Coinbase Research has issued a detailed report, written by David Han, emphasizing that the likelihood and timing of a US spot Ethereum (ETH) exchange-traded fund (ETF) approval are significantly underestimated by the market. The potential approval of such an ETF is poised to bring profound changes to Ethereum’s market dynamics.
The Case For A Spot ETH ETF Approval
The report delves into the critical importance of a spot ETH ETF, drawing parallels with the successful approval of spot BTC ETFs in the US. The introduction of spot Bitcoin ETFs has provided regulatory clarity and attracted significant capital inflows, reinforcing Bitcoin’s status as a macro asset. Similarly, a spot ETF would open Ethereum to the same capital pools that currently favor Bitcoin, fundamentally altering investment patterns within the crypto ecosystem.
Han underscores the core argument for a spot ETH ETF: the high correlation between CME ETH futures and spot prices. This correlation was a key factor in the approval of spot BTC ETFs.
“The correlation between the CME futures product and the spot exchange rates is sufficiently high such that CME’s surveillance can be reasonably expected to detect misconduct in the spot market,” Han states. This reasoning is expected to be equally applicable to Ethereum, given that the CME ETH futures launched just a month before the correlation study period used for BTC ETF approvals.
Despite the significant market potential, the report highlights the differences to Bitcoin and recognizes the regulatory uncertainties, particularly around Ethereum’s proof-of-stake (PoS) mechanism. The complexities of staking—such as slashing conditions, validator differences, and unstaking liquidity risks—introduce additional layers of consideration for regulators. “The complexities of staking present unique challenges, but these should not impact the status of unstaked ETH,” Han notes.
Market sentiment, as reflected in trading platforms like Polymarket, currently prices the odds of a spot ETH ETF approval by May 31, 2024, at 16%. However, Coinbase’s analysis suggests these odds are significantly higher, closer to 30-40%. This divergence indicates that the market may not fully appreciate the potential regulatory and market shifts in favor of Ethereum.
Han also points out that even if the initial deadline of May 23, 2024, encounters a rejection, there remains a high likelihood that litigation could reverse such a decision. “Crypto is becoming an election issue, and the SEC may not be willing to expend the political capital necessary to support a denial,” Han argues, suggesting that political dynamics could also play a role in the regulatory process.
The approval of a spot ETH ETF would not only align Ethereum with Bitcoin in terms of regulatory clarity and access to institutional capital but also disrupt traditional capital flow patterns within the crypto market. Historically, capital has rotated from Bitcoin to Ethereum and then to higher-beta altcoins. A spot ETH ETF would potentially streamline this flow, directly channeling institutional investments into Ethereum.
This approval would also mitigate one of the largest overhangs for ETH, especially in a challenging regulatory environment. “The potential approval of a spot ETH ETF removes a significant barrier, opening up ETH to new capital inflows and regulatory clarity,” Han emphasizes.
Ethereum’s Long-Term Positioning
Beyond the immediate implications of a spot ETF, Coinbase’s report delves into Ethereum’s strong long-term positioning. Despite facing competition from other layer-1 networks like Solana, Ethereum’s advantages—such as the maturity of its developer ecosystem, the proliferation of its EVM platform, and its role as DeFi collateral—remain unparalleled, according to Han.
The growth of Ethereum layer-2 solutions and the reduced ETH burn post-EIP-1559 are highlighted as factors enhancing its value proposition. Additionally, Ethereum’s historical trading patterns reveal its dual role as both a store-of-value and a technology-token, adding to its unique market positioning.
In conclusion, Coinbase’s analysis presents a compelling case for the near-term approval of a spot ETH ETF in the US. The report suggests that market participants may be underestimating the odds and timing of such approval, leaving room for potential upside surprises.
“We think the market may be underestimating the timing and odds of a potential approval, which leaves room for surprises to the upside,” Han remarks. Moreover, he predicts that ETH may “have the potential to surprise to the upside in the coming months. ETH does not appear to have major sources of supply-side overhangs such as token unlocks or miner sell pressure.”
At press time, the ETH price stood at $3,028.
