The Long and Winding Road to Ethereum ETF Approval

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Ethereum enthusiasts held their breath last week as the SEC delayed its ruling on Fidelity’s spot Ethereum ETF application. While disheartening for bulls, the 45-day extension was largely anticipated by industry experts familiar with the ETF approval process.

“This is completely expected,” remarked James Seyffart, analyst at Bloomberg Intelligence. The new deadline coincides with predictions that the SEC will greenlight several spot Ethereum ETFs at once in late May – similar to how they bundled approvals for Bitcoin products last year.

The Long and Winding Road to Ethereum ETF Approval

Shadowing Bitcoin’s Pathway

The SEC’s handling of Bitcoin ETF filings provides a template for what to expect with Ethereum. In 2021, the SEC individually reviewed each Bitcoin ETF application before finally approving a handful of physically-backed products simultaneously last October.

Now, with at least nine pending spot Ethereum ETF applications, market participants widely believe the SEC will gather these together and make a unified judgement call in May.

“I still expect we’ll see an ETH spot ETF approval that last week of May, potentially multiple approvals,” commented Will Clemente, co-founder of crypto research outfit Reflexivity.

Beyond basic exposure, asset managers want to introduce leveraged and inverse Ethereum ETFs. In recent weeks, REX Shares, ProShares and Direxion have each applied for five leveraged Bitcoin ETFs. This signals surging demand for magnified crypto exposure on both the long and short side.

Once the SEC blesses spot Ethereum ETFs, their juiced-up counterparts will likely swiftly follow.

The Method Behind the Madness

The lack of spot Ethereum products remains puzzling to some investors. After all, Ethereum ranks as the second largest cryptocurrency with a market value over $200 billion. Its blockchain handles roughly 1.5 transactions per second, powering an array of decentralized apps.

Perhaps uncertainties around Ethereum’s role in decentralized finance (DeFi) and non-fungible tokens (NFTs) – two controversial areas – give regulators pause. However, the most straightforward explanation seems to be that the SEC is simply being thorough.

This is a very new, very complex asset class and the SEC wants to get things right,” explained Todd Rosenbluth, head of research at VettaFi.

While the plodding approval process tests investors’ patience, it ultimately boosts market stability by allowing the SEC to properly evaluate issues around custody, liquidity, arbitrage and more.

Drivers Behind the Ethereum ETF Rush

Even with approvals outstanding, major asset managers like Fidelity, VanEck and Grayscale remain interested in launching spot Ethereum ETFs. What’s fueling this demand?

Surging Adoption

For one, Ethereum adoption continues climbing at a breakneck pace. In August 2022, the network handled $50 billion worth of transfers per day – a 650% year-over-year increase.

Investors now seem to view Ethereum as the financial bedrock of Web 3.0, supporting everything from decentralized computing to tokens and NFTs. This real-world usage signals that demand for Ethereum exposure could have staying power.

Staking Opportunities

Some also believe Ethereum’s new proof-of-stake model improves its investment case. With this setup, Ethereum holders can “stake” their coins to assist with network validations in exchange for newly minted tokens.

Essentially anyone holding the asset can now generate crypto yield. Asset managers appear keen to serve up staking rewards in ETF wrappers. A spot Ethereum ETF would let investors tap staking returns without operating their own complex validator nodes.

Mainstream Accessibility

On top of this, a spot Ethereum ETF would provide exposure to this high-growth asset via a familiar investment structure readily accessible to everyday investors. This could significantly expand Ethereum’s investor base beyond the crypto cognoscenti.

Rising interest from financial advisors supports this idea. Advisors ramping up crypto recommendations – with 62% suggesting some exposure in 2023 compared to 50% in 2022 – overwhelmingly favor ETFs over directly handling coins.

Crunch Time

As the decision day approaches in May, analysts seem increasingly optimistic that Ethereum ETF approvals are imminent. Nonetheless, nothing is guaranteed in the Wild West of crypto.

“While I think the SEC will likely approve these spot Ethereum ETFs, the timing is still uncertain,” cautioned Nate Geraci, president of advisory firm The ETF Store.

In today’s capricious crypto markets, twists and turns are inevitable on the road to ETF approval. But with fundamentals firmly backing Ethereum, big asset managers chasing ETFs, and Bitcoin having paved the regulatory pathway, the odds seem favorable for liftoff of spot Ethereum ETFs this spring. The launch could then unleash more exotic variants like leveraged and inverse products onto the scene.