Ethereum
Breaking down Ethereum’s big move and why history says it will next
Ethereum is getting an ETF (or several) and this could lead to a sharp rise in prices.
It’s been a wild ride for Ethereum (ETH 0.68%) in recent years. Since its launch in 2015, the cryptocurrency has grown by nearly 128,000% thanks to its novel smart contracts and the domination of decentralized finance (DeFi) economy. Yet as impressive as the last decade has been, its story may only just be beginning.
On May 23, the Security and Exchange Commission (SEC) paved the way for approval of an Ethereum spot exchange traded fund (ETF). Once completed, this process essentially opens the cryptocurrency to a new set of buyers and increases demand on its deflationary supply. Here’s why the move is so historic and what it could mean for the world’s second-most valuable cryptocurrency.
Image source: Getty Images.
A historic decision
Just a few weeks ago, the chances of a one-time approval of the Ethereum ETF seemed slim. Many analysts believed there was only a 25% chance, but on Thursday, May 22, things took a turn for the better as rumors began to circulate that the SEC had changed its mind.
The next day, it was officially announced that the SEC would approve all eight 19b-4 applications, paving the way for the approval of the Ethereum ETF. This isn’t exactly the same as full approval, but this final step is almost guaranteed at this point. Under the current schedule, the SEC is expected to approve S-1 applications (the official documents that allow ETFs to go live) between mid-to-late summer.
The reason an ETF is so important is its ability to democratize access for investors. With ETFs, investors can now gain exposure to Ethereum by simply purchasing shares as they would a stock on a stock exchange. Gone are the days of browsing crypto exchanges or managing digital wallets.
Additionally, and perhaps most importantly, approval of an ETF means institutional investors can join the game. Without ETFs, these investors were hesitant to get into crypto due to the lack of regulatory guidelines and custody issues. This is why not only the rise of Ethereum, but that of all cryptocurrencies, over the years, has been driven by retail investors.
But ETFs offer institutions a simple and accessible way to buy. And that’s a good thing because institutional investors are known for their vast resources and deep pockets.
Charting the future trajectory
To quantify the impact of an Ethereum ETF, we can return to BitcoinIt is Spot ETF journey. In January, Bitcoin became the first cryptocurrency to get a spot ETF, marking a landmark event in the world of crypto adoption and evolution. The initial 11 Bitcoin ETFs were hugely successful and quickly became one of the most successful ETF launches in history. In just four months, they attracted more than $38 billion and, at one point, purchased 10 times the daily supply of Bitcoin, introducing a supply shock that sent the price of Bitcoin to an all-time high .
Although Ethereum ETFs are unlikely to be as popular as Bitcoin ETFs simply because Bitcoin is the most well-known crypto asset, Ethereum will still benefit significantly. Indeed, the market capitalization of Ethereum is lower than that of Bitcoin. In other words, it will take less capital to move the price of Ethereum than that of Bitcoin.
We can even speculate on the possible evolution of the price of Ethereum (emphasis on speculation). Since the launch of Bitcoin ETFs, approximately $425 billion has been added to its market capitalization. All of this is not a direct result of ETFs buying Bitcoin, but we can use it as an indicator to measure the effect of ETFs.
If Ethereum ETFs were half as successful as Bitcoin ETFs, that would add $212 billion to its market cap, an increase of about 45%. If this were to happen, the price of Ethereum would rise to $5,300, a new all-time high.
The road to follow
While we can only speculate on exactly how much demand Ethereum ETFs will generate, one thing is certain: Ethereum is about to be opened up to a new class of deep-pocketed investors.
The impact of these ETFs will be felt over time, as institutional investors typically require extensive research and due diligence before making allocations. However, given the success of Bitcoin ETFs and the recent trend of institutions revealing Bitcoin holdingsthe question is probably not if, but when these investments will materialize.
In the meantime, Ethereum presents an attractive investment opportunity. Although its current price is around 25% below its all-time high, Ethereum’s fundamentals have never been stronger. As we approach full approval of ETFs, expect growing demand for the world’s second most valuable cryptocurrency.