The market impact of Ethereum ETFs: Will there be a "sham dance" under the compliance stick?

Author: Haotian

How to view the changes in the industry after the approval of the Ethereum ETF? To conclude: In my opinion, the market will enter a prolonged "altcoin" season, and a bull run is just around the corner, but the process won't be so pleasant. Why? Next, let me share my personal observations:

1) The market reaction after the approval of the Bitcoin ETF was not as grand as expected; the anticipated explosive bull market did not materialize, but Bitcoin's volatility has clearly decreased, and the market's absorption capacity is strengthening. The mysterious forces behind Wall Street have become the "bottom support" for Bitcoin's stabilization.

This is because BTC's pure asset attributes lack a complete ecological support. The secondary market expectations for BTC seem disconnected from the primary market that everyone is building. In the short term, BTC's "gain" effect on the market cannot extend to the primary investment market, especially in the mainstream Ethereum Lego ecosystem, where the correlation is even weaker.

However, the approval of the Ethereum ETF is quite different, right? On one hand, the deflation of ETH will directly affect the activity of the primary market. The price increase of Ethereum and the low gas fees of layer 2 will highlight the advantages and indirectly drive the development of the layer 2 market. The reduction in Ethereum's circulation will intensify the competition in the Restaking and AVS yield sectors, driving value growth. Ethereum, held by incremental funds, will be used to invest in and support compliant leading DeFi projects, etc.

If this example seems forced, it is enough to understand that the value of Ethereum today is gradually nurtured by this vast primary build market. Conversely, the asset price and circulation audience of ETH will also bring a continuous influx of users, funds, and talent resources to the industry ecosystem. This is the fundamental reason why the Ethereum ETF is more likely to promote the arrival of the "altcoin season."

2) The "altcoins" referred to here are more about those with VC support, teams building, and tokens that did not receive significant market attention before issuance, but whose prices plummet after issuance without value support—these are the "mainstream coins." Simply put, the approval of the Ethereum ETF can attract mainstream funds to flow into the vast ecosystem built around Ethereum, driving the continuous growth of valuable coins. (Can it break the curse that valuable coins are inferior to meme coins?)

However, the ideal is beautiful, and attracting mainstream funds into the ecosystem to drive the web3 entrepreneurial ecosystem is not easy. The passage of the "21st Century Financial Innovation and Technology Act," abbreviated as FIT21, by U.S. Congress carries significant implications. This act explicitly proposes to provide key consumer protections and promote innovation in the U.S. digital asset ecosystem. A brief interpretation:

1. The CFTC (Commodity Futures Trading Commission) has greater regulatory power, and the regulation of digital virtual assets under the "commodity" attribute will be more flexible and free, which is the basis for long-term "stability" with fewer variables on the policy side;

2. "Compliance" will become the main theme of the development of the crypto digital ecosystem, including the establishment of systems for the processes and standards for issuing assets. This means that the virtual asset ecosystem will be divided into two extremes:

Those that comply with regulations will gradually find solutions to key issues such as KYC and anti-money laundering, and will directly receive the ETF gain buff. Those that do not comply will face increased sanctions and will gradually return to niche markets (e.g., Tornado). Remember, in the year 2021, when institutions flooded in, we defined the market as the year of compliance, but the unexpected events of FTX and Luna delayed this aspiration. With the approval of the ETF, the "compliance" issue will ultimately have to be faced.

3. U.S. financial institutions or conglomerates will strongly "intervene" in key areas such as stablecoins, exchanges, digital asset custodians, and payment platforms. The probability of directly creating stablecoins in the short term is low, but it does not rule out indirect control through licensing and other means.

3) If the above assumptions are correct, we can foresee:

In the short term, the crypto secondary market will be polarized. Some behind-the-scenes players will intensify speculation before a series of regulatory bills are introduced, leading to high volatility in meme coins and some mainstream coins, while altcoins will dance wildly;

In the medium term, some leading DeFi, stablecoins, and exchanges will increase compliance efforts. Value targets with good compliance orientation will perform well in the market, while the opposite will be entirely different and will gradually lose value support;

In the long term, the political color of crypto will gradually align the crypto market with the tastes and preferences of the web2 market. This may disappoint some who adhere to a highly decentralized fundamentalism, but expecting favorable policies and being pressed down by policies is inherently a double-edged sword.

Web3 native is not a shield for scams and money laundering under the guise of decentralization. Under the compliance stick, community differentiation and product stratification are trends that cannot be avoided. Some complex technologies and protocols in crypto are difficult for regulation to influence, but the market will only align with the most mainstream development path. (The choice is actually in the market.)

In summary, whether it is the last carnival of speculators, the slight pressure of regulatory swords, or the loss of speculative crowds after high volatility is constrained, everyone has their own vision for the development of crypto. Overall, the crypto market, driven by politics, will no longer maintain the original pure dream of "decentralization," but it can allow the chaotic development of the crypto market over the years to eliminate the dross and provide mainstream valuable coins with the possibility of shining brightly.