In what could be a big catalyst for Ethereum (ETH -0.26%), Cathie Wood's Ark Invest has filed an application for the first-ever spot Ethereum exchange-traded fund (ETF). This comes after a summer filled with twists and turns surrounding the launch and approval of the first-ever spot Bitcoin ETF.
So could this new ETF from Ark Invest send the price of Ethereum soaring? There are several different factors to consider.
Institutional demand
Let's face it -- the launch of a spot Ethereum ETF probably means little for the seasoned crypto investor. Why would you go to the added step of buying an ETF (which comes with management fees), when you can already go to a cryptocurrency exchange like Coinbase Global and buy Ethereum directly? The only allure of a spot crypto ETF is if you want exposure to crypto, but without the risk or hassle of investing directly in crypto.
The big reason a spot Ethereum ETF is so bullish for the markets is because it signals pent-up institutional demand for the world's second-largest cryptocurrency. Many institutional investors are unwilling or unable to purchase crypto directly, due to the constraints placed on them. Do you really want your pension fund or university endowment dabbling in a volatile, poorly regulated industry with significant risk of loss?
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But the picture changes when you take into account a market-traded financial instrument that has been approved by the Securities and Exchange Commission (SEC). According to the Ark Invest filing, the spot Ethereum ETF would trade on the CBOE BZX Exchange and custody its crypto assets with Coinbase. That essentially makes Ethereum "safe" (relatively speaking) for the world's biggest institutional investors. And that's where things get really exciting, because it could signal a tsunami of new money flowing into Ethereum. Theoretically, that new influx of money should boost Ethereum's price. It's just simple supply and demand.
Lessons from Bitcoin this summer
And that, of course, brings us to what happened this summer, which was headlined by one big event: the decision by BlackRock, the world's biggest fund manager, to file for a spot Bitcoin ETF on June 15. That led to a flurry of follow-on filings from other institutional investors, a response by the SEC, and new adjustments to those filings in response to the SEC. Just about everyone -- including Ark Invest -- was trying to be first in line for the first-ever spot Bitcoin ETF.
And the market responded accordingly. The Bitcoin rally in June was very real. On the date of the BlackRock ETF filing, Bitcoin was trading around $25,000. Thirty days later, it was trading near $30,000, and bullish sentiment was risiing. It seemed to be a matter of not if, but when, a new spot Bitcoin ETF would be approved. Finally, it looked like Bitcoin was about to go mainstream.
Granted, the effect on Ethereum is not going to be as great as for Bitcoin, simply due to the fact that institutional investors still prefer Bitcoin to Ethereum. But there is almost certain to be a similar type of effect, given that Ethereum now accounts for roughly 20% of the entire market cap of the crypto market.
The heavy hand of the SEC
So what could possibly go wrong? There's a short answer: the SEC. There's something about a spot Bitcoin ETF that the SEC doesn't like. Despite the fact that the SEC has already approved futures-based Bitcoin ETFs, it doesn't seem to want to approve a spot Bitcoin ETF. So it's uncertain how long the approval process could take. Ark Invest, for example, originally filed its first spot Bitcoin ETF application back in 2021.
And, in the case of Ethereum, there's an added wrinkle. That's because Ark Invest is essentially skipping a step here. Unlike with Bitcoin, no futures-based Ethereum ETF has yet been approved in the U.S., although several applications have been filed. So Ark Invest is skipping from no Ethereum ETF in the U.S. to spot Ethereum ETF without the intermediate step of a futures-based Ethereum ETF.
The big picture
Despite these regulatory challenges, the big picture is that the decision by Ark Invest to file for a spot Ethereum ETF appears to signal that there's plenty of institutional demand for Ethereum. As crypto becomes more and more of a mainstream asset class for institutional investors, that's huge for Ethereum's future prospects. So buckle up: This could get interesting if Cathie Wood ever gets SEC approval for the first-ever spot Ethereum ETF.
