Invest in Ethereum? ETFs Approved, But Proceed with Caution

The US Securities and Exchange Commission (SEC) approved multiple spot Ether ETFs on May 23, 2024, sending shockwaves through the cryptocurrency market. This move, which follows the approval of Bitcoin ETFs in January 2024, is a significant step towards mainstream cryptocurrency use. However, the journey to approval was not without its challenges, and certain issues remain unresolved.

The judgement bears tremendous weight. According to CoinMarketCap, Ethereum's market value was expected to hit $500 billion by May 24, 2024. This makes it the world's second-largest cryptocurrency, following only Bitcoin, which has a market capitalization of almost $1.3 trillion. With a projected 100 million bitcoin users worldwide, the opportunity for enhanced accessibility via ETFs is apparent.?

Security Concerns and the CME Connection

The SEC prioritized avoiding fraud and manipulation during the approval process. A major issue was the lack of direct Chicago Mercantile Exchange (CME) surveillance of the spot Ether market, despite a high link between spot and futures prices. CoinGecko data reveals that Ethereum's price has moved by more than 20% in a single day on several occasions, emphasizing the possibility of volatility.??

To address this problem, exchanges provided data confirming the link between spot and futures prices. The SEC performed its own investigation, evaluating pricing data for CME Ether futures and spot ETH/USD trading pairings on prominent platforms like as Coinbase and Kraken at various intervals (hourly, five-minute, and one-minute) for more than 2.5 years (October 1, 2021 to March 29, 2024). The findings demonstrated a significant and persistent association, ensuring the SEC that CME's futures market surveillance may indirectly aid in detecting and deterring fraud in the spot market.

Investor Protection and Market Transparency

Investor protection and market integrity were also paramount for the SEC.? The commission mandated similar requirements to those for Bitcoin ETPs:

• Pricing Information: This includes quotation and last-sale information for each ETF via securities information processors, intraday indicative values (IIV) and net asset values (NAV) that are easily accessible on ETF websites, and the dissemination of IIV by major market data vendors every 15 seconds during trading hours.?

• Transparent Portfolio Holdings: ETFs must report their portfolio holdings on a regular basis, including the quantity of Ether as well as any cash or cash equivalents. This data is normally updated daily and made available on the ETF's website and other significant financial information sources.

• Surveillance Procedures and Sharing Agreements: Exchanges, like the CME, must establish data exchange agreements with other regulated markets to share information and improve the identification and deterrent of fraudulent and manipulative actions. Exchanges must also define the criteria under which trade halts and suspensions will be implemented.

Lingering Concerns: Volatility & Risk

While the approval is a positive development, some concerns remain:

Market Volatility: One commenter expressed concern over Ether's price volatility, which might endanger regular investors (estimated at tens of millions globally) and the larger financial system. While the SEC acknowledged this problem, it ultimately concentrated on satisfying the Exchange Act's anti-fraud provisions. The possible influence of market volatility on the overall financial system remains a subject for further investigation.

Potential Systemic Risks: The introduction of crypto ETFs, particularly Ethereum ETFs, raises worries about the growing interconnection of traditional finance and the still-evolving cryptocurrency industry. The long-term repercussions of these relationships for the whole financial system must be carefully considered.

Looking Ahead: A Conditional Step Forward

The SEC's approval of Ethereum ETFs opens the door to more accessibility and liquidity for Ethereum. This might attract a broader group of investors, boosting the total cryptocurrency market. However, the sector must address ongoing concerns about market volatility and potential systemic hazards in order to assure long-term stability and increased adoption.