Is it time for BlackRock to apply for Ethereum spot ETF and Soha ETH?

BlackRock CEO Larry Fink is applying for further involvement in the crypto world through spot ETFssummaryBlackRock, the world's largest asset management company, has just submitted an application to list Ethereum spot ETFs. As soon as the news came out, Ethereum immediately soared, rising nearly 10% from $1880 and briefly rising to over $2100

BlackRock CEO Larry Fink is applying for further involvement in the crypto world through spot ETFs

summary

BlackRock, the world's largest asset management company, has just submitted an application to list Ethereum spot ETFs. As soon as the news came out, Ethereum immediately soared, rising nearly 10% from $1880 and briefly rising to over $2100.

After the news of BlackRock spread, Ethereum surged

background

The surge in Ethereum prices is almost identical to the rebound in Bitcoin in June, when BlackRock also submitted an application to list spot Bitcoin ETFs. ETFs are exchange traded funds that provide investors with a convenient way to purchase asset exposure without directly purchasing underlying assets. This nature is particularly attractive to cryptocurrency investors, many of whom are deterred by the technical and security challenges posed by purchasing actual assets.

Bitcoin surged by over 20% in June, as many industry insiders believe that asset management companies with BlackRock's influence and reputation will not submit applications without successful expectations. It is worth noting that so far, the US Securities and Exchange Commission has not approved any spot ETF applications for encrypted assets (although optimism is increasing, they have not yet been approved). Therefore, although Bitcoin has increased by 45% since that date, its development process has not been smooth. In fact, the asset almost gave up all of its autumn gains before rebounding again in October.

Outlook and Impact

The first thing to remember is that BlackRock's Ethereum ETF can only be listed for a few months at the earliest, and there is no guarantee that it will definitely be listed. The SEC has up to 240 days to decide whether to approve the product, which may delay the start date until next autumn. Furthermore, it is important to note the key differences between the regulatory status of Bitcoin and Ethereum, which may result in additional delays.

Although almost all parties involved, including the US Securities and Exchange Commission, agree that Bitcoin is not a security and does not fall within its jurisdiction, the prospects for Ethereum are slightly bleak. In fact, Gary Gensler, Chairman of the US Securities and Exchange Commission, has repeatedly been vague on this issue, including during a high-profile showdown with the Chairman of the House Financial Services Committee, Patrick McHenry (R-NC), on whether Ethereum is considered a security. It is worth noting that Ethereum has not been listed as an unregistered security in any lawsuits filed by the US Securities and Exchange Commission against exchanges such as Coinbase and Binance.

Although this difference may not directly determine whether Ethereum can be included in ETFs, such debates may still slow down this process. If the exchange needs to remove tokens from the shelves, it may harm global liquidity and regulation, and make the market more fragile. The US Securities and Exchange Commission may also wish to understand the trading status of spot Bitcoin ETFs before approving products that track other assets. All of this means that after a week or two of excitement, if a follower suddenly appears, the excitement may persist.

Let's explore in more detail.

Ethereum holds a unique position in the crypto world as it crosses the line between a safe harbor/value storage token and the higher beta/instability of the entire crypto industry. This means that its value proposition has a hedging attribute, as well as a growth asset attribute. This hybrid model has been confirmed in recent years, with Ethereum performing better than Bitcoin, but lagging behind highly anticipated tokens such as Solana's SOL or Binance's BNB.

However, with increasing interest in spot Bitcoin ETFs, the script underwent a reversal in 2023. Now, investors believe that Bitcoin is the best way to return to the cryptocurrency industry after experiencing a brutal 2022. Ethereum clearly lags behind Bitcoin in terms of price, and in addition, core fundamentals such as network usage and active participants have not changed much within a year.

All of this means that Ethereum's prospects are bleak in the months leading up to its ETF application. Although it has started to rise slightly driven by Bitcoin, its actual monthly volatility is the lowest in nearly five years. Even in a bull market, Ethereum's implied volatility (expectations for future volatility) lags behind Bitcoin.

Ethereum's volatility is decreasing

Ethereum's implied volatility remains low in 2023

How to make decisions

Investors should be cautious in purchasing Ethereum in large quantities, as this news has not changed any of Ethereum's basic attributes or trajectory.

Nevertheless, Ethereum's prominent position in the encrypted world makes it an important component of any investment portfolio, but it must be done in a responsible manner. Therefore, most Ethereum traders may want to immediately focus on the spot market and gradually establish long positions. There are several options for the spot market, and centralized exchanges are the most common way to purchase spot Ethereum. However, due to the centralized party controlling these exchanges, they also bring risks. For example, unless you attempt to retrieve the asset, it cannot be verified whether the asset actually exists. The lack of transparency is one of the reasons for the collapse of FTX. People have taken some measures to mitigate this risk, such as reserve certificates, but they are not perfect. For retail traders, the cost of exchanges may also be higher. For example, Coinbase charges a fee of nearly 300 basis points for a simple transaction.

Despite the name, these seven exchange traded funds based on ETH futures actually track the spot prices of Bitcoin. These can be purchased directly from a broker account without requiring the holder to hold cryptocurrency. However, in addition to expense ratios, these may also bring hidden 'extension costs'. The extension cost is related to the additional cost of having to purchase monthly futures contracts with higher prices every 30 days, which will ultimately be passed on to consumers. Fortunately, during periods of low volatility, these costs can be minimized.

Key data for top Ethereum futures ETFs in the United States, source: Forbes

If you are more adventurous, choosing a suitable set of targets for long short hedging strategies should be more worth considering, that is, long Ethereum while short some smaller competitors, such as Solana's SOL, Cardano's ADA, and Algorand's ALGO. However, please note that historically, these assets have been closely correlated in both bull and bear markets. If you want to take on greater risk, you can consider using leverage from futures or options contracts, or buying ETF stocks aimed at doubling Ethereum returns (but please note that risk also increases exponentially). To hedge, people can also directly short Ethereum or purchase ETFs such as ProShares' short Ethereum strategy (SETH: NASDAQ).

Finally, if someone is interested in a possible discounted Ethereum, they can consider the Gray Ethereum Trust Fund (ETHE: OTC QX). They are currently trading at an 18% discount to their net asset value. The problem is that the Ethereum behind them is now irredeemable. However, if Grayscale is able to convert ETHE into ETF (which it submitted in October), there is a possibility of receiving a small premium in addition to the increase in spot prices.