From Bitcoin to Ethereum: The SEC’s game-changing approvals

What happened

On July 23, 2024, Ethereum ETFs began trading, just one day after the U.S. Securities and Exchange Commission (SEC) approved the issuers’ S-1 filings. This approval follows the earlier introduction of Bitcoin ETFs and represents a significant milestone in the cryptocurrency market.

The regulator had already approved the 19b-4 forms submitted by exchanges in May. Back then, we highlighted how the SEC would have to be comfortable with Ethereum's higher level of complexity vs. Bitcoin, given the limitless possibilities offered by smart contracts. The approval within two months indicates the SEC’s evolving stance on cryptocurrency investment vehicles.

Impact on our Investment Case

Why do Ethereum ETFs matter?

If some investors doubted the emergence of a new asset class after the approval of the spot Bitcoin ETFs in the United States, now they have confirmation that something is happening. All U.S. institutional investors will have to decide whether to be exposed to cryptocurrencies. New possibilities in terms of asset allocation are so rare in an investor’s life that the approval of these ETFs is an event in and of itself.

ETFs offer convenience, being accessible through traditional brokerage accounts and tradable with usual counterparties. They eliminate the operational burdens and tax complexities associated with holding digital assets directly.

What can we infer from the SEC?

Unlike the Bitcoin ETFs, which required federal court orders to push the SEC, Ethereum ETF approvals were straightforward. This shift suggests the SEC is moving away from strict regulatory enforcement towards a more accommodating approach.

Moreover, we can note that the Ethereum ETFs were approved under the rules for commodity-based trust shares, like the Bitcoin ETFs. The issuers of the ETFs were not required to file applications under the Investment Company Act of 1940, which is required for ETFs that trade securities, temporarily closing the debate whether Ethereum must be considered a security in the United States.

However, as outlined in our last note, the spot Ethereum ETFs do not allow staking, depriving investors of potential revenue stream (currently the staking yield on Ethereum is ~3% per year). Should an investor want to offer an ETF that allows staking, then another application will have to be filled. And it remains unclear if the SEC would consider a staked Ethereum as a security.

This matters for the next digital asset ETFs. Decentralized cryptocurrencies for which there is no coordinated group responsible for driving up the value (like Bitcoin and Ethereum) should fall into the commodity category, for which the path to ETF is now rather clear given the approvals of both Bitcoin and Ethereum ETFs.

Is there any implication for Ethereum’s price?

If Bitcoin can be considered as a store a value, a digital gold, Ethereum is a slightly different asset with its own tokenomics. Its programmable nature gives it a slightly different role that goes beyond financial transactions. The protocol should play a key role in tomorrow's infrastructure that will support the tokenization of everything. We have extensively written about the ongoing developments on the protocol that will allow us to reach this step (e.g., proto-danksharding, Shanghai upgrade, Ethereum merge).

As a financial asset, Ethereum is highly correlated to Bitcoin despite its different nature while exhibiting a low correlation to the global equity markets. This is not surprising, as both Bitcoin and Ethereum are part of a new asset class (i.e. digital assets).

Both Bitcoin and Ethereum have demonstrated similar performances year-to-date, though short-term volatility is expected as the market analyzes Ethereum ETFs’ flows. On the first day of trading, these flows reached a bit more than $100mn (vs. $600mn for the first day of Bitcoin ETFs). Lower media coverage and the launch timing (mid-summer) may have influenced these initial figures.

Long-term, the investor base for Ethereum ETFs will grow as institutional investors adjust their asset allocations. An annual survey of 4'000 institutional traders by JPMorgan shows that the proportion of active crypto traders has only grown from 8% to 9% of the sample between 2023 and 2024 - but an additional 12% intends to trade cryptos within 5 years. We anticipate Ethereum ETFs will attract 25-30% of Bitcoin ETF flows (see chart below), aligning with Ethereum's market cap relative to Bitcoin. This pattern is consistent with European markets, where Ethereum exchange-traded products have been available for some time.

Impact on blockchain-related stocks

At AtonRâ, we invest in companies leveraging and enabling blockchain technology. These stocks are highly correlated with cryptocurrencies. Our dedicated AtonRâ Blockchain & Digital Assets strategy, along with allocations in our Fintech strategy, reflects our confidence in blockchain's long-term value and cryptocurrency diversification.

As for the Bitcoin ETFs, Coinbase Global Inc serves as a crucial service provider for nine of the eleven Ethereum ETFs approved. The firm is actually mentioned almost 200 times in the prospectus of Blackrock. In particular, Coinbase will handle custody and trading, reaffirming its role as a leading institutional service provider for cryptocurrencies in the U.S.

Coinbase does not have the same margins in such institutional business as in its cash cow, the trading activity for retail investors. However, it once again demonstrates that it is the leading institutional service provider in the United States for cryptocurrencies.

The approval of the Ethereum ETFs should have no direct impact on our strategy's other verticals, like Bitcoin miners.

Our Takeaway

It is not too late to embrace the digital asset revolution. The approval of the Ethereum ETFs is a key milestone along the long journey of institutionalizing the crypto asset class. Investors now have access to the backbone of tomorrow’s digital infrastructure with a securitized instrument.

More importantly, the approval of the Ethereum ETFs confirms the shift in the SEC’s approach to digital assets. In the event of a change in administration, we might see a SEC that goes one step further and facilitates the growth of the ecosystem. We already mentioned that Trump wanted to build a crypto army; he will attend the Bitcoin Conference in Nashville this weekend and gathers a lot of hope about the message he will deliver for blockchain and cryptocurrencies.