Analyzing the ETH Spot ETF & The Market’s Lack of Action

Ark files for an ETH ETF, but why does price remain unchanged?

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Traditional finance institutions continue pushing to launch crypto products. Following last week’s Grayscale win, on Wednesday we saw Cathie Wood’s Ark file to launch the first spot ETH ETF, a product which would facilitate broader investment into the second largest crypto-asset. Despite the news, Ether’s price remained relatively unmoved throughout the week.

This week we discuss the market’s lack of reaction to news such as this, diving into on-chain concentration and the drivers behind the ongoing market dynamics keeping price within a tight range.

Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether

• Bitcoin network fees climbed by 38% as Ordinals inscriptions reached their second highest daily amount
• Ethereum fees declined 24%, with the lack of market volatility leading to lower gas usage from DeFi applications

Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges

• Both Bitcoin and Ether recorded modest netflows into CEXs as market activity cools off

Analyzing the ETH Spot ETF & The Market’s Lack of Action

Following Ark’s spot ETH ETF filing, Grayscale’s ETH fund is close to its yearly highs, even while Ether itself is down over 20%. The diverging paths between these assets is worth exploring further as complex market forces are at play.

Via ITB’s Free Capital Markets Analytics

ETHE Outperformance — Grayscale’s ETH fund has produced significantly higher returns than spot Ether this year

• ETHE has increased by over 140% in 2023, significantly narrowing its discount to the underlying Ether it holds
• The ETHE discount decreased from -56% to -36% in the month following the Blackrock spot Bitcoin ETF application, leading ETHE to yearly highs despite Ether trending lower
• Following Ark’s spot Ether ETF filing this week, the gap has narrowed to -26%, its lowest discount since October 2022 per Ycharts
• This trend suggests that the market is weighing higher odds that Grayscale will be able to convert its ETHE product into an ETF following the push from traditional finance giants into the space

While a spot ETH ETF would certainly facilitate inflows into Ether, it begs the question: why did such news not affect Ether’s price?

Via ITB’s Ethereum financial indicators

Supply/Demand Congestion — Large holdings are concentrated close to ETH’s current price, consolidating prices in a tight range

• 5.1 million ETH was previously acquired in the low $1,600s, showing that this has historically been a place where buyers have stepped in as support
• Similarly, 6.5 million ETH has been purchased with a price in the high $1,600s, much of which creates resistance from holders looking to exit the market minimizing losses
• In short, buyers and sellers are agreeing to transact in a narrow range where there is a large concentration of ETH positions

This explains why the market is consolidating, but does not answer our main question: why isn’t the market reacting positively (or at all) to bullish news?

The spot Ether ETF is not the only instance where price was barely affected by optimistic news. This week Visa announced it will be using Solana for faster and cheaper settlements. While SOL’s price increased in the hours following the release, the move was fully retraced the next day, similar to what happened with ETH.

Automated Buying, Discretionary Selling — trading bots appear to be buying these announcements, but discretionary sellers then overtake the trend

• A key factor behind the discretionary selling is likely to be FTX’s upcoming liquidation of reportedly $3B in crypto holdings
• Though FTX has not reported when they will conduct these liquidations, it is likely that the market got spooked following their recent bridging activity
• With ETH and SOL both being part of FTX’s holdings, it is plausible to believe that the lack of sustained price action in these assets is linked to sellers front-running FTX and less buyers looking to buy ahead in anticipation of their liquidation

Ultimately, demand and supply appear to be matching within a narrow trading range as market forces clash. The heterogeneity of market participants make it difficult to ascertain the sole drivers behind price action, but it appears that buying activity driven by catalysts such as a potential ETH spot ETF is being offset by the anticipation of FTX selling. These complex dynamics may persist as there are other waves of large sellers (such as the US government and MT Gox claims) expected later this year at the same time that institutional catalysts and organic adoption continue to improve.