For the convenience of readers, some common nouns will be abbreviated. The following is a comparison of the full name and abbreviation:
Ethereum Spot ETF: hereinafter referred to as “Ethereum ETF”
Bitcoin Spot ETF: hereinafter referred to as “Bitcoin ETF”
U.S. Securities and Exchange Commission: hereinafter referred to as "SEC"
Since 8 asset management institutions that plan to issue Ethereum ETFs in the U.S. securities market finally submitted S-1 documents to the U.S. SEC in June 2024, whether the Ethereum ETF can be successfully issued? When can it be listed for trading? It has always attracted the attention of industry insiders. Various predictions have been rising and falling, and the market value of ETH has also fluctuated frequently due to related news. Why does the Ethereum ETF affect market sentiment so much? In this regard, should we be optimistic and expect to enter the market first, or remain calm and wait and see?
Through ETFs, digital assets are being integrated into the mainstream financial trading market
This may be one of the most important market significances of issuing crypto asset ETFs.
"What you're seeing is the birth of a new class of assets," Matthew Hougan, chief investment officer of Bitwise Asset Management, said in an interview with U.S. media CNBC on July 8, 2024.
Bitwise Asset Management is also one of the issuers of the Ethereum ETF that is planned to be issued in the US securities market. Matthew Hougan also believes that crypto asset ETFs are a story that will continue to develop. The issuance and successful trading status of the Bitcoin ETF in January 2024 is a good indicator of future development.
Data released by FactSet shows that the scale of capital inflows attracted by the US Bitcoin ETF has already ranked in the top 2 in the 2024 US ETF rankings.
As for the issuance of Ethereum ETF in the U.S. securities market, people also have high expectations for its "money-making ability", but at the same time, industry insiders generally believe that the scale of funds that Ethereum ETF can attract is expected to be smaller than Bitcoin ETF.
However, as an article on Bankless.com once pointed out: In the first few years, the Ethereum ETF's capital inflows may also reach billions of dollars, which is actually a strong start for any ETF.
Matthew Hougan, chief investment officer at Bitwise Asset Management, expressed more optimistic expectations: "If the Ethereum ETF achieves $5 billion, $10 billion, or $15 billion in revenue in the first two years after its launch, it will be a huge success."
At present, in addition to the issuance of ETFs for assets on Bitoicn and Ethereum, there are also constant reports that the US securities market will release the Solana spot ETF in early July 2024.
On July 8, 2024, the Chicago Board Options Exchange submitted a 19b-4 document to the U.S. SEC. According to the content of the document, the news that VanEck and 21Shares, two asset management institutions, plan to list and issue Solana spot ETFs has been confirmed. The U.S. SEC needs to make a reply to the 19b-4 document submitted by the Chicago Board Options Exchange within 240 days (expected to be March 2025).
Why was the issuance of Bitcoin ETF in the United States so smooth, while the issuance of Ethereum ETF was confusing?
The main reason is regulatory disputes.
In the U.S. financial regulatory environment, is the digital asset ETH on Ethereum an ordinary asset or an unregistered security? There is still controversy over the determination of this issue. The root cause of the controversy over the nature of ETH is the game of regulatory power. If ETH is identified as an ordinary asset and a "digital commodity", it will be regulated by the U.S. Commodity Futures Trading Commission; if ETH is considered to have a model of earning income through on-chain staking that is consistent with the nature of traditional financial "investment contracts", then it may be identified as a security and regulated by the U.S. SEC.
In the United States, the issuance of securities needs to be registered with the U.S. SEC. If ETH is identified as a security and is regulated by the U.S. SEC, it must be registered with the regulatory authorities before it can be issued and traded; if it is not registered, and the issuer's securities issuance transactions do not meet the conditions for exemption from registration, the issuers of this batch of Ethereum ETFs may face enforcement actions or sanctions from regulators for "issuing unregistered securities" and non-compliant transactions.
However, the digital asset BTC on Bitcoin does not face such regulatory challenges because there is no on-chain pledge, and the asset positioning is more certain, so it can be issued smoothly.
It is worth noting that the U.S. SEC has not commented on the "characterization of ETH" and "whether the Ethereum ETF will be issued" so far, and has not issued any official opinions.
What impact does the Ethereum ETF have on Ethereum?
In order to avoid compliance risks as much as possible, the first batch of asset management institutions that plan to issue Ethereum ETFs in the U.S. securities market have clearly stated in the relevant issuance documents that they will not use the ETH held in their ETFs to participate in Ethereum's on-chain staking.
Ethereum staking began with the merger event on September 15, 2022. At that time, Ethereum completed a major transition from the PoW consensus mechanism to the PoS consensus mechanism. For the Ethereum 2.0 version that officially adopts the PoS consensus mechanism, ETH staking is indispensable and has important significance for maintaining the security of the Ethereum mainnet and the growth of ETH's market value.
On the one hand, the larger the scale of ETH involved in staking, the more validators will join the Ethereum network, which will significantly increase the cost and difficulty of hackers attacking Ethereum, creating a safer environment for on-chain transactions and smart contracts. On the other hand, since the completion of the merger of Ethereum, the supply of ETH has decreased, and the scale of the destroyed Gas fee is greater than the number of newly issued ETH. In theory, this supply and demand relationship will gradually form deflation, which is conducive to the increase in the value of ETH.
However, due to the rapid surge in BTC's market value since 2024 and the successful issuance of Bitcoin ETF, ETH's market value position in the field of blockchain digital assets seems to have been challenged. Regarding the issue of how the issuance of Ethereum ETF will affect Ethereum, most industry insiders choose to focus on ETH's market value management. They predict that if the Ethereum ETF is issued, ETH's market value may rebound significantly, breaking through the historical high of $4,867.60 set in November 2021.
Zach Pandl, managing director of research at crypto asset management company Grayscale Investments, once told the media: Less than 30% of the total supply of ETH is staked, and about 10% of ETH is locked in smart contracts. These may reduce the amount of new ETH available for ETFs to hold. Under such supply and demand relationships, the market value of ETH may be pushed up.
There are also media reports pointing out that due to the tight supply of ETH and weaker liquidity than BTC, the US dollars flowing into the Ethereum ETF may have a greater impact on the market value of ETH.
This may also be one of the important reasons why most people are eagerly looking forward to the quick listing and issuance of the US Ethereum ETF.
As of the end of June 2024, according to data from Morningstar Direct cited by the media, the US Bitcoin ETF has attracted nearly $38 billion in capital inflows. In the two months after the issuance of the US Bitcoin ETF, the market value of BTC itself soared from more than $40,000 to a maximum of $73,803.25. In contrast, although ETH has risen since 2024, it is far from reaching its previous market value high.
△ BTC market value trend from January 1 to July 14, 2024
Market value unit: US dollars, source: Google
△ ETH market value trend from January 1 to July 14, 2024
Market value unit: US dollars, source: Google
It is an optimistic expectation that the market value of ETH will rise. However, since the scale of ETF funds in the traditional financial industry is usually very large, according to the establishment and operation of the US Ethereum ETF, the large amount of ETH absorbed by asset management institutions will no longer participate in the pledge of Ethereum. Will this affect the security of Ethereum?
At the same time, if there is a gap between the rewards for participating in staking and the returns of investing in ETFs, will a large number of users who participate in staking in order to obtain rewards also give up participating in staking? If asset management institutions hold a large amount of ETH and do not participate in staking, will the market value pricing power of ETH be substantially interfered with or manipulated by asset management institutions? Is this exacerbating another kind of centralization? Will Ethereum's original intention of being a "world computer" be affected?
It is not certain that all this will not happen. Given the global influence and fund-absorbing capacity of the US securities market, the issuance of the US Ethereum ETF is actually a double-edged sword for the future development and goals of Ethereum.
If the US Ethereum ETF issuance is rejected, what can we pay attention to?
In addition to the US securities market, the UK, Hong Kong, and Australia have already joined the ranks of issuing Bitcoin ETFs. The trend of blockchain digital assets being integrated into the mainstream financial trading market is increasing.
On April 15, 2024, Harvest Global Asset Management Co., Ltd. and China Asset Management (Hong Kong) both announced that they had obtained the approval in principle from the Hong Kong Securities Regulatory Commission to list and issue the first Bitcoin ETF and Ethereum ETF on the Hong Kong Stock Exchange. Since Hong Kong has a very clear division of supervision for blockchain digital assets, the regulator is the Hong Kong Securities Regulatory Commission, and it has confirmed that blockchain digital assets are not securities, there will be no regulatory uncertainty risks such as those in the US securities market, and issuers of crypto asset ETFs will not have the compliance risk of "issuing illegal securities."
On April 30, 2024, the Hong Kong Stock Exchange officially welcomed the first trading day of Bitcoin ETF and Ethereum ETF. In addition, Bitcoin ETF and Ethereum ETF issued in Hong Kong are also open for physical subscription.
On May 24, 2024, according to an instant message released by Yahoo Finance, Bloomberg News quoted people familiar with the matter as saying that the Hong Kong Securities and Futures Commission is considering allowing Ethereum ETFs to participate in staking. People familiar with the matter pointed out that the Hong Kong Securities and Futures Commission has discussed with issuers of crypto asset ETFs about participating in staking services through licensed platforms, but the relevant discussions are still ongoing and there is no clear timetable for decision-making. A spokesperson for the Hong Kong Securities and Futures Commission did not comment on the news.
