Rally or dud: What to expect if spot Ether ETFs are approved

Market observers are conflicted over what could happen following SEC approval of a spot Ether ETF.

The United States Securities and Exchange Commission’s (SEC) first deadline for a spot Ether ETF falls on May 23. 

Its approval would be a significant event not only for investors, but it could also represent an important change in the current status quo of U.S. crypto regulation.Many in the crypto community didn’t expect the SEC to approve a spot Ether (ETH) ETF.

But reports about the SEC requiring updates from applicants and the amendment of filings from U.S. asset managers signal that a spot Ether ETF may be approved after all.

Sebastian Heine, chief risk and compliance officer of institutional staking partner Northstake, told Cointelegraph how a spot Ether ETF would be “a game-changer for the entire crypto ecosystem and traditional finance sectors.”

ETF analysts Eric Balchunas and James Seyffart believe that the SEC may be turning 180 degrees on an Ether ETF despite it becoming an “increasingly political issue.”

What are the expected effects if the spot Ether ETF gets approved?

Will Ether ETFs increase ETH’s price?

There is widespread belief among crypto investors that the price of ETH will surge thanks to spot Ether ETFs, as it will open the doors to a new inflow of money from investors in traditional markets. Heine said:

“An ETH ETF approval would not only be bullish for Ethereum but for the entire crypto market, especially in the U.S., which holds the largest capital pool globally.”

The price of Ether surging over 20% the day before the ETF deadline “demonstrates the substantial amount of money waiting on the sidelines, ready to jump in at any significant catalyst,” noted Heine.

Solo Ceesay, former securitization investment banker at Citi Bank, told Cointelegraph that he believes the sudden surge of ETH “underestimates” the potential inflow Ethereum could receive, as big money still hasn’t arrived in the ETH market.

Ceesay explained that the potential is significant, as an “ETF allows the deep pockets that were prohibited from investing in the asset to now enter the game.”

But there could be a possible pullback. Basel Ismail, CEO of investment analytics company Blockcircle, told Cointelegraph that “the ETH ETF being approved isn’t properly priced in at all yet.”

Related: Ether security debate continues as SEC ETF decision deadline looms

Ismail foresees a “short-lived” pullback similar to that which followed the approval of the Bitcoin ETFs.

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

Nick Cowan, CEO of fintech firm Valereum, agreed that there could be a pullback. He explained to Cointelegraph that “moves with such high volume are often followed by a move sideways or a rolling over followed by a pullback selling on the news.”

Cowan described how “retail buyers will pile in [FOMO], offering the big institutional holders a chance to offload their holdings.” He said that large investors require big news to shift their sizeable positions.

“The challenge is always what power the retail guys have to sustain the price levels once the FOMO dies down.”

Ismail said that the Grayscale Ethereum Trust (ETHE) “still controls [over] $10 billion worth of ETH.”

As with the spot Bitcoin ETFs, Grayscale’s “management fees are extreme,” and he expects ETHE to provide “a significant outflow for a while until their fees are reduced to be competitive with alternative market options.”

Ceesay agrees with Ismail that the market will “definitely experience a more pronounced pullback to the downside.”

However, he thinks inflows to ETFs will have a bullish effect on the price of ETH, the same way BlackRock’s Bitcoin (BTC) ETF provided enough demand to push Bitcoin to new all-time highs.

Moricz said that “institutional money will flow slower to spot ETH ETF than it did to spot BTC ETF,” mainly due to institutional investors’ perception of Ethereum.

Manuel Villegas, a digital assets specialist at private bank Julius Baer, told Cointelegraph that “Ethereum’s value proposition is certainly different from Bitcoin’s.”

Villegas explained how Bitcoin “was quick to find its way into a portfolio context for institutional investors, whether as a return-enhancer, a store of value or as an alternative asset with diversification potential.”

But as Moricz remarked, “ETH is more complicated to describe since many more use cases exist.”

For Ethereum to receive steady inflows from a spot Ether ETF, its regulatory classification must become clearer for institutional investors to feel more comfortable investing in it.

Ether ETF approval could mark shift in U.S. regulations

No decision happens in a vacuum.

Crypto lawyer Jake Chervinsky said that policy is driven by politics and highlighted that crypto has been winning the political battle in recent months.

Moricz said that a recent Senate vote overturning an SEC banking rule — one that many claim would stifle crypto innovation — “might have helped to change the sentiment toward quicker approval of spot ETH ETF.”

The sudden transformation of ex-President Donald Trump’s stance on crypto and the open critique of President Joe Biden and SEC Chair Gary Gensler’s approach to crypto may also influence the regulator.

Ceesay believes Trump’s support for the crypto industry could force “the SEC’s chokehold over the asset class to relax.”

There are indications that the SEC may try to classify Ether as a security, while in previous litigation, the Commodity Futures Trading Commission (CFTC) has labeled it as a commodity.

This inconsistent classification by U.S. regulators has led to interagency conflicts over jurisdiction and makes it difficult for businesses to expand, the argument goes.

For compliance officer Heine, the “approval would signify a pivotal shift in crypto regulation, highlighting a move toward acceptance and integration.”

The SEC is the regulatory entity responsible for spot Ether ETF approval. Therefore, Heine believes the approval “would mark a significant change in their stance, potentially signaling the end of the current destructive strategy of regulation by enforcement.”

What’s next after spot Ether ETFs are approved?

Crypto markets tend to be driven by the anticipation of an upcoming event. So, when or if spot Ether ETFs are approved, what will happen next?

Some participants in the crypto markets, such as decentralized finance investor Cyril, who runs the Telegram channel Wealth Craft, said that markets may not have a succeeding event to look forward to.

Conversely, Ismail believes the spot Ether ETF approval could bring new events with “multiple key beneficiaries.” 

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In his opinion, the “floodgates will reopen to competing and complimentary layer 1s, layer 2s and sidechains, which will then trickle down to more speculative alts.”

For Ismail, there could also be future crypto ETFs comprising assets found in the existing pseudo-ETFs from Grayscale. He said that the industry could see ETF products with XRP (XRP), Cardano (ADA), Polkadot (DOT) and more.