Coinbase analyst David Han said the market may be underestimating the likelihood of a potential spot. Ethereum ETH
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Approval for exchange-traded funds comes despite widespread market consensus that won’t materialize anytime soon.
“We believe the market is underestimating the timing and probability of potential approval,” one mayor wrote in a report Thursday. “Ethereum has the potential to see incredible upside in the coming months and we don’t see any major issues on the supply side, such as token unlocks or mining machine selling pressure.”
The Securities and Exchange Commission (SEC) has set May 23 and May 24 as key deadlines to decide whether to approve spot Ethereum ETF applications submitted by VanEck and ArkInvest/21 Shares, respectively.
Expectations for approval have declined significantly this month, with Bloomberg ETF analyst Eric Balchunas describing the odds of approval as “slim to nothing” amid the SEC’s apparent silence on the issuer.
However, given the rationale Coinbase used to approve the spot Bitcoin ETF, namely that the correlation between the CME futures product and the spot rate is sufficiently high, it is unclear whether or not a U.S. spot Ethereum ETF will exist, “when and if” He said it remains a question of “whether or not it will happen.” — This also applies to Ethereum.
Assuming the correlation holds, the remaining possible justifications for the disapproval are likely related to the differences between Ethereum and Bitcoin, with the most relevant being Ethereum’s proof-of-stake mechanism, Han said.
Without clear regulatory guidance on staking, Coinbase believes it is unlikely that a spot Ethereum ETF containing staking rewards will be approved anytime soon. Interestingly, Ark Invest cut the staking component of its spot Ethereum ETF application last week. “That said, this should not affect the state of unstaked Ethereum in our view,” Han said.
Polymarket, an Ethereum-based decentralized prediction market platform, sets the approval probability for May at 16%, and Grayscale Ethereum Trust (ETHE) is trading at a 24% discount to net asset value.
But with cryptocurrencies increasingly becoming an election issue and the likelihood of lawsuits increasing if they are rejected, Coinbase believes the odds of approval are closer to 30-40%.
On Tuesday, Balchunas suggested that newly unearthed details from the Ethereum ETF filing showed that the SEC is considering Ether as a security, potentially rejecting the ETF.
Ethereum’s poor performance in 2024
Ethereum has underperformed many other large cryptocurrencies since the beginning of the year, rising about 33% in 2024 compared to Bitcoin’s 57% price increase and Solana’s 64% price increase.
According to TradingView, the ETH/BTC ratio is at 0.045, the lowest since April 2021.
ETH/BTC chart. Image: TradingView.
Meanwhile, the SOL/ETH chart is near all-time highs.
SOL/ETH chart. Image: TradingView.
Other potential tailwinds for Ether
Despite the recent negative sentiment surrounding Ether, Coinbase analysts remain positive about its long-term prospects. “Ethereum has the strongest and most sustained demand drivers in the cryptocurrency space and benefits from a mix of “store of value” and “tech token” narratives,” Han said.
The approval of a spot Bitcoin ETF has helped solidify Bitcoin’s store-of-value narrative and its status as a macro asset, but Ethereum is facing open questions about its place in the cryptocurrency market. Competing layer 1 blockchains like Solana undermine Ethereum’s previous dominance. According to Han, it is the “go-to” network for decentralized app (dApp) distribution.
Nonetheless, Coinbase believes that Ethereum still offers important advantages that distinguish it from other smart contract networks, including the maturity of the developer ecosystem, proliferation of the Ethereum virtual machine platform, Ethereum’s usefulness as collateral in DeFi, decentralization, and security. of network.
“We found that Ether’s ability to capture both a store of value and a technology token narrative is evidenced by historical trading patterns. Ether trades with a high correlation to Bitcoin and exhibits behavior consistent with Bitcoin’s store-of-value pattern. At the same time, like other altcoins, during periods of prolonged rise in the price of Bitcoin, it is separated from Bitcoin and traded like a technology-oriented cryptocurrency. We believe Ether will continue to play this role and has room to outperform in 2H24 despite its poor YTD performance,” Han concluded.
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