Recent analysis from Bloomberg has significantly increased the probability of an Ethereum spot ETF approval by May 23rd to 75%. Coinbase, a major custodian for both Bitcoin and Ethereum spot ETFs, believes that approval is inevitable—merely a matter of timing.
However, the company also suggests that ETFs incorporating Ethereum staking are unlikely to gain immediate regulatory clearance. Moreover, the U.S. Securities and Exchange Commission (SEC) is not expected to approve all applications at once.
How Spot ETFs Are Reshaping the Crypto Landscape
Spot ETFs introduce regulatory clarity and create new channels for capital inflow. These investment vehicles are structurally transforming the industry and challenging traditional crypto market cycles, where capital typically flows from Bitcoin to Ethereum and then to higher-beta altcoins.
Following the approval of Bitcoin spot ETFs in the United States, fund flows have had a structural impact. A new base of capital is now exclusively buying Bitcoin. Unlike retail traders or many crypto natives, new market participants such as registered investment advisors (RIAs), wealth management firms, and brokerage companies may have a very different perspective on including BTC in their portfolios.
While Bitcoin is considered the least volatile asset in a pure cryptocurrency portfolio, it is often viewed as a small diversification asset within more traditional portfolios consisting of fixed income and equities.
Ethereum Spot ETF Approval Is Inevitable
Coinbase asserts that the approval of a spot Ethereum ETF is only a question of when, not if. The core rationale that led to the approval of Bitcoin spot ETFs applies equally to Ethereum.
Specifically, the correlation between CME futures products and the spot market is sufficiently high. This allows the CME to effectively monitor and prevent market manipulation in the spot market.
The approval notice for the Bitcoin spot ETF referenced a correlation study period starting in March 2021, which began just one month after CME Ethereum futures launched. This choice of assessment period is significant, as similar reasoning can be applied to the ETH market.
Previous correlation analyses presented by Coinbase and Grayscale indicate that the spot and futures market correlation for ETH is comparable to that of BTC.
The Central Issue: Ethereum’s Proof-of-Stake Mechanism
Coinbase identifies Ethereum’s proof-of-stake (PoS) mechanism as the central focus for regulators. The ability to stake assets and earn rewards introduces a new layer of complexity.
Due to the current lack of clear regulatory guidance on the treatment of staking, Coinbase believes that Ethereum spot ETFs which include a staking feature are unlikely to be approved in the near term.
This perspective was reinforced when Ark Invest and 21Shares updated their Ethereum spot ETF application, removing all language related to staking. Bloomberg ETF analyst Eric Balchunas noted that this move was likely an attempt to eliminate a potential reason for SEC rejection.
Current Probability of Approval
In its report, Coinbase pointed to market-based indicators for estimating approval odds. Prediction market Polymarket priced the probability of approval by May 31, 2024, at around 16%. Meanwhile, the Grayscale Ethereum Trust (ETHE) was trading at a 24% discount to its net asset value (NAV).
Based on these metrics, Coinbase inferred the market-implied probability of approval to be in the 30-40% range. The report also noted that as cryptocurrency becomes an increasingly prominent election issue, it is unclear whether the SEC is willing to expend the political capital required for a denial.
Even if the applications are rejected on the first deadline of May 23, 2024, Coinbase believes litigation could successfully overturn the decision.
Additionally, the report suggests that the SEC is unlikely to approve all Ethereum spot ETF applications simultaneously. A more measured, sequential approval process is expected.
Frequently Asked Questions
What is an Ethereum spot ETF?
An Ethereum spot ETF is an exchange-traded fund that holds actual Ether (ETH). It allows investors to gain exposure to the price of Ethereum without directly buying or storing the cryptocurrency themselves. These products are traded on traditional stock exchanges.
Why is staking a hurdle for ETF approval?
Staking involves locking up cryptocurrency to participate in network security and earn rewards. The SEC has not provided clear rules on whether these rewards constitute a security or how they should be regulated. This lack of clarity makes regulators hesitant to approve products that include this feature.
How does the approval process work?
The SEC reviews applications submitted by asset managers. They assess factors like market manipulation risks, custody solutions, and correlation with regulated futures markets. The process can involve multiple rounds of comments and amendments before a final decision is made.
Could an ETF approval change Ethereum’s price?
Yes, historically, ETF approvals have led to significant capital inflow from traditional finance into the asset. This new demand can positively impact the price, as seen with Bitcoin following the approval of its spot ETFs.
What happens if the ETF is rejected?
Asset managers like Grayscale have previously sued the SEC after rejections and won. If the Ethereum spot ETF is denied, similar lawsuits are likely, which could eventually force the SEC to approve them.
Are other countries ahead of the U.S. in approving these ETFs?
Yes, several countries, including Canada and Brazil, have already approved and launched spot Ethereum ETFs. The U.S. is seen as lagging in this aspect of crypto regulation. To explore more strategies on digital asset investment, you can discover comprehensive market insights.
The journey toward an Ethereum spot ETF is complex and heavily influenced by regulatory interpretation of staking. While approval seems probable, the specific features of the first approved funds and their timing remain uncertain.