SignalPlus Macro Analysis Special Edition: Et tu, ETH?

In the past 48 hours, both the cryptocurrency market and TradFi lobbyists have been caught off guard by sudden changes. The U.S. SEC has unexpectedly changed its stance on the approval of ETH ETFs, suddenly requiring all ETF issuers to update their latest "19 b-4" filings and notify the NYSE and CBOE that these funds will be listed on the exchanges, indicating a high likelihood of ETH ETF approval.

In response, five institutions applying to issue ETFs (Ark 21, Fidelity, Franklin Templeton, Invesco/Galaxy, VanEck) updated their 19 b-4 filings within the past 24 hours, with VanEck's product even listed at DTCC under the name $ETHV. This progress is indeed very rapid!

So, what changes have been made in the updated filings? ETF analysts report that, unsurprisingly, the SEC has required all issuers to remove any references to ETH staking, as this is the main argument for the agency's stance that ETH is a security. Therefore, the underlying asset of the final ETH ETF may not be able to "earn profits through staking," but how will it be handled if it is packaged through centralized exchanges or completed via third-party platforms willing to pay deposit interest? How will the final S-1 filing describe this? It seems that lawyers still have the upper hand in this industry!

ETH, of course, surged with the news, skyrocketing 25% from $3100 to $3750 in less than two days. ETH has performed relatively poorly over the past two years, significantly lagging behind BTC in the past year, facing issues such as declining transaction fees, competition from L1-EVM, and excessive focus on complex liquid staking and re-staking, which have taken away from the narrative of Ethereum as a "robust currency" prior to POS. Now, similar to the approval of the BTC ETF, the entry of "TradFi giants" is once again expected to be the catalyst needed for Ethereum to break free from its lows.

Unlike in January, the market now has a "script" regarding how these ETF issuances will proceed, or at least a precedent to refer to:

• Since the approval of the BTC ETF in January, Bitcoin's price has increasingly been driven by the speed of TradFi ETF capital inflows.

• The correlation of BTC with macro factors and even the Nasdaq is much higher than in previous cycles.

• BTC experienced a rapid profit-taking in January, dropping from around $57,000 to about $50,000, after which accumulated capital inflows quickly pushed the price to a new high of over $72,000. Will market participants behave the same way this time?

• Given that ETH is so unpopular, have native users accumulated enough ETH? Unlike the BTC ETF situation, the likelihood of ETH ETF approval has long been in a "negligible" state.

• What impact will Grayscale's sell-off of its backlog combined with ETF capital inflows ultimately have on the price?

• The circulation of ETH is much smaller than that of BTC; should we expect that future net inflows/outflows of ETH will cause greater price volatility?

• How proactive will Larry Fink and Wall Street be in promoting ETH this time?

• As trading volume continues to shift towards U.S. time zones, will the influence of the U.S. market (which has reached an all-time high since the beginning of the year) continue to grow?

• From a timing perspective, there is still a long way to go before the final S-1 approval date. By the time the ETF launches, will the macro environment (economy and interest rates) have changed significantly?

Speaking of the ever-changing macro factors, while the market awaits Nvidia's earnings report today, a number of Federal Reserve speakers have quietly yet firmly changed their interest rate narrative again, returning to a hawkish stance. Just this week and the past week:

• Fed Governor Waller: "In the absence of significant weakness in the labor market, I need to see a few more months of good inflation data to feel comfortable supporting a loosening of monetary policy."

• Vice Chair Jefferson: "It is still too early to determine whether the recent inflation slowdown will continue."

• Vice Chair Michael Barr: "The inflation data from the first quarter of this year has been disappointing. These results have not given me confidence to support a loosening of monetary policy."

• Atlanta Fed's Bostic: "I am not in a hurry to cut rates… My prediction is that inflation will continue to decline this year, until 2025," however, he added that the pace of price declines will be slower than many expect.

• Cleveland Fed's Mester: "My previous prediction was three rate cuts, but based on the economic developments I see now, I don't think that is still appropriate… I need to see a few more months of inflation data showing that inflation is declining."

• San Francisco Fed's Daly: "It is currently unclear whether inflation is indeed receding, and there is no 'urgency' for rate cuts."

The SPX has now gone 313 days without a single-day drop of more than 2%. The last time this happened was from 2016 to 2018, when the record was 351 consecutive days, and the longest record was from 2003 to 2007, during which there were about three years without a drop exceeding 2%. No wonder everyone is selling volatility.