What impact will the SEC’s approval of Ethereum futures ETF have?

Impact of SEC's approval of Ethereum futures ETF?

Original text: DLNews; Compilation: Wu Shuo Blockchain

● The U.S. Securities and Exchange Commission is about to approve Ethereum futures ETF.

● In July, investors traded Ethereum futures contracts worth $12.5 billion.

● Futures products in the United States may increase demand for Ethereum.

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Although Bitcoin futures ETFs have been around for nearly two years, Ethereum has yet to have a futures ETF – but that may be about to change.

According to Bloomberg, the U.S. Securities and Exchange Commission is preparing to approve the sale of ETH futures ETF. ETH is the token used in the Ethereum blockchain network and is the second largest cryptocurrency by market capitalization.

This is good news for the dozen or so companies that have been eager to launch Ethereum futures ETFs. These include Bitwise, Roundhill, ProShares, and others. Bloomberg reports that some funds may be approved as early as October. In addition, funds seeking investors may significantly reduce management fees in order to quickly gain market share.

Increased demand

Ethereum futures ETFs could also bring new hope to DeFi investors who have frequently encountered hackers and thefts in the cryptocurrency field this year. According to K33 Research, futures products could “increase the influx of U.S. demand for Ethereum.” This means more trading volume and more activity.

The emergence of ETH futures ETFs may also enhance confidence that the SEC is open to the many applications for Bitcoin spot funds submitted by asset management companies such as BlackRock.

This will be a major event as ETFs provide an affordable way for investors to bet on stocks, commodities, and perhaps the performance of cryptocurrencies. In addition, ETFs traded on the securities market often have high liquidity.

People hope that Bitcoin ETFs will eventually bring this asset class into the mainstream and drive other cryptocurrencies.

Unlike spot ETFs, futures ETFs will provide investors with an opportunity to bet on what the price of ETH will be several months later. These products are technically derivatives tailored for institutional investors rather than retail traders.

That’s why the SEC and Gary Gensler may approve their sales even as the agency continues to review applications for Bitcoin spot ETFs.

Strong market

Analysts say that although ETH supporters may like this news, the futures ETF for the token may follow the same trajectory as Bitcoin ETFs. This may worry investors.

Nate Geraci, president of investment advisory firm ETFStore, told DL News that after two years of launching, the total assets under management of Bitcoin futures-related ETFs are still less than $1.5 billion.

Nevertheless, the market for Ethereum futures contracts remains strong. According to Coinglass data, in July, the trading volume of Ethereum futures traded on the Chicago Mercantile Exchange exceeded $12.5 billion. This may be far below the record high of $34 billion in November 2021, but monthly trading volume this year has consistently exceeded $10 billion.

Fee Battle

The approval by the SEC is likely to trigger a competition among asset management companies to attract investors. This means a fee battle is on the horizon.

Roundhill is an asset management company that is vying for an Ethereum futures ETF. If its fees are attractive, it could capture a significant market share. Bloomberg Intelligence analyst James Seyffart tweeted that the asset management company has disclosed a management fee of 0.19% for its fund.

“Compared to ProShares’ Bitcoin futures ETF fee of 0.95%, this is very low,” Seyffart said. It could be “significantly lower” than VanEck’s Bitcoin futures product fee of 0.76%.

Geraci of ETFStore said he believes the fee will be below 0.4%, but it could actually be “significantly lower than that.” “The fee competition will be very intense,” he concluded.

Not as Simple as Bitcoin

Geraci said that compared to Bitcoin futures, it is very important for investors to assess the scale of an Ethereum futures ETF. Ethereum is not as simple as Bitcoin.

As a crucial part of the Ethereum network, and thereby extending to most of the DeFi ecosystem, Ethereum is more like a software game. Its value proposition lies in providing financial utility to users, whether it’s for payments, loans, loan collateral, or purchasing NFTs. In contrast, Bitcoin is now widely seen as a speculative asset.

CoinShares stated last year that investors should approach these two digital assets in completely different ways.

“Ethereum should be evaluated in a different way, with certain utility demands, while Bitcoin is a currency and should be evaluated using a monetary demand model,” wrote research assistant Marc Arjoon.

In other words, Arjoon believes that Ethereum is more closely aligned with technology companies rather than Bitcoin. Therefore, as investors understand its complexity, its correlation with Nasdaq may “potentially surpass Bitcoin over time.”

The conclusion is that an Ethereum futures ETF may decouple from the trend of Bitcoin futures products. There is also another consideration—if the SEC approves a spot Bitcoin ETF, a large amount of assets in the futures market may shift to the spot market.

“I believe investors want something real,” Geraci said, referring to a spot ETF.

An Appropriate Benchmark

Analysts have been trying to estimate the size of the Ethereum futures ETF market. Bitcoin has a market cap of about $500 billion, while Ethereum’s market cap is slightly less than half of that. Geraci said, “I think this is a nice benchmark for predicting the size of an Ethereum futures ETF.”

Research analyst Matt Kunke from market maker GSR is also making estimations. “We expect the upper limit of demand to be around $1 billion,” he told DL News. He added that this is only a small part of the expectations from market makers for a spot ETF.

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