Should we be prepared for the rejection of the Ethereum spot ETF?

Author | BloFin

Compiled by | Ehan Wu Says Blockchain

The views in this article are the author's personal opinions and do not represent the views and positions of Wu Says.

Original text:

https://medium.com/@BloFin_Official/whales-view-should-we-do-some-preparation-for-the-possible-rejection-of-spot-eth-etfs-f6b0173d598e

Compared to spot Bitcoin ETFs, the negative impact of the PoS mechanism, the risk of price manipulation, and the risk of securitization significantly reduce the probability of approval for spot ETH ETFs. Fortunately, whether or not the spot ETH ETF is approved, the final outcome will not affect the breakthrough of ETH prices. However, as other competitors catch up, it may be difficult for ETH's market share to increase further.

"Securitization Risk"

Many investors believe that after the approval of the spot BTC ETF, the approval of the spot ETH ETF is just a matter of time. Previously, some analysts believed that since BlackRock is one of the applicants for the spot ETH ETF, the probability of approval for the spot ETH ETF could reach 80%. However, as more details have been disclosed, analysts have gradually lowered their expectations for the spot ETH ETF.

The 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 the criteria for reviewing cryptocurrency spot ETFs—"commodity tokens," which do not have securities attributes and do not carry securitization risks.

Undoubtedly, Bitcoin is one of the SEC's "gold standards."

● Bitcoin, like minerals such as gold, has a limited and non-renewable supply, requiring specific costs to obtain.

● The Bitcoin network is stable and mature, and will not undergo significant changes in the future due to factors such as consensus mechanism upgrades.

● It has not undergone an ICO (Initial Coin Offering) or any form of financing, and its market has gradually formed based on trades and transactions between users.

● The number of Bitcoin holders is large and decentralized, resulting in relatively low risks of price manipulation.

However, these standards do not seem to apply to Ethereum.

The new mechanisms introduced by ETH 2.0 and subsequent upgrades will lead to a deflationary trend for ETH, reducing its total market supply. However, ETH will continue to be generated, with a theoretically unlimited total supply, and its "inflation" and "deflation" are highly correlated with the activity level of its own network. During periods of low activity on the Ethereum network (for example, in July 2023), ETH's "inflation" reappeared.

Changes in Ethereum network activity (Source: Nansen)

Of course, some may argue that Ethereum is a "renewable digital commodity," a "crop" that grows in the digital space. The Proof of Stake (PoS) mechanism is like planting seeds, where providing 32 ETH as "seeds" yields a "harvest." However, holding crops does not confer voting rights, while ETH holders under the PoS mechanism can obtain voting rights. The more ETH one holds, the more votes one has, and the greater the impact on the future of the Ethereum network.

Moreover, it is difficult to find a more reasonable explanation for the following series of standards that make ETH appear more like a "commodity" rather than a "security."

● The Ethereum network is continuously upgrading. After ETH futures were officially listed on CME, significant changes occurred in ETH the following year, with the consensus mechanism shifting from PoW to PoS and a mainnet fork. With each upgrade, ETH becomes like the "Ship of Theseus": the ETH of March 2024 is significantly different from the ETH of March 2021.

● Ethereum conducted an ICO in 2014. The ICO record gives ETH itself a certain degree of "securities attribute risk," as the SEC and financial institutions in other countries have stated that "ICO tokens may be considered securities." For assets with disputed attributes, the SEC may take a more cautious approach.

● According to statistics from Glassnode, nearly 55% of the ETH supply (about 66 million tokens) is held by 1,041 addresses, with an average balance exceeding 10,000 ETH. In contrast, retail traders account for less than 45% of the ETH supply. Additionally, considering that under the PoS mechanism, token holdings are almost directly linked to voting rights, the holders of these 1,041 addresses can have a significant impact on the upgrades and operations of the ETH network.

In contrast, BTC holders do not have voting rights and do not significantly influence 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, while the number of whale addresses has reached 2,100, making the possibility of price manipulation in BTC significantly lower than in ETH.

The SEC has not yet begun to downplay its concerns regarding the risks posed by the ETH PoS mechanism. In public documents, the SEC expressed concerns about the risks that the ETH PoS mechanism may bring:

"… Are there unique concerns that make Ethereum susceptible to fraud and manipulation, given the specific characteristics of Ethereum and its ecosystem, including its proof-of-stake consensus mechanism and the concentration of control or influence among a small number of individuals or entities?"

In summary, due to "securitization risks," while there is hope for the approval of the spot ETH ETF, it is also necessary to prepare for the SEC's rejection.

So, what do the whales think?

Compared to the market when the spot Bitcoin ETF was approved, spot whales and derivatives traders seem to have insufficient expectations for the approval of the spot ETH ETF and are prepared for it.

From an on-chain data perspective, although miners' quarterly selling behavior has had some impact on the statistics, since May 2023, the number of addresses holding more than 100 BTC has shown a significant upward trend. Compared to 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, indicating that many spot whales bought large amounts of BTC during this period, after which the spot BTC ETF was approved.

However, no similar signs have been found for ETH. Even under relatively lenient standards, the number of addresses holding more than 32 ETH has continued to decline since January 2023, and the hype around the spot ETH ETF has not had a significant impact on the downward trend. On the contrary, the downward trend has accelerated.

If we only consider addresses holding more than 1,000 ETH, the same conclusion can be drawn. Whales seem to be selling ETH to profit from speculation and optimism.

There are also some possible clues in the options market. After the announcement of the spot BTC ETF application, the skew of long-dated options for both BTC and ETH showed a significant increase, peaking in November 2023. In contrast, the announcement of the spot ETH ETF application did not attract the attention of options traders. The increase in bullish sentiment and the greater skew in long-dated options in February is more likely influenced by the return of liquidity.

Is the spot ETF important?

There is no doubt that the approval of the spot ETF will provide ample support for the price performance of BTC and ETH. After the approval of the spot ETF, additional liquidity support from the U.S. stock market has driven the price of BTC to rise over 71% since the beginning of the year, with BTC prices briefly breaking through $72,000, setting a new historical high.

It is worth noting that although ETH's performance in terms of exchange rate is relatively weaker than BTC, in terms of price increase, ETH's price performance is not inferior to BTC, and even the increase since the beginning of the year is slightly better than BTC.

ETH's unexpectedly good performance depends on various factors. On one hand, the inertia of cryptocurrency market investors prompts them to sell BTC and buy ETH when BTC prices rise significantly, "bridging" the cash liquidity stored in BTC to cryptocurrencies like ETH. At the same time, the rapid return of cash liquidity provides more support for ETH's price, and ETH's relatively high volatility brings higher growth potential.

Therefore, as more cash liquidity flows into the cryptocurrency market, from a medium to long-term perspective, the rise in ETH prices is expected and has already been priced in the derivatives market. The sustained positive skew in long-dated ETH options is the best reflection of investors' bullish sentiment, and it is only a matter of time before ETH prices reach new highs.

The approval of the spot ETF will only accelerate the above process, but if it is not approved, it is also acceptable. The price of ETH may experience some volatility or even a significant pullback. However, in a bullish market environment, the gaps caused by declines will be quickly filled, and the upward trend of ETH prices will not fundamentally change.

It is worth noting that in the event that the spot ETF cannot be approved, ETH will need to face other competitors within the cryptocurrency market. SOL has outperformed BTC in the past six months, and other public chain tokens are also stirring.

Although ETH's leading position will not be challenged temporarily, 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 cryptocurrency market will be a "relatively slow and steady" process. Therefore, competition for existing cash liquidity will be one of ETH's main challenges.