How will the approval of the Ethereum spot ETF affect the market?

Original Title: “What to Expect If Spot ETH ETFs Are Approved?”

Author: Daniel Ramirez-Escudero

Translation: Dixin Financial News

The first approval deadline for the Ethereum spot ETF by the U.S. Securities and Exchange Commission (SEC) is May 23.

Its approval is not only a significant event for investors but may also represent an important shift in the current state of cryptocurrency regulation in the U.S. Many members of the cryptocurrency community did not expect the SEC to approve the Ethereum spot (ETH) ETF.

However, reports about the SEC requesting applicants to update information and U.S. asset management companies modifying documents suggest that the Ethereum spot ETF may ultimately receive approval.

Sebastian Heine, Chief Risk and Compliance Officer at institutional equity partner Northstake, told Cointelegraph that the Ethereum spot ETF will "change the game for the entire crypto ecosystem and traditional finance."

ETF analysts Eric Balchunas and James Seyffart believe that although the Ethereum ETF has become "an increasingly politicized issue," the SEC may still approve the Ethereum ETF.

What impact is expected if the Ethereum spot ETF is approved?

1. Will the Ethereum ETF Increase ETH Prices?

Cryptocurrency investors generally believe that the Ethereum spot ETF will drive up ETH prices, as it will bring new capital inflows from traditional market investors. Heine stated, "The approval of the Ethereum ETF is beneficial not only for Ethereum but for the entire cryptocurrency market, especially for the U.S., which is the largest capital pool in the world." He also noted that the price of Ethereum surged over 20% the day before the ETF deadline, "indicating that there is a lot of capital waiting to enter the market at any significant catalyst."

Former Citigroup securitized investment banker Solo Ceesay told Cointelegraph in an interview that he believes the sudden surge in ETH is "underestimating" the potential capital inflows that Ethereum could receive, as large amounts of capital have yet to enter the ETH market.

Ceesay explained that this potential is enormous because "ETFs allow those who are prohibited from investing in the asset to now join in."

However, a pullback may occur. Basel Ismail, CEO of investment analysis firm Blockcircle, told Cointelegraph that "the Ethereum ETF that is being approved has not yet fully reflected in the price."

Ismail expects a "brief" pullback similar to what occurred after the approval of the Bitcoin ETF.

Peter M. Moricz, partner and head of DLC.Link, a former derivatives trader, told Cointelegraph that when the spot ETH ETF is approved, it will be followed by a buy-the-rumor, sell-the-news event.

Nick Cowan, CEO of fintech company Valereum, also believes a pullback may occur. He explained to Cointelegraph that "such a large volume trend often comes with a sideways or rolling trend, followed by a pullback sell-off due to news."

Cowan described how "retail investors will flood in due to fear of missing out (FOMO), providing large institutional holders with an opportunity to sell their holdings." He stated that large investors need significant news to change their large positions.

"The challenge is always the ability of retail investors to maintain price levels after FOMO fades."

Ismail noted that Grayscale Ethereum Trust (ETHE) "still controls over $10 billion worth of ETH." Like the spot Bitcoin ETF, Grayscale's "management fees are very high," and he expects ETHE to experience "significant capital outflows for a while until its fees are lowered to compete with alternative market options."

Ceesay agreed with Ismail, believing that the market "will certainly experience a more pronounced downward pullback."

However, he believes that the inflow of funds into the ETF will have a positive impact on ETH prices, just as BlackRock's Bitcoin ETF provided enough demand to push Bitcoin to new all-time highs.

Moricz stated that "the speed of institutional funds flowing into the spot ETH ETF will be slower than that of the spot BTC ETF," mainly due to institutional investors' views on Ethereum.

Manuel Villegas, digital asset expert at private bank Julius Baer, told Cointelegraph that "the value proposition of Ethereum is indeed different from that of Bitcoin."

Villegas explained how Bitcoin "quickly found its way into institutional investors' portfolios, whether as a tool for enhanced returns, a store of value, or an alternative asset with decentralization potential."

But as Moricz said, "the description of ETH is more complex because there are more use cases."

To achieve stable capital inflows from the Ethereum spot ETF, its regulatory classification must become clearer so that institutional investors can invest in it with more confidence.

2. Approval of the Ethereum ETF May Signal a Shift in U.S. Regulatory Framework

No decision happens in a vacuum.

Cryptocurrency lawyer Jake Chervinsky stated that policy is driven by politics and emphasized that cryptocurrency has been winning in political battles in recent months.

Source: Jake Chervinsky

Moricz mentioned that the recent Senate vote to overturn the SEC's banking rule (which many claim would stifle cryptocurrency innovation) "may help change the sentiment towards faster approval of the spot ETH ETF."

Former President Donald Trump's sudden shift in stance on cryptocurrency and the public criticism of President Joe Biden and SEC Chairman Gary Gensler's attitudes towards cryptocurrency may also influence regulators.

Ceesay believes that Trump's support for the crypto industry could force "the SEC to loosen its grip on this asset class."

There are signs that the SEC may attempt to classify Ethereum as a security, while in previous lawsuits, the Commodity Futures Trading Commission (CFTC) has labeled it as a commodity.

Some argue that this inconsistent classification by U.S. regulators has led to jurisdictional conflicts among institutions and made it difficult for businesses to expand.

For compliance officer Heine, "approval would signify a key shift in cryptocurrency regulation, highlighting a move towards acceptance and integration."

The SEC is the regulatory body responsible for approving the Ethereum spot ETF. Therefore, Heine believes that approval "would mark a significant shift in its stance, potentially signaling the end of the current disruptive enforcement regulatory strategy."

3. What’s Next After the Approval of the Ethereum Spot ETF?

The cryptocurrency market is often driven by expectations of upcoming events. So, what will happen next when the Ethereum spot ETF is approved?

Some participants in the crypto market, such as decentralized finance investor Cyril, who operates the Telegram channel Wealth Craft, suggest that the market may not have follow-up events worth anticipating.

Source: Wealth Craft Telegram Channel

In contrast, Ismail believes that the approval of the Ethereum spot ETF could bring about "multiple major beneficiaries" new events.

In his view, "the floodgates will reopen, allowing competing and complementary Layer 1, Layer 2, and sidechains, and then these floodgates will trickle down to more speculative altcoins."

For Ismail, there may also be a cryptocurrency ETF composed of assets from Grayscale's existing pseudo ETFs. He stated that the industry might see ETF products featuring assets like XRP, Cardano, and Polkadot.