Since the upgrade in Cancun last week, the price of Ethereum has dropped by 10%, and analysts have gradually lowered their expectations for the approval of a spot Ethereum ETF. Will ETH continue to decline? This article is sourced from an article written by BloFin and translated and written by Foresight News.
Table of Contents:
Risk of Ethereum Securitization
SEC does not disclose whether Ethereum is a security
Bitcoin less likely to be manipulated than Ethereum
Views of Whales
Is a spot ETF important?
Compared with a spot Bitcoin ETF, the negative impact of the PoS mechanism, price manipulation risk, and securitization risk have significantly reduced the probability of approval for a spot Ethereum ETF. However, whether a spot Ethereum ETF is approved or not will not ultimately affect the breakthrough growth of ETH prices.
It’s just that with the rise of other competitors, Ethereum’s market share may be difficult to expand further.
Many investors believe that the approval of a spot Ethereum ETF is only a matter of time after the approval of a spot Bitcoin ETF. Previously, some analysts believed that the approval of a spot Ethereum ETF, with BlackRock being one of the applicants, could even reach 80% likelihood.
However, as more details are disclosed, analysts have gradually lowered their expectations for a spot Ethereum ETF.
Analysts’ concerns are not unfounded. Although the Ethereum futures ETF was approved last year, the chairman of the U.S. Securities and Exchange Commission (SEC) seems to have found the standard for auditing spot cryptocurrency ETFs—the “commodity tokens” that have no securities attributes or become securities risks.
There is no doubt that Bitcoin is one of the “gold standards” in the eyes of the U.S. SEC:
– Bitcoin is similar to mined gold, with limited reserves, non-renewable, and requires specific costs for acquisition.
– The Bitcoin network is stable and mature, and factors such as consensus mechanism upgrades will not cause significant changes in the foreseeable future, just as wheat will not turn into corn.
– It has never experienced an ICO or any form of financing, and its market gradually formed through transactions between users, similar to the formation of the Chicago cattle and grain markets, which is also a classic case.
– The number of coin holders is large and decentralized, and the risk of price manipulation is relatively low.
However, for Ethereum, it seems that these standards have not been fully met.
Although the introduction of new mechanisms in Ethereum 2.0 and its subsequent upgrades will make ETH tend to be deflationary, reducing its total market circulation, ETH will continue to be issued under the PoS mechanism, theoretically without an upper limit, and its “inflation” and “deflation” are closely related to its own network activity.
For example, when Ethereum network activity is low (such as July 2023), the “inflation” of ETH has reappeared.
Some people compare Ethereum to a “renewable digital commodity,” similar to renewable agricultural products such as corn and soybeans, emphasizing that it can be “planted” and “harvested” in the digital space, and likening the PoS mechanism to planting—holding 32 ETH is equivalent to having “seeds” and can participate in staking mining and earn rewards.
However, holding crops does not bring voting rights, but ETH holders can vote under the PoS mechanism, and the more they hold, the greater their voting power and the greater their influence on the future of the Ethereum network. In addition, it is difficult to find a more reasonable explanation to make ETH look more like a “commodity” than a “security.”
– The Ethereum network has been continuously upgraded. Among them, significant upgrades occurred in the second year after the listing of Ethereum futures on the Chicago Mercantile Exchange (CME)—its consensus mechanism changed from PoW to PoS, and a mainnet fork occurred. Ethereum is like the “Ship of Theseus,” constantly upgrading and changing, and there are significant differences between ETH in March 2024 and ETH in March 2021 in essence.
– ETH conducted an ICO financing in 2014, and the financing behavior may classify ETH as an “asset with securities attributes.” Because the U.S. SEC and financial institutions in other countries have stated that “ICO tokens may be regarded as securities.” For assets with controversial attributes, the U.S. SEC may consider them more carefully.
– The issue of whale holdings. According to statistics from Glassnode, nearly 55% of the ETH supply (about 66 million) is held by 1,041 addresses, with an average balance of over 10,000 ETH. In contrast, retail holders own less than 45% of the ETH supply. At the same time, considering that under the PoS mechanism, token holdings are directly linked to voting rights, the holders of these 1,041 addresses can significantly influence the upgrade and operation of the Ethereum network.
In contrast, Bitcoin holders do not have voting rights and will not have a significant impact on the execution of the Bitcoin network. Since 2009, the distribution of Bitcoin holders has become quite decentralized. As of March 2024, whales holding more than 1,000 BTC accounted for only about 40% of the total circulation, and the number of whale addresses has also reached 2,100, making the possibility of Bitcoin price manipulation significantly lower than that of Ethereum.
Of course, the U.S. Securities and Exchange Commission (SEC) has not relaxed, at least not yet. In public filings, the SEC expressed concerns about the potential risks brought by Ethereum’s PoS mechanism:
“Are there specific features of ETH and its ecosystem, including the PoS mechanism and the control or influence of a few individuals or entities that are too centralized, which will cause concerns that Ethereum is susceptible to fraud and manipulation?”
In summary, due to the “securitization risk,” although we expect the approval of a spot Ethereum ETF, we must also be prepared for the SEC’s veto.
Compared with the situation when a spot Bitcoin ETF was approved, spot whales and derivatives traders do not seem to have high expectations for the approval of a spot Ethereum ETF and have prepared for it.
From on-chain data, although the selling behavior of miners in each quarter may have a certain impact on the statistics, since May 2023, the number of addresses holding more than 100 BTC has significantly increased. Compared with the first quarter of 2022 and the first half of 2023, the impact of miners’ selling behavior on the number of addresses has significantly weakened, which means that many spot whales bought BTC in large quantities before the approval of a spot Bitcoin ETF.
However, Ethereum’s on-chain data does not show similar signs. Even using relatively loose criteria, the number of addresses holding more than 32 ETH has been decreasing since January 2023, and the speculative frenzy of a spot Ethereum ETF has not significantly affected this downtrend, but rather accelerated the decline.
If we only consider addresses holding more than 1,000 ETH, we can also draw the same conclusion. Whales seem to be taking advantage of speculation and optimism to sell their ETH and make profits.
In the options market, we also found some clues. After the announcement of the spot Bitcoin ETF application, the skewness of BTC and ETH forward options (a statistical concept used to describe the asymmetry of data distribution, with negative skewness and positive skewness) both increased significantly and reached a peak in November 2023, indicating that at that time, options traders were more inclined to bet on the market price rising (bullish).
In contrast, the announcement of the spot Ethereum ETF application did not cause additional bullish sentiment among options traders, and the increase in forward option skewness in February of this year was more likely due to the impact of liquidity regression.
There is no doubt that a spot ETF is indeed important, and its approval will boost the prices of related cryptocurrencies. After the approval of a spot ETF, the additional liquidity support from the U.S. stock market has driven the price of Bitcoin to rise by over 71% from the beginning of the year, and the Bitcoin price has also broken through $72,000, setting new all-time highs.
It is worth noting that although Ethereum’s performance in terms of exchange rate is relatively weaker compared to BTC, in terms of price increase, Ethereum’s price performance is not inferior to BTC and even slightly better since the beginning of the year.
The recent good performance of ETH depends on several factors:
– On the one hand, when the price of Bitcoin rises significantly, the inertia of cryptocurrency market investors will prompt them to sell Bitcoin and buy Ethereum, “grafting” the cash liquidity stored in Bitcoin into the Ethereum and other cryptocurrency markets. At the same time, rapid liquidity inflows also provide more support for Ethereum’s price, and Ethereum’s relatively high volatility brings higher growth potential.
– Therefore, in the medium to long term, with more cash flowing into the cryptocurrency market, the rise in Ethereum’s price can be expected and has already been reflected in the prices in the derivatives market—the continued positive skewness of forward call options is the best reflection of investors’ bullish sentiment, and it is only a matter of time before the Ethereum price reaches new highs.
– The approval of a spot ETF will only accelerate the above process, but if it is not approved, it doesn’t matter. Ethereum’s price may experience some volatility or even a significant decline. However, in a bull market environment, the gaps caused by the decline will be quickly filled, and the upward trend of Ethereum’s price will not fundamentally change.
– It is worth noting that if a spot ETF fails to be approved, Ethereum will need to face competition from other competitors within the cryptocurrency market—SOL has performed better than BTC in the past six months, and other public chain tokens are also eager to try.
– Although Ethereum’s leading position will not be challenged temporarily, other competitors will undoubtedly divert the cash liquidity that originally belonged to Ethereum. As central banks around the world have generally adopted relatively stable monetary policies, the process of liquidity returning to the cryptocurrency market will be “relatively slow and steady.” Therefore, competing for existing cash liquidity will be one of the main challenges Ethereum faces.
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