Ethereum ETF Effect: What to expect?

Will Ethereum see a significant price impact similar to what Bitcoin experienced with its ETF approval in January this year? We believe it will.?

In January, the MVRV-z score, a valuation metric that compares a token's total market value to its "realized value," was 1.54 for Bitcoin and 0.71 for Ethereum. This score reflects the market capitalization based on the last on-chain transaction price, indicating that Bitcoin holders were in profit, while Ethereum holders were not.?

Since the beginning of the year, the market has improved. At the time of Ethereum's ETF approval, its MVRV-z score was 1.2 and has now increased to 1.8. In contrast, Bitcoin's MVRV-z score rose to 3.2 after its ETF approval and currently sits around 2.4. Based on the MVRV-z score alone, it is reasonable to suggest that there is room for Ethereum's price to appreciate.?

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SEC Approves Spot Ethereum ETFs?

Last week, the Securities and Exchange Commission (SEC) approved Form 19b-4 filings from multiple issuers for spot Ethereum exchange-traded funds (ETFs). This approval marks significant progress toward listing these products on U.S. exchanges.?

However, this approval alone is not enough for the Ethereum Spot ETF to begin trading. Issuers must also have their S-1 applications approved, which are the initial registration forms required for new products to be listed on a national exchange. S-1 documents do not have a set deadline, allowing the agency ample time for review.?

Bloomberg ETF analyst James Seyffart noted on May 22 that although the speculation around the ETFs has been accurate, the actual launch could still take weeks or months.?

The approved applications include those from well-known names such as Grayscale, Bitwise, iShares, VanEck, ARK 21Shares, Invesco, Fidelity, and Franklin Templeton. These ETFs will enable everyday investors to buy shares that track Ethereum's price through brokerage accounts, making it more accessible.?

Similar to the spot Bitcoin ETFs listed in January, these new products could expand access to the crypto asset class for a broader range of investors. While both Bitcoin and Ethereum use blockchain technology, they serve different purposes. Bitcoin functions primarily as a store of value and a digital alternative to gold. In contrast, Ethereum operates as a decentralized computing platform, hosting a wide array of applications, often compared to a decentralized app store. New investors should consider Ethereum's unique fundamentals, its competitive positioning, and its role in the growth of blockchain-based digital commerce.?

Ethereum vs. Bitcoin ETPs?

Outside the United States, where both Bitcoin and Ethereum exchange-traded products (ETPs) are available, Ethereum ETPs hold about 25%-30% of the assets in Bitcoin ETPs. Based on this, we can estimate that net inflows into U.S.-listed spot Ethereum ETFs will be 25%-30% of those seen for spot Bitcoin ETFs to date, amounting to approximately $3.5-$4.0 billion over the first four months. This is derived from the $13.76 billion net inflows into spot Bitcoin ETFs since January.?

The 10 approved Bitcoin ETFs have accumulated over $58 billion worth of BTC holdings within five months from their launch in January 2024, with over $10 billion of that acquired in the first month alone.?

Ethereum’s market capitalization is roughly one-third (33%) of Bitcoin’s. This suggests that Ethereum net inflows could be slightly smaller as a share of market cap. While this is a reasonable assumption, the estimates carry uncertainty, with potential for both higher and lower net inflows into U.S.-listed spot Ethereum ETFs.

In the U.S. market, ETH futures-based ETFs hold only about 5% of the assets of BTC futures-based ETFs. However, this is not necessarily indicative of the relative demand for spot ETH ETFs.?

Ethereum Illiquid Supply?

Regarding Ethereum's supply, various sources indicate that around 52% can be considered relatively illiquid. According to Glassnode, approximately 38% of the supply is locked in smart contracts, and about 11% lies in dormant accounts that have not moved in five years or more.

Additionally, Ethereum ETPs hold 3.3% of the supply, while entities like the Ethereum Foundation, Mantle, and Golem collectively hold 0.7%. There may be some overlap in these categories, such as ETH in protocol treasuries being staked.?

Recently, issuers of spot Ethereum ETF applications, including Grayscale, have removed mentions of staking from public filings. This suggests that the SEC may permit these products to trade in the United States without staking, meaning this portion of the supply will not be available for purchase by the ETFs. Besides these categories, ETH used as gas for network transactions accounts for $2.8 billion annually, representing an additional 0.6% of the supply at current prices. Altogether, these groups make up a little over 50% of ETH supply, despite some overlap.?

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For Bitcoin, 72% of the supply is considered illiquid. For new U.S.-listed spot Ethereum ETFs, net purchases of ETH are likely to come from the remaining circulating supply. As existing uses limit the available supply for the new spot ETF products, any increase in demand could have a significant impact on price.?

Smart Contract War?

Crypto investors are likely to focus on how spot Ethereum ETFs might impact the competition among smart contract platforms, particularly in relation to the SOL/ETH price ratio. Solana, currently the second-largest asset in this sector by market capitalization, has shown potential to gain market share from Ethereum in the long run.

Over the past year, Solana has outperformed Ethereum, and the SOL/ETH price ratio is approaching its highest level since the last crypto bull market. This outperformance can be attributed to Solana's active community of users and developers who have continued to grow the ecosystem, even after the collapse of FTX, which had some involvement in terms of token ownership and development activity.?

Moreover, Solana has managed to increase transaction activity and fee revenue by providing attractive user experience. In the short term, the influx of new investments into spot Ethereum ETFs is expected to support Ethereum's price, potentially stabilizing the SOL/ETH price ratio.

However, in the long term, the ratio between Solana and Ethereum will likely depend on which platform achieves greater growth in fee revenue. This dynamic will be closely watched by investors as they assess the evolving landscape of smart contract platforms.

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