22 Aug 2023

Time to increase ETH exposure?

Bitcoin, driven by heavyweight spot ETF applications, has outperformed Ether significantly in 2023. Now, the signals point towards a reversion.
We view the promising ETF outlook for ETH and the relatively low ETHBTC price as strong arguments favoring increased ETH exposure in the coming months. ETHBTC still trades at range lows but has expressed mild strength in the last week. Active ETH ETF filings have yet to be withdrawn, a promising signal related to futures-based ETH ETF approvals in the United States. As ETHBTC still trades below 0.065, the risk-reward of a temporary overweight exposure in ETH for the next two months is a trade worth taking. As is the case for the ongoing BTC ETFs filings, ETH filings follow a timeline. Nonetheless, due to the filings being based on the 1940-act, deadlines are shorter. Valkyrie’s deadline is set to October 3, whereas the other deadlines occur from October 16 to October 18 (See James Seyffart). If the market reacts similarly to the BTC futures-based approvals, conditions should be ideal to increase ETH exposure. In 2021, BTC rallied by 60% in the three weeks before the ETF approvals, a similar pattern would lead to relative ETH strength in the latter part of September and early October. While market conditions are currently vastly different from 2021, with a far more suppressed institutional interest in crypto subsectors, we still favor the trade from a risk-reward perspective. ETH trades at range lows of its 2.5-year long trading range vis a vis BTC, and the ETF narrative represents a potential catalyst for relative strength in the near term.
Arguments in favor of an ETF approval
  1. CME’s ETH futures market has now been live for 2.5 years. Lack of liquidity and a nascent CME market were cited as the main reasons for ETH ETF withdrawals in 2021.
  2. Access to ETH exposure through regulated venues has improved since 2021 with the launch of EDX and ETH Options on CME.
  3. Longevity and relevancy of Ethereum in the crypto market – a long history as the second largest cryptocurrency.
Arguments against an ETF approval
  1. Compared to BTC, ETH is more challenging to classify as either a commodity or a security. Both the ICO and staking dynamics could lead an approval harder to attain.
  2. On multiple occasions, Gensler has been quoted as saying that more or less all crypto assets apart from BTC are securities. However, he also explicitly stated that ETH is not a security in 2018.
  3. The ongoing SEC vs. Coinbase lawsuit related to offering staking as a service.
CME ETH OI up 32% in one week – but it’s not caused by ETF momentum
CME’s ETH open interest saw a 32% growth last week but still sits at modest levels compared to previous highs this year. The increase was accompanied by a sharp decline in ETH’s basis, falling from 10.8% to 5.1% over the past week, indicating that the growth was due to the market-wide crash rather than ETF enthusiasm. Before the launch of futures-based BTC ETFs, we saw a significant uptick in BTC open interest on CME. The initial growth phase directly after the filings was slow, and various narratives impacted the market, particularly El Salvador’s legal tender Tuesday. September 2021 was overall choppy, but the market surged in early October as ETF deadlines neared.
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