Coinbase research shows that decisions about a spot Ethereum (ETH) exchange-traded fund (ETF) could surprise investors.
In a new note, Coinbase Institutional says an ETH ETF is a matter of when, not if, and that the U.S. Securities and Exchange Commission (SEC) is likely looking at the decision with the same reasoning as when it approved Bitcoin. BTC) ETFs earlier this year.
Coinbase notes that the SEC has looked at the strong correlation between the price of spot BTC on the Chicago Mercantile Exchange (CME) – something that also applies to Ethereum.
“While there is uncertainty about timely approval given the SEC’s apparent silence toward issuers, we believe the existence of a U.S. spot ETH ETF remains a matter of when, not if. In fact, the primary reason used to approve spot BTC ETFs applies to spot ETH ETFs as well. That is, the correlation between the CME futures product and spot exchange rates is sufficiently high that “CME’s supervision can reasonably be expected to… detect misconduct.” [in the spot market]’.
The period of correlation research in BTC’s spot approval notice began in March 2021, a month after the launch of CME ETH futures. We believe this evaluation period was deliberately chosen so that similar reasoning could be applied to ETH markets. Indeed, the correlation analysis previously presented by Coinbase and Grayscale suggests that the spot and futures correlation for ETH markets is similar to that for BTC.”
Coinbase says that despite the low odds of an Ethereum ETF being approved in May, markets are in for an unexpected SEC approval.
“We think there is room for a positive surprise with this decision. Polymarket puts the probability of approval on May 31, 2024 at 16%, and the Grayscale Ethereum Trust (ETHE) is trading at a 24% discount to net asset value (NAV). We think the chance of approval is closer to 30-40%.
As crypto begins to take shape as an election issue, it is also less certain, in our view, that the SEC would be willing to provide the political capital necessary to support a denial. Even if the first deadline of May 23, 2024 is rejected, we believe there is a good chance that a lawsuit could overturn this decision. It’s also worth noting that not all spot ETH ETF applications will necessarily need to be approved at the same time. In fact, Commissioner Uyeda’s approval statement regarding the spot BTC ETF criticized the disguised “motivation for accelerating the approval of applications, which is to avoid a first mover advantage.”
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