Ether may rally over 75% if SEC approves the crypto-based ETF, says AllianceBernstein

By Frances Yue

Ether may rally more than 75% if an exchange traded fund investing directly in the crypto is approved, according to AllianceBernstein.

"Given the sustained demand inflow seen by Bitcoin, leading to 75% rally since the ETF approval, we would expect similar price action for ETH," analysts at AllianceBernstein led by Gautam Chhugani wrote in a Tuesday note.

Ether(ETHUSD) has been rallying since Monday afternoon, leading major cryptocurrencies' gain, after speculation suddenly increased that the U.S. Securities and Exchange Commission may approve a spot ether exchange traded fund on Thursday.

The SEC faces final deadlines on this Thursday and Friday to make decisions on ether ETF applications by Vaneck and Ark Invest, respectively. The previous consensus among crypto market participants was that such applications would be refused.

However, the speculation has started to change direction after Eric Balchunas, senior ETF analyst at Bloomberg, wrote on X on Monday that he had increased his odds that the SEC approves spot ether ETF later this week, to 75% from 25%. Balchunas said he has been hearing chatter that the "SEC could be doing a 180 on this."

CoinDesk later reported that exchanges are being asked to update 19b-4 filings on an accelerated basis by the SEC, citing sources familiar with the matter. The move doesn't mean the ETFs will be greenlighted, as the potential issuers' S-1 applications will also have to be approved before the products could start trading.

Ether rose 7.6% on Tuesday to around $3,772, with a 65.6% year-to-date gain, according to Dow Jones Market Data. Bitcoin (BTCUSD) edged up 0.7% on Tuesday to $70,570, up 68.8% so far this year.

If approved, the emergence of ether ETFs could boost ether's price, especially with the crypto's supply and demand dynamic even more attractive than bitcoin, noted the analysts at AllianceBernstein.

Since Ethereum went through a major upgrade called "Merge" in September 2022, the blockchain's consensus mechanism transitioned from proof-of-work to proof-of-stake, which also changed the way new ether was created and distributed. Ether has since been deflationary, with a 0.2% annualized deflation rate, the analysts said.

Meanwhile, 38% of ether is locked in staking, financial smart contracts and blockchains built on top of Ethereum, according to the analysts. Staking is a process where investors locks up their ether to secure the blockchain and earn rewards.

"Thus, ETH supply remains constrained by sticky investors and utility locking supply in financial smart contracts," the analysts wrote.

Ether's gain earlier in the year was mostly linked to the strength of bitcoin. "However, it's now ETH driving BTC higher and if we see SEC approvals this week, it could well provide the platform for a fresh breakout across crypto markets, particularly with the current backdrop of increased Fed easing expectations," James Harte, analyst at Tickmill Group, wrote in a Tuesday note.

-Frances Yue

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05-21-24 1031ET

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