Ether has had a dynamic start to 2024, but challenges remain
Given the breakout year that most cryptoassets have had, it would be reasonable to assume that further maturation of the crypto product marketplace is set to continue. No matter which aspect of the crypto sector is examined, 2024 has been a bounce back year for prices, with the accompanying confidence returning to both the institutional and retail investing public. One of the primary beneficiaries of this increased sentiment has been the opinion around the likelihood of an ether ETF. After all, following years of rejected applications by a variety of institutions, there are now 11 bitcoin ETFs trading in the United States. While fund flows may have slowed somewhat, this slowdown follows a red-hot start that has seen bitcoin rapidly become among the largest underlying assets for ETFs in the world.
As ether remains the second largest cryptocurrency in the world, and the token associated with what is arguably the most important blockchain in the crypto market, the time for an ETF has seemingly arrived. Price volatility aside the legitimacy that a bitcoin ETF has created in the TradFi space is significant; after years of ignoring this asset class the billions of dollars allocated and invested in 2024 cannot be ignored. An even clearer example of the benefits that the bitcoin ETF has resulted in is the first nation, in essence, creating a bitcoin version of Fort Knox. El Salvador, a multi-year buyer of bitcoin, has transferred the majority of bitcoin holdings into a cold storage wallet to be held in a secure location within sovereign borders.
Given all of these positive trends the likelihood of an ether ETF getting approved might seem a sure thing. Let’s take a look at a few of the reasons why that optimism should be tempered.
The SEC
In the most recent example of the anti-crypto perspective that has seemingly dominated the conversations at the Commission under Chairperson Gary Gensler, there is evidence that several U.S. companies are under investigation with regards to dealings with the Ethereum Foundation. These recent investigations follow statements made by the SEC that proof-of-stake blockchains (and associated tokens) could be classified as investment contracts, as well as lawsuits filed against exchanges such as Coinbase and Kraken focusing on the staking-as-a-service services offered to investors.
By focusing on the Ethereum Foundation, the SEC does have several pieces of information that could be used to construct a case to classify ether as a security. The foundation has issued tokens to fund further development, some tokens have been allocated to founders, the work conducted by the foundation is connected to increasing the value of said tokens, and unlike bitcoin there is a founding/managing team involved in the promotion and further development of the ethereum blockchain. Regardless of the opposition the SEC continues to face, and the multiple problems that moving unilaterally would create, the Commission seems set to continue these efforts.
Staked Versus Non-Staked Ether
While it is true that the staking services offered by some exchanges have both led to lawsuits and added fuel to the SEC case that ether should be classified as security, this also could be a factor that reduces that appeal of a spot ether ETF. With average staking yields for staked ETH averaging just under 4% this opportunity has become an attractive one for retail investors, but would be of even greater interest for institutional pools of capital that have to manage returns for investors used to consistency. Given the reality that inflation remains elevated above levels seen prior to 2020, the yield generated by ETH continues to attract attention.
On the other hand the very appeal of this yield, and staking in general, is one of the core arguments that has been used by the SEC to construct its most recent efforts to classify ETH as a security. Since staked ETH involves centralization (whether via a centralized exchange or decentralized protocol), common efforts to pursue profits, and limited direct involvement from most staking participants, the argument is not entirely without merit.
The very development that continues to attract investors to ETH may also prove another obstacle to a spot ETF approval.
Success of Bitcoin ETFs Is A Catch-22
Lastly the very success that the multiple spot bitcoin ETFs have experienced has reignited a storm of criticism and pushback from U.S. policymakers. Renewed efforts to crack down on the energy consumption of bitcoin miners, reviving the possibility of a targeted 30% tax on said miners, and concerns about price volatility continue to add to the public debate undermining the need for more crypto ETFs.
Even as crypto investors and advocates cheer higher prices, increasing flows and trading volumes, and more users onboarding into the space, these very same positive trends are being used against further such developments.
The crypto industry has had a lot to celebrate in 2024, but these same successes might actually forestall more positive news.
