong SFC is considering allowing Ethereum ETFs to participate in staking. Sources indicated that the SFC is in talks with crypto asset ETF issuers about providing staking services through licensed platforms, though these discussions are still ongoing, with no clear timeline for a decision.