Griffin Ardern, head of the research department at BloFin Academy, shares his analysis of the current cryptocurrency market situation. Please note that some of the content has been translated by AI, and there may be deviations.
The approval of Ethereum ETF and its significance
Compared to Bitcoin ETF, especially ETFs based on Ethereum futures, Ethereum ETF is relatively smaller in terms of scale and trading volume. The largest Ethereum futures ETF has an Assets Under Management (AUM) of less than $100 million, which is significantly smaller compared to some Bitcoin ETFs. However, it is worth noting that this represents the largest AUM in Ethereum futures ETF, while others have even lower AUM, which can be considered negligible.
The approval of Ethereum spot ETF may lead to increased investment, funds, and liquidity from the US stock market, supporting the price of Ethereum. This may mimic the impact of Bitcoin, where external liquidity significantly boosted its price, resulting in reaching new all-time highs in a relatively short period of time. However, challenges and uncertainties regarding the approval of Ethereum ETF still exist.
If Ethereum ETF is approved, it may set new standards for other cryptocurrencies and provide examples for them to apply for their own ETFs, especially those seeking to launch spot ETFs for cryptocurrencies with similar features to Ethereum, such as proof of stake and staking mechanisms.
Entities like BlackRock approving Ethereum ETF may pave the way for ETFs covering other cryptocurrencies, expanding the range of crypto assets available to investors through regulated financial products. Conversely, if Ethereum ETF is rejected, it may mean that only cryptocurrencies following the same standards as Bitcoin, such as proof of reserves, will be considered for ETFs. This would exclude cryptocurrencies based on proof of stake (PoS) from ETF considerations.
In summary, the approval of Ethereum ETF is seen as a crucial and potentially transformative step for the future of cryptocurrency ETFs. It will not only benefit Ethereum but also set a precedent for how PoS-based cryptocurrencies integrate into mainstream financial products. The crypto community eagerly awaits this development as it may have significant implications for liquidity, investment, and wider acceptance of cryptocurrencies.
Considering the current landscape and regulatory environment, the approval of Ethereum ETF faces several significant challenges, particularly from the perspective of the Securities and Exchange Commission (SEC). Under the leadership of Chairman Gary Gensler, the SEC has expressed a preference for cryptocurrencies that adhere to similar standards as Bitcoin. This presents a unique challenge for Ethereum due to its security and securitization risks. (The SEC recently disclosed an investigation into the Ethereum Foundation after Ethereum’s transition to PoS)
Concerns regarding the initial coin offering (ICO) conducted by Ethereum in 2014 and the distribution of its assets have raised concerns about centralization and security labels. A significant amount of Ethereum was sold during its ICO, and a considerable portion is still held by the Ethereum Foundation and early investors. This concentration of holdings may be seen as deviating from the decentralized nature characteristic of cryptocurrencies like Bitcoin.
Furthermore, the transition of Ethereum from proof of work (PoW) to proof of stake (PoS) introduces another layer of complexity. This transition could change the classification of Ethereum, moving it from the “commodity” category to a more securities-like category due to the staking mechanism and the rewards it generates, similar to stock dividends.
The SEC has also expressed concerns about potential market manipulation within the Ethereum ecosystem, particularly considering the significant holders and protocols involved in staking. Despite its deflationary mechanism, Ethereum’s unlimited supply may also give the SEC pause, given its preference for assets with capped supply or explicit deflationary policies.
Based on these considerations, it appears that the likelihood of the SEC approving Ethereum spot ETF in the near term is relatively low. Concerns surrounding security classification, centralization, market manipulation, and the shift to PoS pose significant barriers. However, the future remains uncertain, especially if Ethereum’s infrastructure and governance effectively address these concerns, regulatory perspectives may evolve. The possibility of approval exists but is overshadowed by significant regulatory challenges that need to be navigated.
Will the SEC respect Greyscale’s arguments in court orders?
Greyscale’s legal challenge to the SEC, which rejected the Ethereum ETF application while approving Bitcoin ETF applications, has raised significant concerns about the regulatory environment for cryptocurrencies. This challenge highlights the perceived inconsistency in the SEC’s views on different cryptocurrencies and their evaluation criteria.
The SEC’s concerns about Ethereum, particularly regarding its transition from PoW to PoS, the potential for market manipulation, and the overall security classification of Ethereum, are key reasons for its hesitation in approving Ethereum ETF. If Greyscale’s arguments effectively challenge the SEC’s position and if the court supports Greyscale’s viewpoint, it may compel the SEC to reconsider its stance.
If the court supports Greyscale, it indicates that the SEC’s approach to handling Ethereum ETF applications lacks consistency or fairness. Compared to Bitcoin, the SEC may face pressure to demand more consistency in its approval process. This may involve reevaluating Ethereum under its new PoS mechanism and addressing specific concerns about security, decentralization, and market manipulation risks.
However, it is important to note that the SEC’s approval decisions are complex and multifaceted, considering a range of concerns related to regulation, market stability, and investor protection. The outcome of Greyscale’s challenge may indeed impact the SEC’s approach, but the extent to which it affects the approval of Ethereum ETF remains uncertain.
Impact of the decision announcement on prices
In the cryptocurrency options market, traders have begun considering the potential approval or rejection of Ethereum ETF. This expectation is reflected in the implied volatility (IV) of Ethereum options, particularly those expiring in May and June, exhibiting higher IV. This suggests that traders anticipate greater volatility and price movements in Ethereum during the announcement period.
According to the latest data, if the Ethereum spot ETF is not approved or directly rejected, it is expected that the price of Ethereum may experience a significant drop, exceeding 20% to 25%. Conversely, if the ETF is approved, the price may experience a similar magnitude increase, reflecting the market’s reaction to positive news, similar to past significant cryptocurrency announcements.
Interestingly, the skewness in the options market, reflecting the imbalance between call and put option prices, shows a negative skewness for options expiring in the near term, such as March and April. This indicates that the market tends to hedge against the downside risk of potential ETF non-approval. For longer-term options, the skewness appears to be neutral to slightly positive, suggesting a more balanced or slightly optimistic view of Ethereum beyond the immediate announcement period.
Additionally, the butterfly index, which provides insights into tail risk pricing, shows that Ethereum’s index is significantly higher than Bitcoin’s. This may even exceed the index’s annual average, indicating that traders, investors, and market makers are pricing in higher tail risks for Ethereum. This heightened concern may be related to the uncertainty of ETF approval and its potential impact on Ethereum’s price.
Impact of the Bank of Japan’s interest rate adjustment
The Bank of Japan’s (BoJ) interest rate adjustmentThe adjustment of interest rates has significant implications, especially considering the popularity of yen carry trades, which is a common strategy in the global financial market. Yen carry trades involve borrowing yen at historically low interest rates and investing in high-yielding assets elsewhere, usually denominated in US dollars. This strategy profits from the interest rate differential between the two currencies and the potential appreciation of the invested assets.
Before the Bank of Japan may raise interest rates, investors can take advantage of cheap yen loans to invest in high-yielding assets in the US or other markets and benefit as long as the yen remains weak against the dollar. The Japanese government bonds (JGBs) used as collateral will maintain their value, facilitating this trade.
However, if the Bank of Japan decides to raise interest rates, the dynamics of this trade could dramatically change. Higher rates in Japan could strengthen the yen against the dollar, reducing the attractiveness of yen carry trades. Additionally, if the Bank of Japan ends its Yield Curve Control (YCC) policy, which aims to keep long-term interest rates at target levels, it could lead to higher yields on JGBs, causing their prices to drop and affecting the collateral value for carry traders.
Due to the rate hike and the potential end of YCC, investors may be forced to liquidate their dollar-denominated investments to repay their yen loans. This could result in selling pressure on various assets, including US stocks, cryptocurrencies, precious metals such as gold and silver, oil, and other commodities. Essentially, assets that have benefited from the inflow of cheap yen may see reduced demand and price declines.
The impact of the Bank of Japan’s interest rate adjustment goes beyond carry trades. It signifies a shift in Japan’s monetary policy stance that could lead to a stronger yen. A stronger yen would make yen-denominated assets more attractive and potentially reverse the flow of funds from dollar-denominated assets to yen-denominated assets, affecting global asset prices and potentially prompting a reassessment of risk in global financial markets.
Discussion on the Current Cryptocurrency Market
The volatility of the cryptocurrency market has led to significant price declines, forcing those who cannot meet their debt obligations in a timely manner to face additional margin calls or even liquidation. This situation requires selling assets to repay debts, potentially providing an opportunity for investments in undervalued assets such as the yen or the Nikkei 225. The strength of the yen implies an improvement in assets denominated in yen, encouraging investors to shift from dollar-denominated assets to yen-denominated assets, thereby impacting the liquidity and value of the former.
Under these conditions, Bitcoin seems to perform better, benefiting from more diverse sources of liquidity, including the US stock market and the cryptocurrency market. Additionally, the price of Bitcoin has been supported by market-making activities during market downturns, unlike Ethereum, which relies more on liquidity in the cryptocurrency market and lacks similar support, leading to potentially larger price declines.
Observations from on-chain data show that despite recent price increases, large Ethereum holders (“whales”) continue to sell, indicating a lack of confidence in short-term price stability for Ethereum. This selling pressure is exacerbated by panic selling during price declines. The decline in the exchange rate between Ethereum and Bitcoin reflects investors’ expectations of Ethereum performing poorly compared to Bitcoin.
It is expected that Ethereum’s performance may improve after the Federal Reserve’s rate cuts, which could increase market liquidity. However, currently, Ethereum lacks diversified sources of liquidity and primarily relies on stablecoins such as USDT and USDC. In comparison, Bitcoin benefits from multiple liquidity channels, implying that any potential market downturn may have a shorter duration for Bitcoin compared to Ethereum and other altcoins, which may experience a longer period of stagnation.
The approval and launch of a Bitcoin spot ETF have solidified Bitcoin’s position as a key global macro asset closely linked to traditional markets, unlike Ethereum and other altcoins, which lack such connections. This distinction means that altcoins can only perform better in market conditions that support increased liquidity in the cryptocurrency market, such as Federal Reserve rate cuts.
Market inflow dynamics are changing, despite outflows from products like GBTC, Bitcoin asset allocation continues to drive sustained interest, especially in ETFs offered by companies like BITO and BlackRock. Even in the case of overall market outflows, this sustained inflow highlights Bitcoin’s resilience and its attractiveness to the US stock market and institutional investors, with expectations of ongoing support.
Altcoins vs. Bitcoin
When discussing altcoins versus Bitcoin, we are essentially looking for the most favorable outcome. However, focusing on more realistic scenarios, such as excluding the impact of external factors, reveals that the price movements of Ethereum and other altcoins are primarily influenced by two factors. First, the allocation of liquidity in the cryptocurrency market plays a crucial role. There is approximately $1.5 trillion allocated in the crypto market, and Ethereum and altcoins compete for this liquidity. However, in the long run, the Federal Reserve is expected to implement interest rate cuts, with two to three rate cuts expected this year and potentially more next year. This adjustment could reintroduce liquidity into the crypto market, subsequently supporting the prices of Ethereum and other altcoins.
Currently, Bitcoin is expected to perform stronger as overall market conditions are bullish. Meanwhile, altcoins may be relatively weak in a situation of limited liquidity. This situation is particularly relevant for traders in the Asia-Pacific region, who play an important role in investing in lesser-known coins and altcoins. Currently, these traders tend to buy more Bitcoin and other mainstream cryptocurrencies such as Ethereum or Solana.
The cryptocurrency market is increasingly segmented into submarkets. One focuses on Bitcoin and mainstream cryptocurrencies, with investments driven by global macroeconomic changes. The other, known as the speculative market, includes Ethereum, certain emerging coins, and meme coins. In this segmented market, especially with traders from the Asia-Pacific region, they take advantage of limited liquidity through speculative trading.
Overall, while we are all exploring the best investment outcomes, considering various factors, including market liquidity, regulatory environment, and global macroeconomic impacts, the performance of Bitcoin, Ethereum, and other cryptocurrencies will differ. Future market trends will be influenced by numerous variables, including regulatory decisions, technological developments, and changes in investor sentiment. In this ever-changing environment, maintaining flexibility and continuous monitoring of market dynamics will be the key to successful investment in the cryptocurrency market.