Original editor: Wu Shuo Blockchain
Griffin Ardern is Head of Research at BloFin Academy. Below is his analysis of the current cryptocurrency market situation. Some content is translated by AI and may contain deviations.
Current Progress of Ethereum ETF Approval and Its Importance
Compared to Bitcoin ETFs, especially those based on Ethereum futures, the Ethereum ETF is relatively small in terms of size and trading volume. The largest Ethereum futures ETF has assets under management (AUM) of less than $100 million, which is significantly smaller compared to some Bitcoin ETFs. However, it is worth noting that this represents the largest AUM among the Ethereum futures ETFs, with other AUMs even lower and can be considered insignificant.
The approval of an Ethereum spot ETF could lead to increased investment, funding and liquidity from the U.S. stock market, supporting the price of Ethereum. This could mimic the impact of Bitcoin, where external liquidity significantly boosted its price, leading to a new all-time high in a relatively short period of time. However, challenges and uncertainties regarding Ethereum ETF approval remain.
If an Ethereum ETF is approved, it could set a new standard for other cryptocurrencies and provide an example for them to apply for their own ETFs, especially those seeking to launch spot ETFs. These cryptocurrencies share similar features to Ethereum, such as proof-of-stake and staking mechanisms.
Approval of an Ethereum ETF by an entity like BlackRock could pave the way for ETFs covering other cryptocurrencies, expanding the range of crypto assets available to investors through regulated financial products. Conversely, if the Ethereum ETF is rejected, it could mean that only those cryptocurrencies that adhere to the same standards as Bitcoin, such as proof of reserves, will be considered for the ETF. This would exclude proof-of-stake (PoS)-based cryptocurrencies from ETF consideration.
All in all, the approval of the Ethereum ETF is seen as a critical and potentially transformative step for the future of cryptocurrency ETFs. Not only will it benefit Ethereum, but it will also set a precedent for how other PoS-based cryptocurrencies can be integrated into mainstream financial products. The crypto community is eagerly anticipating this development as it could have a significant impact on liquidity, investing, and wider acceptance of cryptocurrencies.
Given the current landscape and regulatory environment, the approval of an Ethereum ETF faces several significant challenges, particularly from the perspective of the Securities and Exchange Commission (SEC). Under Chairman Gary Gensler, the SEC has expressed a preference for cryptocurrencies that follow Bitcoin-like standards. This poses special challenges for Ethereum due to its security and securitization risks. (SEC was recently revealed to have begun investigating the Ethereum Foundation after Ethereum switched to POS)
Ethereum’s initial coin offering (ICO) in 2014 and the way its assets were distributed raised concerns about centralization and security labeling. A large amount of Ethereum was sold during its ICO, and a significant portion is still held by the Ethereum Foundation and early investors. This concentration of holdings may be seen as a departure from the decentralized characteristics that characterize cryptocurrencies like Bitcoin.
Additionally, Ethereum’s transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) introduces another layer of complexity. This shift could change Ethereum’s classification, moving it from the “commodity” category to one closer to a security, since the staking mechanism and the rewards it generates are similar to dividends from stocks.
The SEC also expressed concerns about potential market manipulation within the Ethereum ecosystem, particularly given the influence that major holders and protocols involved in staking agreements could exert on the network. Despite its deflationary mechanism, Ethereum’s unlimited supply may also cause the SEC to hesitate, given its preference for assets with capped supply or explicit deflationary policies.
Based on these considerations, it appears likely that the SEC will approve an Ethereum spot ETF in the short term. Concerns surrounding security classification, centralization, market manipulation and the move to PoS pose significant obstacles. However, the future remains uncertain, especially if Ethereum’s infrastructure and governance effectively address these concerns and regulatory perspectives may evolve. The possibility of approval exists, but is clouded by significant regulatory challenges that will need to be navigated.
Will the SEC respect Greyscales arguments in the court order?
Greyscale’s legal challenge to the SEC over its approval of a Bitcoin ETF but rejection of a similar application for an Ethereum ETF has raised significant concerns about the regulatory environment for cryptocurrencies. The challenge highlights perceived inconsistencies in the SEC’s view of different cryptocurrencies and their evaluation criteria.
The SEC’s concerns about Ethereum, specifically regarding its transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS), the potential for market manipulation, and Ethereum’s overall security classification, were key to its hesitation in approving an Ethereum ETF. If Greyscales arguments effectively challenge the SECs position, and if the court upholds Greyscales arguments, it could force the SEC to reconsider its position.
If the court sides with Greyscale, indicating a lack of consistency or fairness in the way the SEC handles Ethereum ETF applications, the SEC could be pressured to be more consistent with its approval process compared to Bitcoin. This may involve re-evaluating Ethereum under its new PoS mechanism and addressing specific concerns about security, decentralization and market manipulation risks.
However, it is important to note that SEC approval decisions are complex and multifaceted, taking into account a range of regulatory, market stability and investor protection concerns. The outcome of Greyscale’s challenge may indeed impact the SEC’s approach, but the extent of its impact on Ethereum ETF approval remains uncertain.
Determine prices before and after announcement
In the cryptocurrency options market, traders have begun to consider the potential announcement of an Ethereum ETF approval or rejection. This expectation shows up in the implied volatility (IV) of Ethereum options, particularly those expiring in May and June, which exhibit higher IVs. This suggests that traders expect greater volatility and price movement in Ethereum during the announcement period.
According to the latest data, if the Ethereum spot ETF is not approved or directly rejected, it is expected that the price of Ethereum may fall significantly, by more than 20% to 25%. Conversely, if the ETF is approved, prices could rise by a similar amount, reflecting the markets reaction to positive news, similar to what has been the case with major cryptocurrency announcements in the past.
Interestingly, the options markets skewness - which reflects the imbalance between call and put option prices - shows that options with recent expirations such as March and April have negative skew. This shows the markets tendency to hedge against the downside risk of potential ETF disapproval. For longer-dated options, the skew looks neutral to slightly positive, indicating a more balanced or slightly optimistic view of Ethereum’s future beyond the immediate announcement period.
Furthermore, the Butterfly Index, which provides insights into tail risk pricing, shows that Ethereum’s index is significantly higher than that of Bitcoin. This may even exceed the index’s annual average, indicating that traders, investors, and market makers are pricing in higher tail risk for Ethereum. This heightened concern may be related to the uncertainty surrounding the approval of the ETF and its possible impact on the price of Ethereum.
What impact will the Bank of Japans interest rate adjustment have?
The Bank of Japans (BoJ) interest rate adjustment is significant, especially considering the yen carry trade, a popular strategy in global finance. The yen carry trade involves borrowing in yen at historically low interest rates and investing in high-yielding assets elsewhere, often denominated in U.S. dollars. This strategy profits from the difference in interest rates between the two currencies and the potential appreciation of the investment assets.
Before the Bank of Japan could raise interest rates, investors could borrow in cheap yen, invest in higher-yielding assets in the U.S. or other markets, and benefit as long as the yen remained weak against the dollar. Japanese government bonds (JGBs) used as collateral will maintain their value, facilitating this transaction.
However, the dynamics of this deal could change dramatically if the Bank of Japan decides to raise interest rates. Higher interest rates in Japan could strengthen the yen against the dollar, making the yen carry trade less attractive. Furthermore, if the Bank of Japan ends its yield curve control (YCC) policy - which aims to keep long-term interest rates at target levels - it could cause JGBs yields to rise and their prices to fall, affecting the value of collateral for those engaging in arbitrage traders.
Due to higher interest rates and the possible end of YCC, investors may be forced to liquidate their U.S. dollar-denominated investments to repay yen-denominated borrowings. This could lead to selling pressure across a variety of assets, including U.S. stocks, cryptocurrencies, precious metals like gold and silver, oil and other commodities. Essentially, those assets that benefit from cheap yen inflows are likely to see reduced demand and falling prices.
The impact of the Bank of Japans rate adjustment extends beyond the carry trade itself. It signals a shift in Japans monetary policy stance and could lead to a stronger yen. A stronger yen would make yen-denominated assets more attractive and could reverse the flow of funds from dollar-denominated assets to yen-denominated assets, affecting global asset prices and potentially leading to a reassessment of risks in global financial markets .
Discuss the current cryptocurrency market
Volatility in the cryptocurrency market has caused sharp price drops, forcing those unable to meet their debt obligations in a timely manner to face margin calls or even liquidation. This situation, which requires the sale of assets to repay debt, may provide an opportunity to invest in undervalued assets such as the Japanese yen or Nikkei 225. A stronger yen signals an improvement in the performance of yen-denominated assets, encouraging investors to switch from U.S. dollar-denominated assets to yen-denominated assets, thereby affecting the liquidity and value of the former.
Bitcoin appears to perform better under these conditions, benefiting from more diverse sources of liquidity, including U.S. equities and cryptocurrency markets. Additionally, Bitcoin’s price has been supported by hedging activities of market makers during market declines, unlike Ethereum, which is more dependent on cryptocurrency market liquidity and lacks similar support, resulting in potentially larger price swings. decline.
Observations of on-chain data show that despite the recent price increase, large Ethereum holders ("whale") continues to sell, indicating a lack of confidence in Ethereum’s short-term price stability. This selling pressure is exacerbated by panic selling during price declines. The decline in the exchange rate between Ethereum and Bitcoin reflects investors’ expectations of Ethereum’s underperformance compared to Bitcoin.
It is expected that Ethereum’s performance may improve following the Federal Reserve rate cut, which may increase market liquidity. However, currently, Ethereum lacks diversified liquidity sources and mainly relies on stablecoins such as USDT and USDC. In contrast, Bitcoin benefits from multiple liquidity channels, suggesting that the duration of any potential market correction may be shorter for Bitcoin, while Ethereum and other altcoins may experience a more prolonged downturn.
The approval and launch of the Bitcoin Spot ETF has cemented Bitcoin’s status as a key global macro asset with strong ties to traditional markets, unlike Ethereum and other altcoins, which lack such connections. This distinction means that altcoins will only perform better when market conditions, such as the federal reserve reduction rate, support increased liquidity in the cryptocurrency market.
Market inflow dynamics are changing, and despite outflows from products such as GBTC, Bitcoin asset allocation is still driving continued interest, particularly in ETFs like BITO and BlackRock offers. This continued inflow, even amid overall market outflows, underscores Bitcoin’s resilience and its appeal to U.S. equity and institutional sector investors, who are expected to receive continued support.
Altcoins vs Bitcoin
When discussing altcoins vs. Bitcoin, we are essentially looking for the most favorable outcome. However, focusing on a more realistic scenario, such as rejection that excludes external factors, reveals that the price movement of Ethereum and other altcoins is mainly influenced by two factors. First, the distribution of liquidity in the cryptocurrency market plays a key role. There is approximately $1.5 trillion allocated in the crypto market, with Ethereum and altcoins competing for this liquidity. Over the longer term, however, the Federal Reserve is expected to implement rate cuts, with two or three expected this year and possibly more next year. This correction could reintroduce liquidity into the crypto market, subsequently supporting the price of Ethereum and other altcoins.
Currently, Bitcoin is expected to perform stronger as overall market conditions are bullish. At the same time, altcoins may be relatively weak amid limited liquidity. This situation is particularly relevant for traders in the Asia-Pacific region, who play a major role in investing in lesser-known coins and altcoins. Currently, these traders tend to buy more Bitcoin and other mainstream cryptocurrencies such as Ethereum or Solana.
The crypto market is increasingly segmented into submarkets. One focused on Bitcoin and mainstream cryptocurrencies, with investments driven by global macroeconomic changes. The other, which can be called the speculative market, includes Ethereum, certain emerging currencies and meme coins. Within this segment, traders, especially from the Asia-Pacific region, take advantage of limited liquidity by engaging in speculative trading.
Overall, while we are all searching for the best investment outcomes, the performance of Bitcoin and Ethereum, as well as other cryptocurrencies, will There is a difference. Future market trends will be affected by numerous variables, including regulatory decisions, technological developments and changes in investor sentiment. In this ever-changing environment, maintaining flexibility and a constant focus on market dynamics will be key to successfully investing in the crypto market.
