Oleksandr Shatyrov

After months of anticipation, it has finally arrived. The Ethereum USD (ETH-USD) ETF has been approved by the SEC. Following Bitcoin USD's (BTC-USD) turn on January 10th, it's now ETH's moment. In this article, we'll draw inspiration from the BTC ETF approval episode to explore potential outcomes for ETH.

First, we'll examine BTC's price action around and after its ETF approval date. Then, we'll analyze whether ETH's current situation mirrors BTC's situation at the time of its approval on January 10th, highlighting both similarities and differences. These analyses, combined with our own interpretations, will guide you to our recommendations on how to play what comes after the ETH ETF approval event.

The BTC path to ETF approval has been long and full of obstacles. Yet, each hurdle has been overcome one by one, impacting thus BTC's price action.

According to Reuters, the 29th of August 2023:

The U.S. District of Columbia Court of Appeals on Tuesday ruled that the Securities and Exchange Commission (SEC) was wrong to reject an application from crypto asset manager Grayscale Investments to list an exchange-traded fund that tracks the price of bitcoin.

Right after this news, the BTC reacted positively and printed a +6% intraday performance.

Bloomberg

However, despite this positive news, BTC performed poorly over the following two months.

We identified several reasons for this:

On October 13, 2023, the SEC decided not to appeal the court decision. This move surprised many investors, as it signalled the SEC's acknowledgment of its error and paved the way for a review of BTC ETF products that investors had been closely monitoring for years. Following this decision, BTC experienced a strong rally, gaining 70% from October 13 to January 9.

Bloomberg

On January 11th, after a decade-long battle, the SEC finally approved 10 ETF proposals from issuers like BlackRock, ARKK, VanEck, and Fidelity.

Immediately after this, the ETF approval was seen as a "sell the news event." for two weeks. However, BTC then rallied strongly, reaching a new all-time high of $73 664 on March 11th.

From January 11th to March 11th, BTC surged another 60%.

Bloomberg

This rally has been supported by strong ETF inflows.

However, this demand has been decreasing since the 18th of March.

Bloomberg

The decrease in demand has been accompanied by substantial outflows from the Grayscale Bitcoin Trust ETF (BTC) (GBTC), which held nearly 600,000 BTC prior to the ETF approval. This accounted for just over 3% of the total BTC supply. These outflows were primarily due to higher fees, with GBTC fees at 1.5% compared to the new ETF at 0.30%.

The red zone highlighted shows consistent and strong outflows matching with a period of lower inflows in BTC's ETF, thus justifying poor BTC performance from March to April.

You can have a detailed view of the outflows on the following graph:

Bloomberg

However, the outflows have now stabilized following Grayscale's decision to lower its fees. Currently, GBTC holds close to 290,000 BTC.

Since the 14th of March, the BTC has been rangy and has tested successfully several times its key 60k level.

Bloomberg

BTC performed strongly before the ETF approval. However, its approval led to a "sell the news" event lasting two weeks. Despite this, strong inflows have supported the asset price, although these inflows have been offset by GBTC outflows. After reaching its all-time high, BTC has been trading within a range for two months.

Will we see a similar price action for ETH? In our view, it's likely.

However, there are several key differences to consider. First, ETH ETF approval was unpopular. Consensus views shifted dramatically, with the probability of approval rising from 25% to 70% just four days before the decision.

Polymarket

Why did the SEC change its stance? In our view, primarily for political reasons. The U.S. government is beginning to recognize the growing significance of crypto among Americans. In an election year, losing valuable votes is not an option.

That's why on the 20th of May, according to CoinDesk:

The U.S. Securities and Exchange Commission (SEC) asked aspiring ether exchange-traded fund exchanges to update 19b-4 filings ahead of a key deadline this week.

Due to this surprising shift in market expectations, ETH's price sharply rallied, gaining 22% in two days. BTC also saw strong performance before its approval, but it was a more gradual rise as it had more time to be anticipated. We wouldn't be surprised to see ETH rally even more sharply than BTC, driven by investors eager to "catch the train" they might have missed with BTC.

Bloomberg

Several additional factors could influence ETH price actions.

ETH features a staking mechanism, with many participants willing to stake their ETH for clients.

ETH ETF Issuers (Bloomberg)

However, the SEC has required the removal of the staking feature from ETF applications. The ability to earn a yield on an asset is particularly appealing, so the absence of staking in these ETFs makes them less attractive than simply holding and staking ETH. Nevertheless, we still view the ETF as an interesting product for both institutional and retail investors, ensuring robust demand.

Another key consideration is the uncertainty surrounding the ETF launch date. The SEC, issuers, and exchanges have spent months negotiating the 19b-4 and S-1 documents for BTC, a process that has just begun for ETH. This could take weeks or even months to finalize.

Additionally, ETH's market cap is three times smaller than BTC's, making it more volatile and easier to move in either direction. We see this as a positive, especially considering that major players like BlackRock and JP Morgan have a positive outlook on ETH. Grayscale Ethereum Trust (OTCQX:ETHE) holds almost 2.5% of the ETH float, which could create short-to-medium-term selling pressure similar to what we saw with GBTC. However, we expect Grayscale to avoid past mistakes and implement lower fees, reducing outflow pressure.

Post-approval, there might be a "sell the news" event, similar to what happened with BTC.

When the BTC spot ETF was approved in January, it was unprecedented. BTC steadily increased before the approval, surged upon approval, and then dropped about 22% before sharply rising to new highs. We expect a similar trend for ETH, but we advise against trading on this expectation. It's wiser to maintain exposure to ETH, as the outcome might differ this time. Those who sold BTC at the time of approval missed out if they didn't repurchase at lower prices, and there's a risk of not catching those lower prices.

We recommend buying dips. The "sell the news" event and potential Grayscale outflows should they occur, could present attractive buying opportunities.

We see opportunities to accumulate after a retrace between $2900 and $3200 that has been historically strong support and resistance levels.

Bloomberg

Finally, as with BTC, ETH might experience some weakness after surpassing its all-time high. We suggest progressively reducing your exposure to ETH once it surpasses its ATH of $4,666.

We have the conviction that the ETH ETF approval is a significant milestone. It represents in our view a strong opportunity. Analyzing BTC's price action reveals an initial strong performance, a "sell the news" dip, and a subsequent rally. We expect a similar pattern for ETH with some specificities related to its market cap, ETF listing dates, stacking features, and Grayscale potential outflow impact.

Our strategy is to be long on ETH before the ETF approval and listing, anticipating strong pre-listing performance. Post-listing, we expect a "sell the news" event but advise maintaining exposure to ETH to avoid missing out on potential gains. We recommend buying dips, especially between $2900 and $3200, and gradually reducing exposure once ETH surpasses its all-time high of $4,666.

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Ethereum ETF Approval: What Bitcoin's History Teaches Us (Cryptocurrency:ETH-USD) - Seeking Alpha