OTC Desk Market Update: Ethereum ETF News Sparks Rally
Welcome back to our weekly market update! Here are the top things we’ll be paying attention to this week:
SEC Approves Spot Ethereum ETFs
Regulatory Landscape and Significance
The U.S. Securities and Exchange Commission’s (SEC) approval of spot Ethereum (ETH) ETF products comes amid a changing regulatory landscape for crypto. The U.S. House of Representatives recently passed legislation aimed at providing more clarity for the industry, and the SEC’s decision follows a series of legal battles in recent years. This approval is seen as a significant milestone for the crypto industry, as Ethereum is the second-largest cryptocurrency by market cap, trailing only Bitcoin (BTC).
Ethereum ETFs and Their Potential
While Bitcoin ETFs are primarily viewed by the investor community as a vehicle for long-term value storage, Ethereum ETFs offer exposure to the Ethereum network, which powers various applications in the Decentralized Finance (DeFi) space, NFTs, and tokenization of real-world assets. Asset managers were quick to celebrate the news, with VanEck releasing a 37-second ad titled “enter the ether” within an hour of the announcement, teasing Ether’s potential to fuel a “less centralized and open-source economy.”
Approved ETF Issuers and Next Steps
The SEC approved 19b-4 filings for spot Ethereum ETFs from major asset managers, including VanEck, BlackRock, Fidelity, Grayscale, Franklin Templeton, ARK 21 Shares, Invesco Galaxy, and Bitwise on May 23, 2024. However, while the 19b-4 filings have been approved, each ETF issuer still needs SEC approval on their respective S-1 registration statements before the spot Ethereum ETFs can officially begin trading, a process that industry analysts say could take days, weeks, or even months.
Growing Acceptance and Future Outlook
The approval of Ethereum ETFs, following the recent greenlighting of Bitcoin ETFs, signals a growing acceptance of crypto as a legitimate asset class by U.S. regulators. However, the initial size of new ETFs is expected to be smaller compared to their Bitcoin counterparts, with the Grayscale Ethereum Trust currently managing about $11 Billion USD in assets, significantly less than its Bitcoin fund before its conversion to an ETF structure.
Crypto Market Overview
Weekly and Monthly Returns (%)
Implied and Realized Volatility
Realized volatility surged following a 20% rally in Ethereum after the SEC’s approval of spot ETH ETFs. Previously, both Bitcoin and Ethereum were experiencing realized volatilities in the high 40s. However, the recent price movement saw realized volatility jump to around 110 in Ethereum while BTC remained in the low 40’s.
Realized volatility charts indicate that Ethereum is trading significantly over, with front-end weekly volatility spreads reaching 35 points, levels last seen during the Ethereum Merge network upgrade. The 30-day spread is at 20 points, and the back-end spread remains elevated at about eight or nine points.
Implied volatility, which was trading at slight premiums to realized volatility, also spiked, maintaining the positive carry we’ve seen over the last few weeks. This persistent positive spread shows that traders are positioning themselves in options across the term structure in anticipation of further higher realized volatility. These recent developments have reintroduced event risk into the options markets, with expectations of continued elevated volatility until the launch of the ETH ETF.
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Term Structure and Skew
Bitcoin’s curve has shifted upwards by approximately four to six vols while Ethereum’s curve has inverted, with the front end experiencing a much higher volatility, jumping to 90–100 volatility points, while the back end also saw significant increases.
Skew has returned with a vengeance due to the ETF announcement. The front end of the Ethereum skew curve reached nearly 20 vols points before drifting back slightly. This dramatic shift resulted in Ethereum’s front-end skew trading above Bitcoin’s for the first time, with the long end of both assets’ skew curves showing similar increas
Options Flows and Positioning
Bitcoin volumes are up 40%, approaching $8 Billion USD, primarily driven by traders speculating on BTC ETF inflows. These include short-dated call buying in the $65,000 — $70,000 USD strikes, call spreads in June between $70,000 — $85,000 USD, and December call spreads in the $100,000 — $120,000 USD range. There were also some bearish protection trades in June.
Ethereum volumes remained flat at $3.5 Billion USD until the recent news, which saw an additional $3 Billion USD traded in a single day. This spike triggered substantial short covering from gamma sellers and traders repositioning for upside, including rolling short call positions and outright buying of May and June call spreads.
Gamma positioning indicates Bitcoin is near neutral, with dealer positions not significantly impacting spot prices. In Ethereum, dealer gamma has spiked positively, but this has not prevented significant price movements, suggesting that news flow regarding the ETF will be the primary driver of future volatility.
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Disclaimer: This article is not intended to provide investment, legal, accounting, tax or any other advice and should not be relied on in that or any other regard. The information contained herein is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of cryptocurrencies or otherwise.