Joseph Lubin, co-founder of Ethereum and CEO of blockchain technology company Consensys, has indicated that the potential approval of spot Ethereum ETFs by the US Securities and Exchange Commission (SEC) could lead to significant supply restrictions for Ether. This development is expected to be a “turning point” for Ethereum.
On an exclusive interview Along with DL News, Lubin predicted that the adoption of spot Ethereum ETFs will unlock substantial institutional demand. Considering that many institutions have started their crypto investments with spot Bitcoin ETFs, Ethereum is obviously the next substantial asset for diversification.
“There will be a fairly large amount of natural, pent-up pressure to buy Ether through these ETFs,” Lubin said. However, he also noted that the situation for Ethereum is significantly different from Bitcoin due to the underlying supply dynamics.
A key factor that differentiates Ethereum from Bitcoin in the context of ETF creation is the availability of the assets. On-chain data indicates that more than 27% of all ether is deployed across various protocols on the Ethereum network. These funds are recorded in contracts and contribute to the security and operation of the network, which means they are not immediately available for market trading.
“A large part of the airwaves is deployed in the core protocol, DeFi systems or in DAOs,” Lubin explains. This structural difference means that there is less ether available for ETF providers to purchase and allocate new ETF shares.
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In August 2021, the Ethereum network’s EIP 1559 introduced a burn mechanism where a portion of the Ether used for transaction fees is permanently removed from circulation. This deflationary mechanism is designed to balance the growth of Ether supply and potentially increase its scarcity over time.
As network activity increases – possibly further fueled by new institutional interest in Ethereum through ETFs – this burn mechanism will gradually reduce available supply, adding another layer to the potential supply crisis. “This could be a pretty profound turning point,” Lubin said.
Ethereum price targets and doubts
The market impact of an approved Ethereum spot ETF can be significant. Crypto analyst Miles Deutscher predicted a possible scenario where Ethereum could see a price increase similar to Bitcoin following its own ETF approval.
According to Deutscher’s analysis, “BTC climbed 75% in 63 days after the spot ETF was approved. If ETH follows the same trend (if approved), it would go to $6,446 by July 23.”
$BTC rose 75% in 63 days after the spot ETF was approved.
If $ETH follows the same trend (if approved), this would take it to $6,446 by July 23. pic.twitter.com/FfWg9VGUMx
— Miles Deutscher (@milesdeutscher) May 21, 2024
However, opinions among analysts vary. Vetle Lunde of K33 Research pointed out the challenges in replicating Bitcoin’s success, noting that the futures-based Ethereum ETFs captured only a small portion of assets compared to their Bitcoin counterparts before the adoption of the spot ETF. “Fut-based ETH ETFs have seen cumulative net inflows of $126 million since launch, roughly equal to inflows at BITX over the past three days. Fut-based ETH ETFs’ total AUM is only 7.4% of AUM fut-based BTC ETFs before spot approval,” he noted.
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Meanwhile, crypto analyst Vijay Boyapati increased concerns about the structural differences in ETFs, particularly the inability of ETF structures to integrate staking. “It should be noted that the ETH ETFs, if approved, will be a much worse proxy for the underlying asset than BTC ETFs, as it is still extremely unlikely that the SEC will allow ETF applicants to stake,” he said .
This could result in the ETFs not fully reflecting the underlying value growth of the Ethereum price marked by Alex Thorn, head of research at crypto-focused financial services firm Galaxy, noted: “Lack of stakes in ETH ETPs would be material to returns. If you bought 10,000 ETH on Merge Day on September 22 and held it until today without staking it, you performed 8% worse over that period than someone who bought and staked to collect issuance, tips, and MEV.
At the time of writing, ETH was trading at $3,759.
Featured image of Consensys, chart from TradingView.com