How will the launch of the ETF affect the development of the Ethereum market?

Accompanied by the conclusion of the German government's liquidation-style sell-off, the Mt. Gox compensation has officially begun. This article anticipates that the last wave of significant selling is not far off, but there is no need to worry too much. This article previously predicted Bitcoin's performance in July, and it still appears to be valid. With the imminent launch of the Ethereum ETF, how will the Ethereum market develop?

German Government's Liquidation Sell-off, Mt. Gox Compensation Over Halfway, Last Wave of Panic Approaches

The German government acts more like an "outsider big player," having no particular obsession or faith in Bitcoin. For such confiscated assets, their value may already be an excessive return, hence they are accelerating their sell-off before the Mt. Gox compensation is completed. Unlike the German government, the compensation recipients of Mt. Gox are mainly retail investors, making a complete sell-off unlikely. However, with the rise of Bitcoin, continuous selling pressure is expected, with the most significant pressure likely occurring when most people receive Bitcoin for the first time. As previously predicted, this is expected to happen from late July to early August; meanwhile, the market is also playing out the previously predicted "five poor, six dead, seven reborn."

Most of the compensation funds from Mt. Gox have already been transferred, but it will take 7-14 days for them to fully reach retail investors, which means late July. On July 16, Mt. Gox trustee Nobuaki Kobayashi announced that following July 5, 2024, on July 16, the Mt. Gox trustee repaid Bitcoin and Bitcoin Cash to some creditors through designated cryptocurrency exchanges according to the plan. As of now, the trustee has repaid these assets to over 13,000 creditors. Kraken stated in an email that it has successfully received creditor funds from the Mt. Gox trustee (48,641 BTC from Mt. Gox). The platform will strive to allocate the funds as soon as possible, with deposits expected in the corresponding accounts within 7-14 days. The amount received by users has been determined by the trustee, and the platform will distribute according to their instructions.

In addition to Kraken, the designated compensation exchanges for Mt. Gox include Bitstamp, SBI VC Trade, Bitbank, and Bitgo, with the basic compensation expected to conclude by mid to late August at the earliest. On July 5, a report from Mt. Gox creditors indicated that Bitbank had transferred the Bitcoin compensation to creditors within hours, without waiting for the 14-day period. This article anticipates that Bitstamp and SBI VC Trade will mainly carry the majority of the remaining Mt. Gox compensation tokens. Bitstamp stated in a statement: "According to the agreement with the Mt. Gox trustee, Bitstamp has 60 days to distribute the tokens, but we will strive to ensure that these investors are compensated as soon as possible." This is also expected to be completed within the next month, possibly as early as mid to late August.

Overall, the recent large selling pressure on Bitcoin has essentially come to an end, and many influencers have begun analyzing this from different dimensions. Ki Young Ju, founder and CEO of CryptoQuant, posted on X: "Mt. Gox is preparing to distribute Bitcoin to creditors. The large outflow of funds indicates that retail investors have not yet received their funds. Unlike the German government's sale, Mt. Gox creditors are not forced to sell, so this is not purely seller liquidity."

Crypto analyst Alex Krüger estimates that this could lead to a maximum drop of 10% in Bitcoin's price, even if an immediate sell-off occurs. "I believe this distribution will not end the bullish trend, as these Bitcoins are expected to respond to market sentiment just like the existing supply."

Greg Cipolaro, head of research at NYDIG, stated in a report: "Although sentiment and psychology may dominate in the short term, our analysis suggests that the impact of potential sell-offs on prices may be exaggerated. We can reasonably assume that rational investors may find this an interesting opportunity created by irrational fear. Additionally, NYDIG data shows that publicly listed mining companies actually increased their Bitcoin holdings in June. Although the amount of BTC sold last month saw a slight rebound, it remains far below levels earlier this year and last year."

Ethereum ETF Just a Step Away, But Huge Selling Pressure May Cause Short-term Setbacks

The Ethereum ETF is just a step away from launch and is likely to begin trading next week. On July 16, The Wall Street Journal reported that the U.S. Securities and Exchange Commission (SEC) informed asset management companies that the spot Ethereum ETF may launch on July 23. After asset management companies submit their final round of application documents this week, the SEC is expected to announce the effectiveness of the Ethereum ETF registration statement next Monday. Once the statement is effective, the spot Ethereum ETF can begin trading.

The net inflow for the U.S. spot Ethereum ETF may only be 30%-35% of that for the spot Bitcoin ETF. Citigroup stated in a research report that the net inflow for the first six months of the Ethereum ETF is expected to be between $4.7 billion and $5.4 billion. Furthermore, the inflow of funds and the beta value of Ethereum relative to the inflow may be lower than the analysis results. While ETH may offer diversification benefits in the long term, this is not the case at present. Investors who may purchase the spot ETF (rather than the respective tokens) might consider Bitcoin and Ethereum sufficiently similar to allocate their configurations to both cryptocurrencies rather than viewing them as distinct assets. This means Ethereum may see inflows specifically intended for the Bitcoin ETF rather than additional allocations. Another reason for the lower-than-expected inflows is the lack of staking services.

In addition to the potentially insufficient net inflow for the Ethereum ETF, the selling pressure from Grayscale's ETHE has also become a major constraint on Ethereum's ability to surge in the short term. Currently, it seems likely that Grayscale's Ethereum ETF will also go through, and based on previous experiences with GBTC, ETHE is expected to see significant outflows in the early stages of the Ethereum ETF, which will hedge the inflows into the Ethereum ETF. Additionally, the Ethereum Foundation is also experiencing selling pressure, casting a shadow over the market. According to data monitoring from Spot On Chain on July 17, in the past two days, two Ethereum Foundation/ICO-related wallets deposited 3,631 ETH (worth approximately $12.5 million) into Kraken. Among them, the address starting with 0xdb3 deposited 2,631 ETH (worth approximately $9.01 million), and the address starting with 0xbf5 deposited 1,000 ETH (worth approximately $3.46 million).

According to data from Deribit and Kaiko, Ethereum hedging activity is more pronounced in short-term contracts, with the implied volatility determined by options expiring on July 19 recently at a relative high compared to those expiring on July 26. According to Kaiko's data, the IV for options expiring on July 19 rose from 53% last Saturday to 62% on Monday, exceeding the IV for options expiring on July 26. This indicates an increased demand for options or derivatives to hedge against price fluctuations.

Pectra Upgrade Approaches, Ethereum's Best Time May Start in October

In March 2024, Ethereum underwent the Dencun upgrade, significantly reducing L2 transaction costs, which had a tremendous impact on the entire Ethereum ecosystem. The next major upgrade for Ethereum, Pectra, is also receiving market attention and may be even more important than Dencun. According to official Ethereum news, Pectra is planned for release in the fourth quarter of 2024 or the first quarter of 2025. If the launch of the Ethereum ETF opens the door for Ethereum to enter the traditional financial market, then the Pectra upgrade will truly begin to attract traditional financial capital into Ethereum, thereby driving rapid growth in Ethereum's value.

Pectra combines two previously planned upgrades: Prague (for the execution layer) and Electra (for the consensus layer). Through this merger, Pectra aims to bring several significant improvements to Ethereum, making it more flexible and optimized than ever before.

Pectra plans to incorporate 9 standard EIPs and a meta EIP composed of another 11 EIPs, which include enhancements to account abstraction, validator operations, and overall network performance.

EIP-2537 --- Introduces precompiled operations for the BLS 12-381 curve, making BLS signature operations faster and cheaper, thereby improving accessibility and performance for Ethereum validators and reducing gas costs.

EIP-2935 --- Implements the storage of previous block hash values in special storage slots to enhance the efficiency and reliability of verifying Ethereum data before stateless execution.

EIP-7002 --- Allows validators to trigger exits and partial withdrawals through their execution layer withdrawal credentials, providing more flexible options for re-staking and staking pools.

EIP-7251 --- Increases the maximum effective balance for Ethereum validators from 32 ETH to 2048 ETH, reducing the total number of required validators and simplifying the computational load on the network.

EIP-7594 --- Introduces peer data availability sampling (PeerDAS) to further optimize L2, enhancing transaction processing and scalability.

EIP-7702 --- Adds a new transaction type that allows setting EOA (Externally Owned Account) code during a single transaction, enabling regular wallets to temporarily convert into smart contract wallets to improve user experience.

EIP-7692 --- A meta EIP composed of 11 EIPs aimed at enhancing the EVM object format (EOF) to improve contract deployment and execution efficiency.

After this upgrade, regular Ethereum accounts will be more programmable, L2 will be more affordable, smart contracts will be more efficient, and validators will manage more flexibly, which will enable the Ethereum ecosystem to meet a wider range of use cases and user needs, potentially giving rise to truly groundbreaking applications. This will also allow Ethereum to drive value growth through technology.

Summary

Overall, with the end of the German government's selling pressure and over half of the Mt. Gox compensation completed, the compensation funds have begun to be distributed to retail investors, with the last major sell-off expected in late July. Unlike government actions, retail investors' collective large-scale sell-offs are unlikely to continue. Therefore, this article believes that Bitcoin's market will continue to strengthen in a bullish pattern. It is worth noting that Bitcoin has become a hot topic in the U.S. elections, with Trump clearly expressing support, which will attract a large amount of traffic to Bitcoin, thereby driving a significant rise. Additionally, from a macro perspective, the Federal Reserve is showing a dovish stance, with the market expecting a rate cut in September, which will also provide a favorable macro environment for Bitcoin.

The rise of Bitcoin is also a positive for Ethereum; however, with the passage of the Ethereum ETF, Grayscale's previous ETHE is expected to experience short-term profit-taking selling pressure. Furthermore, institutional funds flowing into Ethereum before October are relatively limited, which will have a limited impact on Ethereum's rise. With the conclusion of the U.S. elections and the upcoming Pectra upgrade, Ethereum's technical strength will attract more institutional investors' attention, and its inflow of funds will significantly increase, making Ethereum likely to gradually approach an explosive growth phase in the fourth quarter.