Joseph Lubin, co-founder of Ethereum and CEO of blockchain technology firm Consensys, has expressed that the potential approval of spot Ethereum ETFs by the US Securities and Exchange Commission (SEC) could lead to significant supply constraints for Ether. This development is anticipated to be a “watershed” moment for Ethereum.
In an exclusive interview with DL News, Lubin predicted that the approval of spot Ethereum ETFs will unlock substantial institutional demand. Given that many institutions have begun their crypto investments with spot Bitcoin ETFs, Ethereum is naturally the next substantial asset for diversification.
“There’s going to be a pretty large amount of natural, pent-up pressure to purchase Ether” through these ETFs, Lubin commented. However, he also noted that the situation for Ethereum differs significantly from that of Bitcoin because of the underlying supply dynamics.
A major factor distinguishing Ethereum from Bitcoin in the context of ETF creation is the availability of the assets. On-chain data indicates that more than 27% of all Ether is staked across various protocols on the Ethereum network. These funds are locked in contracts and are contributing to the network’s security and operations, thus they are not readily available for market trading.
“Much of the Ether is put to work in the core protocol, DeFi systems, or in DAOs,” Lubin explained. This structural difference means that there is less Ether available for ETF providers to purchase and allocate to new ETF shares.
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In August 2021, the Ethereum network’s EIP 1559 introduced a burning mechanism where a portion of the Ether used for transaction fees is permanently removed from circulation. This deflationary mechanism is designed to balance Ether supply growth and potentially increase its scarcity over time.
As network activity increases—potentially spurred further by new institutional interest in Ethereum through ETFs—this burn mechanism will gradually reduce the available supply, adding another layer to the potential supply crunch. “This could be a pretty profound watershed moment”, Lubin said.
Ethereum Price Targets And Doubts
The market impact of an approved Ethereum spot ETF could be significant. Crypto analyst Miles Deutscher projected a possible scenario where Ethereum could see a price surge similar to that experienced by Bitcoin following its own ETF approval.
According to Deutscher’s analysis, “BTC rallied 75% in 63 days after the spot ETF was approved. If ETH follows the same trend (if approved), this would take it to $6,446 by July 23.”
$BTC rallied 75% in 63 days after the spot ETF was approved.
If $ETH follows the same trend (if approved), this would take it to $6,446 by July 23. pic.twitter.com/FfWg9VGUMx
— Miles Deutscher (@milesdeutscher) May 21, 2024
However, opinions among analysts vary. Vetle Lunde from K33 Research pointed out the challenges in replicating Bitcoin’s success, noting that the futures-based Ethereum ETFs have only captured a small fraction of the assets compared to their Bitcoin counterparts prior to spot ETF approval. “Fut-based ETH ETFs have seen cumulative net inflows of $126m since launch ~ roughly equivalent to the inflow to BITX over the past 3 days. Fut-based ETH ETFs aggregated AUM is only 7.4% of the AUM fut-based BTC ETFs had before the spot approval,” he remarked.
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Meanwhile, crypto analyst Vijay Boyapati raised concerns about the structural differences in ETFs, specifically the inability of ETF structures to incorporate staking. “It should be noted that the ETH ETFs, if approved, will be a much worse proxy for the underlying asset than BTC ETFs because the SEC is still extremely unlikely to allow the ETF applicants to stake,” he said.
This could result in the ETFs not fully reflecting the underlying value growth of Ethereum price, as also highlighted by Alex Thorn, Head of Research at crypto-focused financial services firm Galaxy commented: “Lack of staking in ETH ETPs would be material for returns. If u bought $10k ETH on Merge day in Sep ‘22 and held until today without staking it, you underperformed by 8% over that period vs someone who bought and staked to collect issuance, tips, and MEV.”
At press time, ETH traded at $3,759.
Featured image from Consensys, chart from TradingView.com