Ethereum ETF, interest rate cuts, and elections... HashKey analyzes three factors stimulating the recovery of the bull market

Author: Chief Analyst of HashKey Group, Jeffery Ding

If the use of Bitcoin during the 2013 Cyprus financial crisis brought cryptocurrency onto the world stage for the first time, then today, amid escalating geopolitical crises, cryptocurrency has stepped into the center of that stage. Nearly two decades after Satoshi Nakamoto published the Bitcoin white paper, it has gradually evolved into a vast world distinct from traditional finance but tied to the macroeconomy. Currently, the total market capitalization of cryptocurrencies has reached $2.4 trillion, ranking fourth in the world if viewed as a company, surpassing giants like Google and Meta.

After four weeks of sideways decline, Bitcoin and Ethereum prices have recently experienced a surge. Has the bull market revived? What significant opportunities this year could trigger a bull market rally? This article will analyze the three macro factors that the market is most concerned about: the Ethereum spot ETF, the Federal Reserve's interest rate cuts, and the U.S. elections.

Is Ethereum ETF Approval Imminent?

The influence of Bitcoin ETFs is undeniable. The SEC's "tug-of-war" over Bitcoin spot ETF applications lasted for a decade, ultimately being approved last year. Within just 40 days, it brought in $8.6 billion in capital inflow, and Bitcoin's price surged from the $40,000 mark at the beginning of 2024 to $70,000.

As for the Ethereum spot ETF, its approval expectations have already been reflected this week. With reports stating that the SEC is urging the approval process for the Ethereum ETF 19b-4 filing, and may make a 180-degree turn in its stance on the Ethereum spot ETF, approval could come as soon as this Wednesday, leading to a more than 20% increase in Ethereum's price within 8 hours, briefly surpassing $3,700. Bloomberg senior analyst Eric Balchunas has raised the probability of Ethereum spot ETF approval from 25% to 75%.

However, one of the key reasons the Ethereum ETF has not yet been approved is that it remains undecided whether it is classified as a commodity or a security in specific jurisdictions. Currently, the attention and market investment demand for Ethereum spot ETFs have not reached the same scale as that for Bitcoin spot ETFs. Additionally, Ethereum's consensus mechanism has shifted from the same proof-of-work (PoW) as Bitcoin to proof-of-stake (PoS), significantly increasing the likelihood that U.S. regulators will classify Ethereum as a security rather than a commodity.

Moreover, the Ethereum network upgrades could lead to the "Ship of Theseus" effect—after multiple upgrades, the current Ethereum may be difficult to consider the same blockchain network as the previous version, and SEC Chairman Gary Gensler has historically shown little favor for such "mutable" cryptocurrencies.

However, the market is very optimistic about its prospects, especially its appeal as a yield-generating asset.

The successful launch of the Ethereum ETF could position it similarly to America's "eighth-largest tech stock." Particularly, if the on-chain staking issue of custodial ETH tokens is resolved, it will attract more large institutional investors to choose this "yield-generating asset," potentially making it more appealing than the Bitcoin spot ETF. Therefore, the impact of the Ethereum ETF listing extends far beyond Crypto itself and will directly drive the Ethereum ecosystem and projects within it.

Based on previous historical experience, the ultimate fate of the Ethereum ETF may be decided this week by a vote from SEC Chairman Gensler. In January of this year, the approval of the Bitcoin spot ETF was handled by a small group of five commissioners. Gensler ultimately cast a favorable vote, and many industry insiders believe his vote ensured the approval of the spot Bitcoin ETF. The same five SEC commissioners will vote on May 23 to approve or reject VanEck's Ethereum spot ETF.

Referring to Gensler's previous silence when asked whether Ethereum is a security, and his subsequent assertion that many tokens are indeed securities, the prospects for the Ethereum ETF remain uncertain. His stance has also drawn considerable dissatisfaction; Ripple's CEO has commented that the SEC's avoidance of the issue could confuse regulatory transparency, and Patrick McHenry, Chairman of the House Financial Services Committee, has directly stated that Gensler misled Congress regarding the classification of Ethereum.

In addition to the VanEck vote on the 23rd, the approval of the 21Shares & ARK Ethereum spot ETF on the 24th is also noteworthy, while BlackRock's application for a spot Ethereum ETF will reach its final deadline on the 17th, making its potential impact on the market worth watching.**

In contrast, Hong Kong may be ahead of the curve. On the 29th, the Hong Kong Securities and Futures Commission approved the first issuance of digital currency spot ETFs by Huaxia Hong Kong, Harvest International, Bosera (International), and HashKey Capital Limited, which officially listed on the Hong Kong Stock Exchange on the** 30th. Three of these are Bitcoin spot ETFs, while the other three are Ethereum ETFs. HashKey Group COO Livio expects the mid-term capacity of the Hong Kong ETF market to reach 20% of the U.S. ETF market, estimating a scale of around $10 billion. As a new channel for traditional capital to enter the virtual asset industry, ETFs will attract more traditional investors into the virtual asset market, driving market scale growth.

Increased Likelihood of Federal Reserve Rate Cuts

Compared to the many uncertainties surrounding the Ethereum ETF, industry insiders believe that the Federal Reserve's interest rates have become one of the determining factors for initiating a crypto bull market.

Recently, the U.S. Department of Labor's Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose by 0.3% compared to March. A decline in the CPI index indicates that the U.S. economy is stabilizing, with inflation being well-controlled. As inflation is brought under control, the Federal Reserve's inclination to cut interest rates will gradually become apparent.

Historically, interest rate hikes often put pressure on the crypto market, while rate cuts represent increased liquidity, leading investors to shift funds from traditional banks to higher-risk, more volatile assets, including increased investments in the crypto market. Looking back at the last bull market in 2020, the Federal Reserve printed trillions of dollars to respond to the impact of COVID-19, initiating the fifth round of quantitative easing in March, and two months later, the Fed's interest rates dropped to a near ten-year low. Bitcoin then reached its price peak of $69,000 in November of that year, marking an increase of nearly 18 times from the previous bear market bottom.

Therefore, we may see a revival of investor interest in cryptocurrencies and other risk assets. Currently, institutional pension funds that are on the sidelines may enter the market in the second half of 2024 if favorable factors emerge, bringing in hundreds of billions in capital. A bullish Bitcoin investor predicts that "there is $6 trillion in cash on the sidelines," which could drive Bitcoin prices up to $150,000 this year, stating that the current bull market is "still too early."

Last week, Federal Reserve Chairman Powell also commented on the current inflation situation, stating that the U.S. economy is performing very well. He expects the inflation rate to decline month-over-month. However, Powell also indicated that restrictive policies may take longer than expected to take effect in reducing the inflation rate to the 2% target. "In many ways, the policy rate is restrictive. I don't think the next step will be an interest rate hike; it's more likely to maintain the policy rate at its current level," Powell stated.

Combining Powell's remarks with the core CPI's year-over-year increase, which is the smallest increase in three years since early 2021, expectations for rate cuts are reignited.

Overall market sentiment is leaning towards optimism, with analysts predicting that by the September Federal Reserve meeting, the probability of a 25 basis point rate cut will exceed 80%. At that time, U.S. stocks may surge to historic highs, the dollar index may plummet, and the crypto market will likely rebound strongly alongside U.S. stocks.

U.S. Elections and New Crypto Supporter Trump

Another significant influencing factor is the U.S. elections scheduled for this November. The two leading candidates, Biden and Trump, have shown starkly different attitudes towards cryptocurrency. In this election, cryptocurrency has taken center stage in American politics for the first time.

A poll indicates that cryptocurrency has become a major concern for voters in the 2024 U.S. elections. The crypto industry has also ramped up lobbying efforts, with cryptocurrency political action committees and industry donors injecting $94 million into federal political committees since 2023. Coinbase and Ripple Labs have donated over $40 million to political campaigns supporting favorable cryptocurrency regulations.

Most notably, Trump's attitude towards cryptocurrency has changed. The former U.S. president, who previously referred to cryptocurrency as "air" on social media, is now positioning himself as the first major party nominee to actively embrace Bitcoin and cryptocurrency holders.

Trump's message is clear: support him, or face strict regulatory measures from the Biden administration against the industry. The Republican Party is increasingly accepting digital assets, while the Democrats still have divisions regarding legitimizing the industry. Moreover, the value of the crypto assets held by Trump has significantly increased, currently valued at $8,903,246.13, including 579,290 TRUMP tokens (worth $5.72 million), 431.018 ETH (worth $1.29 million), and 374.724 W ETH (worth $1.13 million). This "blunt" support may signify a critical moment for the U.S. cryptocurrency industry.

However, it remains uncertain whether Trump's presidency would genuinely be friendly towards cryptocurrency, as he has not committed to any developments related to cryptocurrency upon taking office. Some believe his affinity for cryptocurrency is merely a tactic to attack Biden. While the Biden administration has consistently taken a hard stance against the crypto industry, under its leadership, the industry has largely recovered from the impacts of the 2022 cryptocurrency crash, and the Bitcoin spot ETF was ultimately approved, suggesting that Biden may not be "as bad as imagined."

Furthermore, in terms of the U.S. political system, the president's influence may not be as significant as assumed. The SEC possesses the independent characteristics typical of regulatory agencies: the appointment of its commissioners is not affected by changes in the ruling party, and unless their terms expire, a newly elected president cannot replace them like cabinet members. Additionally, some crypto entrepreneurs believe that even if the current SEC Chairman Gary Gensler, appointed by Biden, were to step down, regulatory uncertainty and enforcement actions against cryptocurrency would not diminish.

The market speculates that the U.S. elections may only impact the crypto market in the short term. In the long run, the trends in the crypto market are influenced by multiple factors.

If the next president fails to change the overall narrative surrounding cryptocurrency, U.S. regulation will remain the largest catalyst for the crypto market, including the SEC's decision on the spot Ethereum exchange-traded fund (ETF), potential actions the White House may take regarding the SEC's SAB 121 repeal, and the House of Representatives' vote on the Financial Innovation and Technology Act (FIT). Potential stablecoin legislation, such as the Lummis-Gillibrand Payment Stablecoin Act, could also impact the overall landscape of the crypto market. Meanwhile, considering the likelihood of Federal Reserve rate cuts, the capital on the sidelines will ultimately need a "place to go," and given the current strong performance of the U.S. Bitcoin ETF, the crypto market remains one of their best options.

About HashKey Global

HashKey Global is the flagship global virtual asset exchange under HashKey Group, providing licensed virtual asset trading services to users worldwide. HashKey Global has obtained a comprehensive license from the Bermuda Monetary Authority (BMA) for its digital asset investor protection regime, offering mainstream trading and service products such as LaunchPad, contracts, and leverage.
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