The Market
In an 180-degree turn of events, the SEC approved the spot ETH ETF last Thursday, about 1hr after the market closed on the deadline date. Given there were no communications from SEC to the ETH ETF issuers close to the deadline, as well as multiple lawsuits related to ETH as a security, the street had assigned a low probability of ETH spot ETF approval until last Monday, when the SEC suddenly asked listing exchanges to update their 19b-4 filings.
The market is very efficient in pricing in the change of odds. ETH price jumped ~20% last Monday. ETHE closed the discount from as much as 20% before the news to ~7% on Wednesday, similar to the discount level of GBTC one day before the BTC spot ETF approval date.
After the approval news, ETH price briefly rose another 6% before falling back to the Monday level. With this week’s drastic turnaround, ETH performance has finally caught up with BTC since December 23. If BTC spot ETF approval can be used as reference, BTC spot fell ~18% in the two weeks following the approval news, reflecting a “sell the news” event, and then went on a 90% rally in two months’ time to its ATH. Can ETH replicate this success?
We believe the situation here is slightly different. Unlike the BTC spot ETF approval which was widely anticipated due to Grayscale winning the lawsuit against SEC regarding GBTC, the ETH ETH approval was less expected, meaning investors haven’t had enough time to accumulate ETH. The total ETH supply on exchanges is at the lowest level since 2016. Furthermore, given the rise of Eigenlayer, ETH staking ratio has increased to 27%. There is some serious supply crunch if ETF inflows start to come in.
On the other hand, ETH spot ETF won’t be launched immediately as the SEC still needs to approve each issuer’s S-1s, which could take months. Once approved, we expect ETH spot ETF inflow to be lower than BTC’s given ETH market cap is much smaller. The AUM of ETHE is around 24% of GBTC’s before the spot BTC ETF approval, which could be used as a good indicator of natural mainstream market demand between the two assets. Assume ETH spot ETF demand is also around 24% of BTC spot ETFs, that indicates approximately $15B ETH ETF inflow. For comparison, the exchange holdings of BTC are currently about 2X the BTC ETF AUM, while the exchange holdings of ETH are only about 0.3X of the expected ETH ETF AUM, which means $1 flow into ETH could have a much bigger impact on ETH price given the supply shortage.
ETHBTC ratio finally broke the downward trend line last week, thanks to the ETF approval news. If the ratio can climb up to the previous high in September 2022, that indicates ~50% outperformance of ETH relative to BTC.
We believe the impact of ETH ETF approval has a wider impact for the whole crypto industry. It has accelerated the regulatory development in the US for crypto projects to gain institutional support. Facing political backlash by threatening to veto SAB21, the sudden ETH ETF approval showed the current administration is paying attention to voter sentiment. What’s encouraging is the house vote result for FIT21, a crypto bill that seeks to clarify the definition of whether a token is a security or a commodity and the delineation of regulatory scope between the SEC and CFTC, which garnered bipartisan support, with 71 out of 213 Democratic representatives voting in favor of the bill.
DeFi Update
With spot ETF approval, ETH might be the next digital asset to achieve mainstream adoption, but ETH is different from BTC. The value comes from the economy built on ETH rather than ETH itself. With more economic activities moving to L2s, the fees earned by ETH are actually going down since the Dencun upgrade, despite an increase in activity.
Source: IntoTheBlock Perspectives
In the meantime, dApps and L2s are gaining the full benefit of increased revenue from activities and reduction in gas cost. For example, Uniswap has become the 4th largest revenue generator among all protocols tracked by Token Terminal YTD, with more revenue than Solana. We believe the recent tail wind in regulations could help clear Uniswap’s path for institutional adoption and make it a powerful alternative to CEXes.
Currently DEX trading volume is only ~9% of CEX, or about 61% away from its peak level at 16%. As more projects come to the market in this cycle, we expect this ratio to go up as DEXes will play a bigger role in providing liquidity for new projects.
Uniswap’s current FDV is ~$10B with a P/F ratio of 11. Compared to Coinbase’, which has a $58B market cap and a 15X P/S ratio, this indicates room for growth for UNI.
Top 100 MCAP Winners
Pepe (+59.11%)
Uniswap (+41.48%)
Lido DAO (+38.21%)
Pendle (+35.89%)
Bonk (+33.56%)
Top 100 MCAP Losers
Arweave (-14.68%)
Akash Network (-9.57%)
Fantom (-8.25%)
TRON (-7.77%)
Internet Computer (-7.66%)
About Decentral Park
Decentral Park is a founder-led cryptoasset investment firm comprised of team members who’ve honed their skills as technology entrepreneurs, operators, venture capitalists, researchers, and advisors.
Decentral Park applies a principled digital asset investment strategy and partners with founders to enable their token-based decentralized networks to scale globally.
The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.
About the Author
Kelly is Portfolio Manager and Head of Research at Decentral Park Capital. Investing across sectors with a thesis driven, deep research approach.
Prior to this, Kelly has led research and product efforts at CoinDesk Indices and Fidelity Digital Asset Management. Kelly has been a TradFi investor for 15 years before joining the crypto space.
You can follow Kelly on Twitter and LinkedIn for more frequent analysis and updates.