Market Commentary: ETH ETF and the SEC
As we await the approval of the S-1 forms required for launching, staking appears to be off the table for the time being.
In our last Monthly Market Update, we noted the slim chances for the approval of spot Ethereum (ETH) ETFs by the SEC in the U.S. by the late May deadline, stating, “The late May final deadline for spot ETH ETF approvals in the U.S. is looking more and more unlikely, given the SEC has yet to seriously engage with issuers.” However, we at Galaxy Asset Management are pleased to admit we were wrong, considering the transformative impact the SEC’s decision will have on digital assets.
The SEC’s approval of 19b-4 forms for eight spot Ethereum ETF applications paves the way for Ethereum, the second-largest cryptocurrency, to join Bitcoin as a regulated digital asset option for investors. This unexpected approval surprised many in the crypto industry. Just ten days earlier, Bloomberg’s senior ETF Analyst Eric Balchunas had described the approval odds as “slim to none.” The Grayscale Ethereum Trust (ETHE) was trading at a significant premium, and the Polymarket prediction market priced approval chances at just ~10%.
A shift in sentiment occurred after former President Trump hosted an event at Mar-a-Lago in early May for buyers of his non-fungible token (NFT) trading cards. Trump’s remarks at the event indicated a softening of his previous anti-crypto stance, suggesting a political maneuver to attract the crypto industry’s vote. This development pressured the Biden administration, which has been ambivalent or hostile towards crypto, to counter strategically. It is likely that the SEC was influenced by the current administration in changing its stance on spot ETH ETFs.
Pressure also came from within President Biden’s party. In May, both the House and Senate voted to repeal Staff Accounting Bulletin 121 (SAB 121), an accounting rule that hindered traditional financial institutions from serving as digital asset custodians. Although President Biden used his veto powers to maintain SAB 121, the digital asset industry secured a victory with the House passing the Financial Innovation and Technology for the 21st Century Act (FIT21). This bill aims to provide greater regulatory clarity for the U.S. digital asset ecosystem and now awaits Senate approval.
While SEC Chair Gary Gensler may not have been enthusiastic about approving the spot ETH 19b-4 forms, the SEC did secure a concession: the removal of staking from all applications. As Ethereum operates on a proof-of-stake (POS) blockchain network, many had hoped the proposed ETFs would enable staking. However, staking appears to be off the table for now, and we anticipate spot ETH ETFs to begin trading in the U.S. by the summer.
In May, crypto prices rebounded positively after a downturn in April. ETH surged by 27.94%, the Bloomberg Galaxy Crypto Index increased by 22.81%, and BTC gained 12.96%. Digital asset funds saw $2 billion in inflows, bringing the year-to-date total to over $15 billion. As digital asset investment product inflows increased globally, crypto ETPs began trading on the London Stock Exchange, available to professional investors.
In the U.S., Q1 2024 13F filings revealed that institutional investors accounted for approximately 20% of total BTC ETF ownership, holding over $11 billion in shares. This institutional demand is significant and is expected to grow as more wealth platforms enable access to spot BTC ETFs.
May also brought developments in two prominent crypto bankruptcies. Mt. Gox prepared to distribute $9 billion worth of bitcoin, with concerns about potential price pressure. However, Galaxy Research’s Alex Thorn believes these concerns are overstated, as many Mt. Gox creditors are early bitcoin proponents likely to hold onto their recovered coins. Additionally, Gemini Earn customers received ~97% of their assets back from the Genesis bankruptcy, totaling $2.18 billion. These resolutions are expected to reduce selling pressure in the crypto markets, and combined with softening political headwinds, we remain optimistic about crypto’s outlook.
We believe May’s developments will have a lasting impact on crypto’s long-term adoption story.
Portfolio Considerations
With spot ETH ETFs set to launch soon, U.S. investors will have another avenue to invest in digital assets. This will enable new strategies to obtain alpha through crypto basis trades with both BTC and ETH.
Despite the exclusion of staking from U.S. spot ETH applications, Ethereum’s largest liquid staking protocol, LDO, still saw benefits from the news, peaking around $2.66 and now trading between $2.20 and $2.50, roughly 30% higher than pre-19b-4 levels. Other liquid staking protocols like RocketPool experienced similar rallies but have since retraced.
Tokenization of real-world assets (RWAs) also progressed. Following Stripe’s decision to work with cryptocurrencies again on Ethereum and Solana, PayPal announced its PYUSD on Solana, highlighting Solana’s higher scalability and throughput. Ondo Finance, a significant RWA protocol, saw the price of its $ONDO token rise by 50% during May, driven by favorable market movements and increased adoption.
Oracles, which connect off-chain data to on-chain environments, also saw increased importance. A successful partnership with DTCC, involving major U.S. banks, completed tests to accelerate fund tokenization. The market reacted positively, propelling LINK’s price above $16, closing May at a two-month high of $19.21.
Overall, the digital asset landscape is evolving rapidly, with significant regulatory and market developments paving the way for greater institutional adoption and innovation in the crypto space.
