The prospects of another altcoin exchange-traded fund (ETF) in the United States may depend on political changes following the upcoming 2024 U.S. presidential election.
This is despite the fact that the U.S. Securities and Exchange Commission (SEC) permitted fund managers to list a spot Ether (ETH) ETF on May 23.
Speculation about the next cryptocurrency ETF has already begun, with Solana (SOL) emerging as a top contender, although SEC Chairman Gary Gensler admitted that “it will take time” for an Ethereum ETF to launch.
Ah, that’s strange @cnbc Called $SOL This is the next ETF.
Hmm, I’ve heard that somewhere before… pic.twitter.com/aYAedMhcM0
— ◢ J◎e McCann (@joemccann) May 22, 2024
Despite enthusiasm for more cryptocurrency ETFs, Ophelia Snyder, co-founder and president of 21.co, sponsor and sub-advisor of the ARK Invest spot Ether ETF, told Cointelegraph that expectations for new altcoin ETFs shouldn’t be too high. .
“It is unlikely that ETH approval will lead to large-scale approval.”
However, as demonstrated by the spot Bitcoin (BTC) and Ether ETFs, high demand for altcoin ETFs from institutional investors may require ETF issuers to file applications.
CoinShares, an alternative asset manager specializing in digital assets, found in an April report that hedge funds and asset managers had significantly increased their holdings of altcoins, particularly Solana.
Snyder highlighted significant interest in 21.co’s Solana Exchange Traded-Product (ETP) on European exchanges, noting it has nearly $990 million in assets under management.
The SEC has shown no signs of accepting other cryptocurrencies in ETFs in the future. Approving a spot Ether ETF was already a difficult pill to swallow due to fees.
Altcoin ETFs may be much more difficult for the SEC to accept. However, a number of factors can change the situation.
The US election could be a catalyst for the approval of altcoin ETFs.
Spot Bitcoin, Ethereum, and altcoin ETFs exist globally. But U.S. regulators are more restrictive. Snyder said foreign altcoin ETFs are not important to the SEC because “U.S. regulators tend not to rely on foreign regulators.”
Bloomberg ETF analyst Eric Balchunas explained to Cointelegraph that the SEC is following a specific timeline for ETF approval, and if followed again, it could take years for other altcoin ETFs to receive approval from the agency.
One of the key elements that allowed the SEC to investigate market integrity was leveraging Chicago Mercantile Exchange (CME) data to compare spot prices and correlations from spot exchanges such as Coinbase and Kraken. “The analysis used a 32-month sample, which requires a significant holding period for CME assets,” Joshua de Vos, head of research at cryptocurrency data firm CCData, explained to Cointelegraph.
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Now with U.S. regulators, Balchunas noted that crypto assets will “probably follow the same process” that would require active futures trading on the CME to track price trends.
Futures altcoin ETFs are not yet listed in the US, which suggests it will be a long time before we see spot altcoin ETFs on the US market. However, Balchunas said, “There is a big variable here: the U.S. presidential election.”
The upcoming US election on November 5, 2024 could be critical to the future of altcoin ETFs as US cryptocurrency regulation becomes a political topic. Donald Trump introduced himself as a cryptocurrency-supporting candidate in response to President Joe Biden’s somewhat anti-crypto stance on U.S. cryptocurrency regulation.
The results could fundamentally change the direction of altcoin ETFs. Balchunas noted:
“If Trump wins, I think other coins could be viewed as ETFs.”
Balchunas added that if Trump wins, he will be “really progressive on cryptocurrencies and support everything,” as he promised. In that case, Balchunas said, President Trump could appoint a “new SEC commissioner” who “doesn’t care about the process” the SEC has followed in previous years, when holding futures data was an important part of the spot ETF approval process.
Balchunas also believes that a Trump victory could lead ETF issuers to apply for new cryptocurrency ETFs en masse. “If Trump wins, I think people will test the waters and try all kinds of ETFs.”
Balchunas, on the other hand, believes that even if Biden removes Gensler and appoints another Democrat as SEC chairman, “it is unlikely that an altcoin ETF will exist if the Democrats remain in power.”
The outlook for altcoin ETFs in the United States appears to be highly correlated with the results of the upcoming presidential election, and with the elected president taking office in January 2025, the chances of an altcoin ETF in 2024 are slim.
Aside from the upcoming US elections, several specific requirements are generally expected to be met in order for ETFs to gain approval. ETFs must offer a healthy level of liquidity, diversification, resistance to price manipulation, and, where possible, accurate classification by regulators. Are altcoins ready to meet these conditions?
Price manipulation in the altcoin market
The market capitalizations of Bitcoin and Ethereum are significantly larger than other altcoins. As Balchunas said, this is a concern for ETFs because “the smaller the market, the greater the potential for price manipulation.”
As it stands, “altcoin markets are vulnerable to market manipulation as the market is still in its infancy,” CCData’s de Vos concluded.
But price manipulation may not be as big of an obstacle as some people think.
De Vos noted that spot Bitcoin ETFs were rejected several times in the past due to concerns surrounding market manipulation before the SEC finally “reluctantly approved them.” Balchunas said ETFs can handle some price manipulation.
“Just because there’s a little bit of price manipulation or the price moves and fluctuates a lot doesn’t mean you can’t own an ETF.”
For example, he said that two active ETFs have GameStop as their largest holding, and while there has certainly been GameStop stock price manipulation, the ETFs are still active.
Can ETFs back illiquid cryptocurrency assets?
Another problem is that the altcoin market lacks liquidity due to lower trading volume compared to Bitcoin or Ethereum.
Sebastian Heine, chief risk and compliance officer at institutional staking partner Northstake, told Cointelegraph that he believes altcoins need large market capitalizations and significant daily trading volume to justify an ETF.
But Balchunas explained how ETFs can exist even without much liquidity. He pointed to the existence of junk bond ETFs, which “even the largest ETFs don’t trade on a daily basis.” So, if junk bond ETFs exist, what about altcoin ETFs?
There may be ETFs with low liquidity, but this factor can be problematic.
Balchunas explained that the biggest issue in markets with low liquidity is the emergence of premiums and discounts. This is not beneficial for ETFs as it may provide different prices than the actual assets. At this point, market makers can help avoid this arbitrage gap.
Alexis Sirkia, founder and former CEO of market maker GSR, told Cointelegraph that market makers should not have trouble securing liquidity in the most mature altcoin markets like Solana.
Additionally, the emergence of ETFs will “attract market makers from other markets and lead to an overall improvement in liquidity and markets.”
For altcoins with small market sizes, low liquidity metrics may not be sufficient for a unique ETF. So a basket of altcoins could be an option.
Justin d’Anethan, head of business development at market maker Keyrock, believes that to have one sustainable ETF, multiple altcoins need to be lumped together. He believes there could be an “Ethereum layer-2 ETF or even a memecoin ETF” in the future.
However, investors do not seem to favor the altcoin basket. Snyder said 21.co senses “more demand for a single asset tracker” than the basket of altcoins it offers. She also explained that an ETF with a basket of altcoins is unlikely because an ETF wrapper in the US would likely require “additional regulatory engagement.”
Is there any chance of Solana ETF coming out?
Snyder said Solana is a major contender for the next altcoin ETF because it has the highest market capitalization compared to other altcoins. However, Solana has problems with centralization.
De Vos explained that the scoring metrics used in the cryptocurrency ESG Benchmark Index evaluated decentralized metrics, including the proportion of coins in the top 10 Solana wallets, Nakamoto coefficient, and governance system type.
Solana is not in the top 10 of CCData’s decentralized rankings.
De Vos said the top 10 holders of Solana hold 7.29% of the supply and play a vital role in price action.
High concentration of wealth in a few wallets is not a problem unique to Solana. This is a common problem with altcoins. According to data from CCData, the top 10 wallets own 5.58% of XRP (XRP), 4.88% of Stellar Lumens (XLM), and 3.90% of Chainlink (LINK).
Basel Ismail, CEO of investment analytics firm Blockcircle, told Cointelegraph that Solana corporate validators are receiving the most support from smaller groups who could manipulate the network if they collude.
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Ismail also noted that Solana had previously experienced several outages that halted transactions with no indication of when the blockchain would come back online. He said this issue needs to be addressed before considering ETFs.
If there are no changes to current regulators after the upcoming election, the spot Solana ETF will face significant barriers. The SEC directly classified Solana as a security, “which makes it very unlikely that a spot ETF will be approved until there is clarity on how to handle it,” de Vos said.
Solana has enough market capitalization and trading volume to justify an ETF, but like other altcoins, its fundamentals may need to improve to overcome current US regulatory requirements and become a viable ETF option.