BloFin Whale’s View: Should We Do Some Preparation for the Possible Rejection of Spot ETH ETFs?
Compared to spot Bitcoin ETFs, the negative impact of the PoS mechanism, price manipulation risk, and securitization risk significantly reduce the probability of spot ETH ETFs’ approval. Fortunately, whether spot ETH ETFs are approved or not, the final result will not affect the breakthrough of ETH price. However, as other competitors catch up, ETH’s market share may be challenging to increase further.
“Securitization Risk”
Many investors believe that after the approval of the spot BTC ETFs, the approval of the spot ETH ETFs is “only a matter of time”. Previously, some analysts believed that due to BlackRock being one of the applicants for the spot ETH ETFs, the approval probability of the spot ETH ETFs could reach 80%. However, as more details are revealed, analysts have gradually lowered their expectations for the spot ETH ETFs.
Analysts’ concerns are not unfounded. Although the ETH futures ETF was approved last year, with the listing of the spot BTC ETFs, the SEC chairman seems to have found the criteria for reviewing cryptocurrency spot ETFs — “commodity tokens” without securities attributes or the risk of becoming securities.
Without a doubt, BTC is one of the “gold standards” of the SEC.
- BTC, like minerals like gold, has limited reserves, is non-renewable, and requires a specific cost to obtain.
- The BTC network is stable and mature, and there will be no significant changes in the visible future due to factors such as consensus mechanism upgrades, “just like wheat will not turn into corn”.
- Without experiencing ICO (Initial Coin Offering) or any form of financing, its market gradually formed based on buying, selling, and trading between users. A classic case: the formation of cattle and grain markets in Chicago is one of the main reasons for establishing the CME.
- The number of holders is large and scattered, and the risk of price manipulation is relatively low.
However, for ETH, these standards do not seem to be met.
The new mechanism introduced by ETH 2.0 and subsequent upgrades will cause ETH to show a deflationary trend, reducing its total stock in the market. However, ETH will continue to be generated, and the theoretical total amount is unlimited, and its “inflation” and “deflation” are highly correlated with its own network active level. At a time when the active level of the Ethereum network is relatively low (for example, Jul 2023), ETH’s “inflation” once appeared again.
Of course, perhaps someone can forcefully explain: ETH is a “renewable digital commodity”, similar to corn and soybeans, but grown in the digital space. The PoS mechanism is like sowing seeds, obtaining “harvests” by providing 32 ETH of “seeds”. However, holding crops does not get voting rights, while ETH holders under the PoS mechanism can. The more ETHs held, the more votes held, and the more significant the impact on the future of the Ethereum network.
Moreover, it is difficult to find more reasonable explanations for the following series of standards to make ETH look more like “commodities” than “securities”.
- The ETH network has been constantly upgrading. After the official listing of ETH futures on CME, ETH underwent significant changes in the second year, with its consensus mechanism changing from PoW to PoS and a mainnet fork. With each upgrade, ETH has become a “ship of Theseus”: there has been a significant difference between ETH in Mar 2024 and ETH in Mar 2021.
- ETH conducted an ICO in 2014. The ICO record makes ETH itself have a certain “securities attribute risk”, because both the SEC and other countries’ Financial Institutions have stated that “ICO tokens may be considered securities”. For assets with controversial attributes, the SEC may tend to consider them more carefully.
- According to Glassnode statistics, nearly 55% of the ETH supply (about 66 million coins) is held by 1,041 addresses with an average balance of over 10,000 ETH. In comparison, retail traders only have less than 45% of the ETH supply. At the same time, considering that under the PoS mechanism, token holdings are almost directly linked to voting rights, the holders of these 1,041 addresses can significantly impact the upgrade and operation of the ETH network.
In contrast, BTC holders do not have voting rights and will not significantly impact the operation of the BTC network. Since 2009, the distribution of BTC holders has become quite natural and even: as of March 2024, whales holding over 1,000 BTC only own about 40% of the supply of BTC, and the number of whale addresses has also reached 2,100, which makes the possibility of BTC price manipulation significantly lower than that of ETH.
Of course, the SEC has not begun to wax dim — at least for now. In public filings, the SEC has expressed concerns about the possible risks posed by the ETH PoS mechanism:
“…Are there particular features related to ether and its ecosystem, including its proof of stake consensus mechanism and concentration of control or influence by a few individuals or entities, that raise unique concerns about ether’s susceptibility to fraud and manipulation?”
Overall, due to the “Securitization risk”, although we hope that the spot ETH ETFs will be approved, we must also be prepared for the SEC’s rejection letter.
What Do Whales Think?
Compared to the market when the spot BTC ETFs were approved, spot whales and derivatives traders did not seem to have sufficient expectations for the approval of the spot ETH ETFs and were prepared for it.
From the perspective of on-chain data, although the quarterly selling behaviour of miners has had some impact on statistics, the number of addresses with a balance exceeding 100 BTC has shown a significant upward trend since May 2023. Compared with 2022Q1 and 2023H1, the impact of miners’ selling behaviour on the number of addresses has significantly weakened, which means that many spot whales have bought a large amount of BTC during this period, and the spot BTC ETFs were subsequently approved.
However, we did not find similar signs on ETH. Even if we use relatively loose standards, the number of addresses with balances exceeding 32 ETH has continuously decreased since Jan 2023, and the speculation on the spot ETH ETFs has not significantly impacted the downward trend. On the contrary, the downward trend has accelerated.
The same conclusion can be drawn if we only consider addresses with a balance of more than 1,000 ETH. Whales seem to be taking advantage of speculative and optimistic sentiment to sell their ETH for profit.
In the options market, we have also found some possible leads. After the announcement of the spot BTC ETFs application, the far-month option skewness of both BTC and ETH showed a significant increase and reached its peak in Nov 2023. In contrast, the announcement of the spot ETH ETFs application did not cause option traders to price additional bullish sentiment, and the increase in the far-month skewness in Feb is more likely due to the influence of liquidity return.
Is Spot ETF Important?
Undoubtedly, the approval of spot ETFs will provide sufficient support for the price performance of both BTC and ETH. After the approval of spot ETFs, additional liquidity support from the US stock market has pushed the price of BTC up more than 71% from the beginning of the year to now, and the price of BTC has also exceeded $72,000, further reaching a new historical high.
It is worth noting that although ETH’s performance in terms of exchange rate is relatively weak compared to BTC, in terms of price increase, ETH’s price performance is not inferior to BTC, and even its year-to-date increase is slightly better than BTC.
The surprisingly good performance of ETH depends on multiple factors. On the one hand, the inertia of crypto market investors prompts them to sell BTC and buy ETH when the price of BTC rises sharply, “bridging” the cash liquidity stored in BTC to ETH and the crypto market. At the same time, the rapid return of cash liquidity provides more support for the price of ETH, and the relatively high volatility of ETH brings a higher potential for growth.
Therefore, with more cash liquidity flowing into the crypto market, from a medium to long-term perspective, the rise in ETH prices has been expected and has already been priced in the derivatives market. The sustained positive skewness of ETH options in the far month is the best reflection of investors’ bullish sentiment, and it is only a matter of time before the price of ETH reaches a new high.
The approval of spot ETFs will only accelerate the process above, but it doesn’t matter if not. The price of ETH may experience some fluctuations or even significant pullbacks. However, in a bull market environment, the gap caused by the decline will be quickly filled, and the upward trend of ETH prices will not fundamentally change.
Notably, in the case where spot ETFs cannot be approved, ETH needs to face other competitors from within the cryptocurrency market. SOL has performed relatively better than BTC in the past six months, and other public chain tokens are also eager to move.
Although ETH’s leading position will not be challenged for now, other competitors will undoubtedly take away more of the cash liquidity originally belonging to ETH. Since central banks worldwide have adopted relatively stable monetary policies, the liquidity return to the crypto market will be a “relatively slow and stable” process. As a result, the competition for existing cash liquidity will be one of ETH’s main challenges.
