The SEC created a storm in the cryptocurrency world late Monday into early Tuesday regarding their stance on Ethereum Spot ETFs. In a stunning about face, the SEC has made noises that they are inclined to approve spot Ethereum ETFs. On the news, ETH soared over 23+% to $3700 a coin. On Friday May 17th, Ethereum closed under $3,000 a coin. While several ETF providers, in fact just about all the spot Bitcoin ETF providers, have filings for a spot Eth ETF, VanEck’s filing was the nearest dated (so if the SEC hadn’t made this shift they liked would have had to refile). All this means is that the SEC is likely to make a decision as soon as Thursday May 23rd. Don’t expect ETH ETFs to be rolled out the following week though, this is just the first step, if not very important step, to getting a spot ETH ETF approved.
The SEC requires two filings to be approved before a new asset like ETH or BTC can trade on exchanges. First, 19B-4, which is up for approval on Thursday, essentially enables exchanges to allow funds, in this case spot ETH, to trade on them. This is essentially a litmus test to whether the SEC believes the asset is relevant, unlikely to be manipulated, and doesn’t pose undue harm to investors.
So… What’s Next?
Provided the 19B-4 is approved, the second filing the SEC must approve is the prospective ETF’s S-1. This is essentially the prospectus, which outlines the nuts-and-bolts of how the fund and vehicle will operate. This will likely take weeks if not months of iterations before approval. During the spot BTC ETF approval saga, one of the key edits the SEC required, forcing many of the filers revise their S-1 and refile, was the removal of the in-kind mechanism. Likely, one thing the SEC will want struck from the ETH S-1 filings is the staking protocol, though there may be other things, such as the in-kind mechanism, that they could also want to change.
Ethereum Use Case? Isn’t it just Bitcoin by Another Name?
The use case for Ethereum is different a more complicated than Bitcoin’s. Bitcoin’s use case is straightforward: primarily it serves as a store of value/information because of its finite supply – its protocol only allows for 21M coins to ever be created. It does potentially have other secondary uses such as a mode of payment, and as a far tertiary it can support some Web 3.0 type activities like NFTs which are dubbed ‘Runes’ on the Bitcoin network.
Ethereum’s use case is primarily facilitating payment and providing a decentralized digital financial architecture with the platform. Its protocol empowers it to process more transactions per second than Bitcoin, and it also has a robust smart contract market. Secondarily, ETH’s network also offers the ability to create things like NFT as well as providing a digital sandbox for programmers to innovate. ETH’s far distant tertiary goal is to be a store of value. While its supply is technically unlimited, it does have a burn protocol where a portion of the fee taken for a transaction is permanently destroyed to keep the supply of ETH from spiraling upwards. On most days the burn rate and issuance rate to miners for approving a transaction are roughly in line.
What to own: Bitcoin or Ethereum?
It doesn’t have to be an either-or scenario, ownership of both is perfectly fine in a portfolio, just like owning both gold and Mastercard/Visa is perfectly fine. The two have different use cases and it depends on the investor preference and risk tolerance to decide what about they would like to own of both, neither, or just one.
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Orion Portfolio Solutions, LLC d/b/a Brinker Capital Investments a registered investment advisor. 1291-BCI-5/22/2024