What’s the Chance of Ether Spot ETF Approval in May? Can the Market Sustain Another Rally?

Key Takeaways:

• We project a low chance of Ether Spot ETF approval by the SEC in May, mainly due to regulators' silence.

• If Ether Spot ETFs are allowed to offer the staking of underlying assets, their approval might be significant in the medium term.

• A bull market might ensue, as Ether’s rise would likely send a tailwind to tokens in its ecosystem. 

What’s Happening Now With the SEC’s Expected Approval of Ether Spot ETFs?

Ether Spot ETFs would track the performance of Ether, directly holding ETH. They differ from Ether Futures ETFs that are available in most markets, which require the periodic rolling of futures contracts and can possess tracking errors. Please refer to this article for more.

Let’s dive in directly. 

The firms applying for listing Ether Spot ETFs in the U.S. are BlackRock, VanEck, ARK 21Shares, Grayscale, Fidelity, Invesco and Galaxy Digital (through a joint proposal), in addition to Franklin Templeton. 

The U.S. SEC has postponed its decision several times because it claims to need more time to consider the applications. However, the deadline for the earliest applicants, BlackRock and Fidelity, is one month away (May 23, 2024). 

It’s widely perceived that SEC rejection would lead to legal action from the applicants.

The market has been building up its anticipation of Ether Spot ETFs since the approval of the listing of Ether Spot ETFs in January 2024.

However, SEC Chair Gary Gensler said at that time that the Bitcoin Spot ETF approvals shouldn't "signal anything about the commission’s views as to the status of other crypto assets under the federal securities laws."

What’s the Chance of SEC Approval of Ether Spot ETFs in May 2024?

Ether’s price surged immediately after the approval of Bitcoin Spot ETFs back in January, and the market anticipates approval of Ether ETFs in the U.S. later this year. However, remarks from SEC Chairperson Gary Gensler on multiple occasions this year have dampened expectations.

In our view, the chance of Ether Spot ETF approval remains dim — despite Hong Kong’s surprising approval of them in April — as the agency is likely to stick to its own assessment before approving Ether Spot ETFs . 

ETH/BTC Ratio from July 2023 to April 2024. Source: Bybit

The dwindling ETH/BTC ratio also illuminates the lowering probability of Ether Spot ETF approval in the U.S., which has dropped below 0.05 —a multi-year low — as shown above. 

Open interest by strike price (ETH options with May 10, 2024 expiration dates). 

Source: Coinglass

Open interest by strike price (ETH options with May 31, 2024 expiration dates). Source: Coinglass

However, the market hasn’t given up, as reflected in the exercise price of ETH options expiring before and after the deadline for the SEC’s decision on ETH Spot ETFs. The exercise price of calls expiring on May 10, 2024, centers on a $3,300~$3,400 interval, while the exercise of calls expiring on May 31, 2024 is remarkably higher, falling between $3,600 and $3,800.

Also, Bybit Research has observed a substantial increase in Ether’s position by institutions as Bitcoin’s outperformance against Ether continues to test new lows. This suggests that institutions may have prepared for the approval of Ether Spot ETFs, at least in the medium term, following the approval of Bitcoin Spot ETFs.

Why Yes to Bitcoin — But No to Ether?

The key consideration by the SEC lies in whether the ETH token is a security or commodity. Simply put, a token closer to the definition of security might have a higher chance of approval, as the SEC may determine it to be in compliance with Federal securities laws. 

Bitcoin adopts proof of work (PoW) models with no yield generation and is considered the most decentralized cryptocurrency due to its diverse user base. SEC Chairperson Gary Gensler has mentioned several times that PoW tokens are unlikely to meet the definition of securities under federal laws. As Ether shifts from PoW to proof of stake (PoS) in 2021, Ether has a higher chance of qualifying as a security and less chance of getting approved.

In addition, the concentration risk of Ether staking could make it look more like a security. Lido continues to own > 28.8% of the total staked ETH on the network. However, the popularity of restaking in recent months may erode Lido’s dominance, and may indirectly ultimately lead to the approval of Ether Spot ETFs in the U.S.

What Makes the SEC’s Approval So Important?

Regions with Approved Bitcoin and Ether Spot ETFs (as of April 23, 2024).

Source: Compiled by Bybit

Although Hong Kong is likely ahead of the U.S. in launching Ether Spot ETFs, as their approvals are expected to be completed by the end of this month (April 2024), not many markets worldwide are offering them yet. 

Despite the U.S, not being the first mover, the impact of approval in the U.S. market would likely be more profound due to the nation’s sheer capital size. Bitcoin Spot ETFs have attracted capital of more than $54 billion so far, leaving other markets in the dust in terms of size since their launch there three months ago. As such, it’s expected that Ether Spot ETFs would bring more capital than any of the existing legalized markets combined. 

If Ether Spot ETFs Are Approved, How Much Capital Can They Bring? 

Source: Compiled by Bybit (data as of April 23, 2024)

Based on the performance of Bitcoin Spot ETFs so far, it’s estimated that Ether Spot ETFs would accumulate at least $16 billion in capital.

Source:Compiled by Bybit (data as of April 23, 2024)

Nonetheless, if the SEC allows a version of staked Ether ETFs, the expected AUM is beyond imagination, as the current native yield from Ether staking amounts to 3.3%, higher than many of its competing asset classes.

Could Approval of Spot Ether ETFs Trigger Another Crypto Rally?

The possible approval of Bitcoin Spot ETFs in September 2023 reversed Bitcoin's bearish trend, creating a new all-time high right after the actual ETF approval. Bitcoin's outperformance gave rise to an ensuing rally from other tokens, as speculation arose from upbeat market sentiment. As Bitcoin Spot ETF approval hit the headlines, new investors were tempted into the cryptocurrency and sustained the rally.

UST Market Capitalization. Source: CoinGecko (as of April 23, 2024)

The above chart indicates the market capitalization of USDT, the largest cryptocurrency. The increase in its market cap arises from increasing supply as it’s pegged to the U.S. dollar. Historically, the increasing supply coincided with the surging price action of the broader cryptocurrency, as the supply represents the on-chain capital. 

Therefore, the possible approval of Ether Spot ETFs will likely sustain the current bull market. New investors are expected to inject new capital into the crypto market, further boosting the supply of USDT. What’s more, approval could spur the broader price increase of Ethereum ecosystem tokens, primarily DeFi and Layer 2 tokens.