What a Potential Ethereum Spot ETF Could Mean for Cryptocurrencies?

By Anush Jafer
10 Min Read

It goes without saying that cryptocurrency and digital asset adoption has reached an inflection point. The recent approval of several Bitcoin Spot ETFs in the United States marked a significant milestone for Bitcoin and the entire crypto market as a whole.

Last year, we speculated on the prospect of these approvals and what impact it could have on the markets. 

Since the approvals in January, the cryptocurrency markets have entered a raging bull market with increased deliberation among the mainstream media. This week, we see yet another turning point towards widespread adoption with the chatter of the SEC (Securities and Exchange Commission) potentially approving several Ethereum Spot ETFs amidst a political backdrop in the US that is becoming increasingly crypto-friendly. 

Even though rumors of the Ethereum Spot ETF have been floating around for months, it wasn’t until this week when real traction grew. The SEC began actively engaging with issuers and national exchanges, mirroring the approach taken prior to the approval of the Bitcoin Spot ETFs. This blog explores what an approval could bring to Ethereum, altcoins and the cryptocurrency sector as a whole over the short term and long term. 

The SEC’s Stance on Ethereum 

The second largest cryptocurrency, Ethereum, has been in the crossfire with the United States’ SEC for years. Ever since Ethereum’s transition from proof of work (PoW) to proof of stake (PoS) in 2022, the SEC under the helm of Gary Gensler has been maneuvering to classify Ethereum as a security rather than a commodity. Shortly after the Merge, Gary Gensler stated that tokens in a PoS consensus system could be considered securities since investors rely on the efforts of others to make a profit.

Classifying Ethereum as a security poses significant drawbacks for the crypto market. Such a designation would subject Ethereum to stringent regulatory requirements, potentially stifling innovation and deterring investment.

The increased compliance costs and legal uncertainties could hinder the development of decentralized applications (dApps) and other blockchain-based technologies built on the Ethereum network.

Furthermore, it might prompt exchanges to delist Ethereum to avoid the complexities of trading securities, reducing its liquidity and accessibility for investors. This regulatory shift could create a ripple effect, impacting the broader crypto ecosystem and slowing the adoption of blockchain technology.

Ethereum ETFs receiving official approval will represent a pivotal moment in the evolution of the cryptocurrency market and underscores the growing acceptance and integration of digital assets within the traditional financial ecosystem.

It will provide a regulated and secure avenue for both individual and institutional investors to gain exposure to Ethereum, one of the most influential and innovative blockchain platforms in the market today.

Saravanan Pandian, KoinBX

In early 2024, the SEC began investigating Ethereum, issuing subpoenas to U.S. entities connected to the Ethereum Foundation. This move raised questions about whether it is part of a broader effort to classify ether as a security, possibly slashing hopes that the regulator will approve Ethereum Spot ETFs. Until last week, this mounting bearish stance pushed the odds of an Ethereum spot ETF being approved to 10%. 

Speculation on the approval of Ethereum Spot ETFs on Polymarket

Over the past week, however, the SEC has seemingly done a 180 on their stance on Ethereum. On Monday, news that the SEC had informed exchanges the agency was leaning towards approving Ethereum spot ETFs shook the world of cryptocurrencies. 

Possible Impact of an Approval 

Price Appreciation

While the decision on the Ethereum Spot ETF’s to be authorized is still pending, it is interesting to speculate on some of the scenarios that could take place. One such is an Ethereum price surge. This scenario has in fact already taken place. Since the news broke, Ethereum’s price rallied a staggering 20% in a single day. 

Ethusd trading view

Some on twitter are also of the opinion that the news has not been priced in. Others view the break of structure as an indicator of the start of a longer-term parabolic bull market. 

To understand market sentiment and the characteristics that typify a crypto bull and bear market, read this article: Bull and Bear Markets Explained: A Guide to Maximizing Profits in Crypto

Even though predicting short term price swings can be difficult, the recent surge in Bitcoin’s price following its ETF approvals may signal similar trends for Ethereum. 

An Altcoin Season 

An approval of Ethereum Spot ETFs could potentially trigger an altcoin season by significantly boosting investor confidence in the broader cryptocurrency market. Ethereum, as the second largest cryptocurrency by market capitalization, holds a pivotal role in the crypto ecosystem. Its recognition and validation through a spot ETF would likely attract a wave of institutional and retail investment. 

This influx of capital could not only drive up the price of Ethereum but also increase interest in other altcoins, as investors look to diversify their portfolios and capitalize on the broader market momentum.

Historically, major developments and positive regulatory news for bluechip cryptocurrencies like Bitcoin and Ethereum have had a cascading effect, lifting the entire market. 

Read this article for an introductory guide on what altcoins are and their different types: A Brief Overview of Altcoins: What are Their Types, Pros and Cons 

Moreover, an Ethereum Spot ETF approval could pave the way for a broader trend of crypto ETFs gaining regulatory approval. Established protocols like Solana are already being speculated as the next candidates for such recognition. 

Increased Institutional Adoption 

One possible scenario following the approval of an Ethereum Spot ETF is a significant increase in institutional adoption of Ethereum. With a spot ETF, traditional financial institutions such as mutual funds, pension funds, and hedge funds would have a regulated and accessible way to gain exposure to Ethereum without the complexities of directly purchasing and storing the cryptocurrency.

This could lead to a substantial influx of institutional capital into the market, which would not only drive up the price of Ethereum but also enhance its legitimacy as a mainstream investment asset. 

We have already seen this play out with the Bitcoin ETFs with large hedge funds accumulating the digital asset at unprecedented rates. 

Easier Accessibility

Ethereum Spot ETFs will significantly enhance accessibility for people interested in investing in cryptocurrencies without having to navigate the complex technicalities of the Web3 ecosystem.

Traditionally, investing in Ethereum requires a basic understanding of setting up crypto wallets, managing private keys, and purchasing the asset via cryptocurrency exchanges—all of which can be challenging for those unfamiliar with this space. With the introduction of Ethereum Spot ETFs, investors can bypass these hurdles.

Read this article for an end-to-end guide on cryptocurrency wallets: Cryptocurrency Wallets: Explained

These ETFs, traded on traditional stock exchanges, offer a familiar and regulated investment vehicle that simplifies the process. This ease of access means that anyone with a brokerage account can gain exposure to Ethereum just as easily as they would with stocks or conventional ETFs.

The availability of Ethereum Spot ETFs will diversify the investor base by attracting people who use legacy investment platforms. By offering a product that fits within the existing framework of traditional finance, Ethereum Spot ETFs open the market to a broader audience, including institutional investors, retirement funds, and everyday individuals who prefer the security and simplicity of regulated financial products. 

Closing Thoughts

The prospect of an Ethereum Spot ETF approval stands to significantly shake up the crypto sector, with both short-term and long-term implications. The approval of Ethereum Spot ETFs would mark a pivotal step towards mainstream adoption and integration of cryptocurrencies into the global financial system.

While the decision for approval remains to be seen at the time of this writing, the mere possibility and the precedent set by approved Bitcoin ETFs speak volumes about the progress and maturation of the cryptocurrency industry since its inception 15 years ago.

The journey of digital assets from a niche investment opportunity to a significant component of the financial landscape underscores its transformative potential and the capacity to redefine financial paradigms.