Original author: BloFin
Original compilation: Ehan Wu talks about blockchain
The views expressed in this article are the authors personal views and do not represent Wu Shuos views and positions.
Compared with spot Bitcoin ETFs, the negative impact of the PoS mechanism, price manipulation risks and securitization risks significantly reduce the probability of approval of spot ETH ETFs. Fortunately, regardless of whether the spot ETH ETF is approved or not, the final result will not affect the ETH price breakthrough. However, as other competitors catch up, ETHs market share may struggle to increase further.
“Securitization Risk”
Many investors believe that after the spot BTC ETF is approved, it is only a matter of time before the spot ETH ETF is approved. Previously, some analysts believed that since BlackRock is one of the applicants for the spot ETH ETF, the approval probability of the spot ETH ETF may reach 80%. However, as more details are revealed, analysts have gradually lowered their expectations for the spot ETH ETF.
Analysts concerns are not unfounded. Although the ETH futures ETF was approved last year, with the listing of the spot Bitcoin ETF, the U.S. Securities and Exchange Commission (SEC) seems to have found a standard for reviewing cryptocurrency spot ETFs - commodity tokens, which have no security properties. , and there is no securitization risk.
There is no doubt that Bitcoin is one of the SEC’s “gold standards.”
Bitcoin, like gold and other minerals, has limited reserves, is non-renewable and requires a specific cost to obtain.
The Bitcoin network is stable and mature, and there will be no significant changes in the future due to factors such as consensus mechanism upgrades.
Without going through an ICO (Initial Coin Offering) or any form of financing, its market gradually formed based on buying, selling and trading between users.
Bitcoin holders are numerous and dispersed, and the risk of price manipulation is relatively low.
However, for Ethereum, 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 and reduce its total market stock. However, ETH will continue to be generated, and the theoretical total amount is unlimited. Its inflation and deflation are highly related to its own network activity. At times when the Ethereum network is less active (such as July 2023), ETHs inflation appears again.
Changes in Ethereum network activity (Source: Nansen)
Of course, some may argue that Ethereum is a “renewable digital commodity” and a “crop” growing in the digital space. The Proof-of-Stake (PoS) mechanism is like sowing seeds, and receiving a harvest after providing a seed of 32 ETH. However, holding crops does not have voting rights, while ETH holders under the PoS mechanism can obtain voting rights. The more ETH you hold, the more votes you hold, and the more significant your impact will be on the future of the Ethereum network.
Furthermore, it is difficult to find a more reasonable explanation for the following set of criteria that makes ETH look more like a commodity than a security.
The Ethereum network is constantly being upgraded. After ETH futures were officially listed on CME, ETH underwent major changes in the second year. The consensus mechanism changed from PoW to PoS and the main network forked. With every upgrade, ETH becomes the Ship of Theseus: there are significant differences between ETH in March 2024 and ETH in March 2021.
Ethereum conducted an ICO in 2014. The ICO record makes ETH itself have a certain security risk because the U.S. Securities and Exchange Commission and financial institutions in other countries have stated that ICO tokens may be considered securities. The SEC may consider assets with disputed attributes more carefully.
According to Glassnode statistics, nearly 55% of the ETH supply (approximately 66 million tokens) is held by 1,041 addresses, with an average balance of over 10,000 ETH. In comparison, retail traders account for less than 45% of the ETH supply. At the same time, considering that under the PoS mechanism, token holdings are almost directly related to voting rights, the holders of these 1,041 addresses can have a significant impact on the upgrade and operation of the ETH network.
In contrast, BTC holders have no voting rights and will not have a significant impact on 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 more than 1,000 BTC own only about 40% of the BTC supply, and the number of whale addresses has reached 2,100 , which makes the possibility of BTC price manipulation significantly lower than that of ETH.
The SEC has not yet begun to downplay its concerns about the risks that may arise from the ETH PoS mechanism. In public documents, the SEC expressed concern about the risks that the ETH PoS mechanism may bring:
“...are there unique concerns about specific characteristics of Ethereum and its ecosystem, including its proof-of-stake consensus mechanism and concentration of control or influence by a few individuals or entities, that make Ethereum vulnerable to fraud and manipulation?”
Overall, while hoping for a spot ETH ETF to be approved due to “securitization risks,” one must be prepared for an SEC rejection.
So what do the whales think?
Compared to the market when the spot Bitcoin ETF was approved, spot whales and derivatives traders do not seem to have enough expectations and preparations for the approval of the spot ETH ETF.
From an on-chain data perspective, although the quarterly selling behavior of miners has had a certain impact on the statistics, the number of addresses holding balances exceeding 100 BTC has shown a significant upward trend since May 2023. Compared with the first quarter of 2022 and the first half of 2023, the impact of miner selling behavior on the number of addresses was significantly weakened, which meant that many spot whales bought large amounts of BTC during this period, and the spot BTC ETF was subsequently approved.
But no similar signs were found on ETH. Even with relatively loose standards, the number of addresses with balances above 32 ETH has continued to decrease since January 2023, and the hype in the spot ETH ETF has not had a noticeable impact on the downward trend. Instead, the downward trend has accelerated.
The same conclusion can be drawn if only addresses with balances over 1,000 ETH are considered. Whales appear to be taking advantage of speculation and optimism to sell ETH for profit.
There are also some possible clues in the options market. After the announcement of the spot BTC ETF application, the far-month option skewness of both BTC and ETH increased significantly, reaching a peak in November 2023. In contrast, the spot ETH ETF application did not attract the attention of options traders after it was announced. The increase in bullish price sentiment and the increase in far-month skewness in February are more likely to be affected by the return of liquidity.
Are spot ETFs important?
There is no doubt that the approval of spot ETFs will provide sufficient support for the price performance of BTC and ETH. After the spot ETF was approved, the additional liquidity support in the U.S. stock market pushed the price of BTC up by more than 71% since the beginning of the year. The price of BTC once exceeded US$72,000, reaching a record high.
It is worth noting that although the performance of ETH in terms of exchange rate is relatively weaker than that of BTC, in terms of price growth, the price performance of ETH is not inferior to that of BTC, and even the year-to-date increase is slightly better than that of BTC.
ETH’s surprisingly good performance depends on a variety of factors. On the one hand, the inertia of investors in the crypto market prompts them to sell BTC and buy ETH when the price of BTC rises sharply, bridging the cash liquidity stored in BTC to cryptocurrencies such as ETH. 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 higher growth potential.
Therefore, as more cash liquidity flows into the crypto market, in the medium to long term, ETH price increases are expected and already priced in the derivatives market. The continued positive skewness of far-month ETH options is the best reflection of investors bullish sentiment. It is only a matter of time before the price of ETH reaches new highs.
The approval of spot ETFs will only speed up the above process, but it doesnt matter if it is not approved. The price of ETH may see some volatility or even a significant correction. But 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.
It is worth noting that when spot ETFs cannot be approved, ETH needs to face other competitors in the crypto market. SOL has performed relatively better than BTC in the past six months, and other public chain tokens are also ready to move.
Although ETHs leading position will not be challenged for the time being, other competitors will undoubtedly take away more cash liquidity that originally belonged to ETH. As central banks around the world have adopted relatively stable monetary policies, the return of liquidity to the crypto market will be a “relatively slow and steady” process. Therefore, competition for existing cash liquidity will be one of the main challenges for ETH.
