Crypto bulls may have gone 'too far, too quick' on ether ETF approval optimism

By Frances Yue

Hello! Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

Crypto investors suddenly turned much more optimistic this week about the potential approval of the industry's first set of spot ether exchange-traded funds, after the U.S. Securities and Exchange Commission appeared to take an abrupt turn on its stance on such products.

The SEC reportedly told major exchange operators Nasdaq, Cboe and the New York Stock Exchange on Monday to amend their applications for proposed listed spot ether ETFs. The report boosted optimism about a potential change of course at the regulator, which might result in the approval of one or multiple ether ETFs.

The SEC faces a final deadline of Thursday for approving a proposed VanEck ether spot ETF and one Friday for an ARK Invest application. The SEC declined to comment.

Ether (ETHUSD) jumped as much as 20% in the past three days, trading at around $3,727 on Wednesday, according to Dow Jones Market Data.

I caught up with Christian Magoon, chief executive at Amplify ETFs, who said the optimism around a potential ether ETF approval this week may have gone "too far, too quick."

What if it takes longer?

It's hard to say if it would be a "sell the news" event if an ether ETF gets approved eventually, as it is still unclear what will happen, Magoon said in a call. "Buy the rumor, sell the news" refers to a strategy where traders tend to buy an asset based on a rumor and then sell it when the news comes out. If traders decide to "sell the news" of an ethereum ETF approval, it means the crypto's price likely will fall.

While the SEC has reportedly asked exchanges to update their filings, such a request wouldn't guarantee that the agency will approve spot ether ETFs this week, Magoon said. There are several possible routes for the SEC to follow, noted Magoon.

"They may be saying, hey, this is what you need to do to change your filing, and then we'll approve it and then you can be immediately effective and launch it," Magoon said. "Or, they may be giving people instructions, saying once the standards are met, we're going to have further discussions and a vote on it, and that's going to take place in the next couple of weeks."

Investors will need to wait for information from the would-be issuers and exchanges to get more clarity on any potential launch date of the ETFs, if they were to be approved, noted Magoon.

"Crypto always kind of ends up going a little bit too far bearish and a little too far bullish," Magoon said. "The danger here is, could it have gone too bullish - what if the ETFs don't come out for 30 or 60 days? Is that going to start to create some fear, uncertainty and doubt about whether or not it's going to happen?"

Still, Magoon said he thinks there's a 75% likelihood that the SEC would approve an ether ETF soon, based on the agency's engagement with the exchanges.

Bitcoin ETF vs. Ether ETFs

Investors may not see as much inflows into ether ETFs as for bitcoin (BTCUSD) ETFs, as ether has a much lower market capitalization than bitcoin, said Alexander Blume, chief executive and co-founder of Two Prime.

Ether's market capitalization stands at around $451.8 trillion, compared with a $1.4 trillion market cap of bitcoin, according to data from CoinMarketCap.

"Maybe you'll see 20% to one-third of the investment volume that flew to bitcoin," Blume said.

Still, if spot ether ETFs get approved, it may have a much larger impact on the broader crypto market, said Matt Ballensweig, head of Go Network at BitGo.

"Allocators will naturally want to understand the asset at a deeper level and will have to go a lot further down the 'DeFi', or decentralized finance rabbit hole than they did with bitcoin," Ballensweig said in an interview. Compared with bitcoin, the ethereum blockchain supports more complex transactions and decentralized applications.

As asset managers get to understand crypto more deeply, it could mean more money inflows into the digital asset space, noted Ballensweig.

Crypto in a snap

Bitcoin has risen 5.3% over the past seven days, while ether (ETHUSD) has climbed 23.6% during the same period, according to Dow Jones Market Data.

Must-reads

The crypto Congress: Momentum builds for 'most significant' digital-asset law in history (MarketWatch)Ether may rally over 75% if SEC approves the crypto-based ETF, says AllianceBernstein (MarketWatch)

-Frances Yue

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

05-22-24 1654ET

Copyright (c) 2024 Dow Jones & Company, Inc.