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The debut of the first-ever spot crypto exchange traded-funds was one of the most notable events in the crypto and finance realm this year. Welcoming not one but two digital currencies to the stock market via spot ETFs in the time span of just a few months is nothing short of impressive considering that only a couple of years ago this idea would have seemed completely outlandish. But the cryptocurrency industry has experienced phenomenal progress recently, and the integration of crypto assets into the mainstream seems almost inevitable now.
A tale of two historic approvals
First, there was Bitcoin, as it’s always the case. Then Ethereum got the green light. If there was any proof needed that Bitcoin and Ethereum are in a league of their own, this development spelled it loud and clear. Having the U.S. Securities and Exchange Commission give the vote of approval to both assets, although some may say begrudgingly, bolstered the reputation and legitimacy of these two assets, marking their ascent to a new level. There was plenty of buzz around both events, especially for Ethereum ETFs, given their rather swift introduction. The latest Ethereum prediction became a lot more optimistic soon after as analysts expect Ether ETFs to have a majorly positive impact on the altcoin’s future performance.
Since Ethereum has a tendency to mirror the behavior of the crypto leader, particularly in the aftermath of a notable market development, many are now wondering it that might also be the case with the arrival of spot ETFs. Although the products haven’t been in the market for long, experts have already started noticing some similarities between Bitcoin and Ethereum’s reactions that might give us a clue on what to expect next.
What are spot crypto ETFs?
First, let’s provide a quick overview of spot crypto ETFs to get a better understanding of their importance and impact. Spot ETFs are a type of investment funds that track the price movements of certain assets – be it gold, stocks, bonds, commodities, or in this case crypto – in real time. The funds are traded on traditional stock exchanges, where investors can purchase shares in them as they would with any other asset class.
The main difference between investing in a spot crypto ETF and purchasing crypto directly is that ETFs give investors the possibility to gain access to the assets they hold without having to own them. The ETFs bear all the custodial responsibilities, while all investors have to do is buy shares of these funds to diversify their portfolios.
This makes a huge difference for retail investors who previously avoided diving into crypto because they didn’t want to deal with the intricacies of setting up an account on a crypto exchange, managing wallets, understating how private keys work, and so on. Institutional investors who shunned crypto in the past due to safety concerns might also change their stance and increase their participation in the crypto market now that digital assets can be accessed through regulated and secure financial instruments. Therefore, ETFs provide an easier and simpler way of getting into crypto, lowering barriers to entry significantly.
For cryptocurrencies, which are still in their early phases of development, the availability of spot ETFs translates directly into greater convenience, popularity and legitimacy. Moreover, by attracting more investors to crypto, spot ETFs can also enhance market liquidity, which could reduce the extreme volatility of digital assets and lead to more stable prices.
Bitcoin’s long-awaited breakthrough and Ethereum’s surprising win
Now to take a look at how things unfolded for Bitcoin and Ethereum following the launch of their respective ETFs and see if we can find any parallels between the two. In Bitcoin’s case, having the first spot BTC ETFs approved was a resounding and strenuous win that came after almost a decade of repeated refusals and postponed deadlines by the SEC. The US-based products finally went live on the Nasdaq, NYSE, and CBOE exchanges on January 11, causing strong reactions in the market. However, despite the enthusiasm and largely positive sentiment, in the first week after the debut of spot BTC ETFs, Bitcoin started to decline, dropping by almost 10%.
The approval of spot Ethereum ETFs went a little differently. Given asset managers’ experience with getting spot Bitcoin ETFs accepted by the US regulator, everyone expected a similar battle to precede the launch of spot Ether ETFs. However, much to everyone’s surprise, on May 23, the SEC made an unexpected U-turn, most likely prompted by pressures from the political sphere, and announced a policy change that would permit the listing of ETH ETFs on regulated exchanges. With the first and most important step already taken, asset managers only had to submit their S-1 forms and wait for the final approval. And so, Ethereum ETFs became available on the market on July 23, almost six months after the advent of spot Bitcoin ETFs.
Curiously enough, the history repeated and the Ethereum price sank by 11% in just three days after launch. Experts believe that the reason for both Bitcoin and Ethereum’s sudden dips is related to investors leaving Grayscale’s crypto trusts. Before spot crypto ETFs, Grayscale’s Bitcoin and Ethereum Trust (ETHE -0.18%) were the only traditional financial instruments on the market that allowed investors to gain exposure to the two digital assets. However, they had various shortcomings, such as high fees and lower price accuracy.
So, when spot crypto ETFs were launched, a lot of investors left these trusts in favor of the newcomers, causing selloff pressure and dragging down the prices of their respective cryptos in the process. That caused Bitcoin to suffer a 20% correction and go from $46,000 to $39,000 in two weeks’ time and Ethereum’s price to slide considerably as well.
But beyond the immediate volatility, once the Grayscale mass exit calmed down, Bitcoin was able to recover and go on a 90% price hike to reach a new record high just two months after the sell-off began. Therefore, if Ethereum is going to continue in Bitcoin’s footsteps, we can expect the altcoin to go on a similar bull run and experience a significant jump in price in the near future.
