It's been a wild ride for Ethereum (ETH 3.64%) over the last few years. Since launching in 2015, the cryptocurrency has grown by nearly 128,000% thanks to its novel smart contracts and dominance of the decentralized finance (DeFi) economy. Yet, as impressive as the last decade has been, its story might just be getting started.
On May 23, the Securities and Exchange Commission (SEC) paved the way for approval of a spot Ethereum exchange-traded fund (ETF). When completed, this process essentially opens up the cryptocurrency to a new set of buyers and puts additional demand on its deflationary supply. Here's why the decision is so historic and what it could mean for the world's second-most valuable cryptocurrency.
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A landmark decision
Just a few weeks ago, the chances of a spot Ethereum ETF approval looked slim. Many analysts estimated there was only a 25% chance, but on Thursday, May 22, things took a turn for the better as rumors began to swirl that the SEC had had a change of heart.
The following day, it was officially announced that the SEC would approve all eight 19b-4 applications, paving the way for Ethereum ETF approval. It's not exactly the same thing as full approval, but that final step is almost guaranteed at this point. On the current timeline, the SEC is expected to approve the S-1 applications (the official documents that allow the ETFs to go live) sometime in the mid to late summer.
The reason an ETF is so significant comes down to its ability to democratize access for investors. With the ETFs, now investors can gain Ethereum exposure by simply buying shares like they would with a stock on a brokerage. Gone are the days of navigating crypto exchanges or managing digital wallets.
In addition, and perhaps most importantly, the approval of an ETF means institutional investors can join the game. Without an ETF, these investors were hesitant to get in on crypto because of a lack of regulatory guidance and custodial issues. That's why not only Ethereum's, but all of crypto's, ascent over the years has been driven by retail investors.
But ETFs provide an easy and accessible way for institutions to buy. And that's a great thing because institutional investors are known for their vast resources and deep pockets.
Charting the future trajectory
To quantify the impact an Ethereum ETF holds, we can look back at Bitcoin's spot ETF journey. In January, Bitcoin became the first cryptocurrency to get a spot ETF, marking a landmark event in the world of crypto adoption and evolution. The 11 initial Bitcoin ETFs were a massive hit and quickly became one of history's most successful ETF launches. In just four months, they attracted more than $38 billion and at one point were buying up 10 times the daily supply of Bitcoin, effectively introducing a supply shock that sent Bitcoin's price to an all-time high.
While it's unlikely that Ethereum ETFs will be as popular as Bitcoin ETFs simply because Bitcoin is the most well-known crypto asset, Ethereum still stands to benefit significantly. This is because Ethereum's market cap is smaller than Bitcoin's. In other words, it will take less capital to move Ethereum's price than Bitcoin's.
We can even speculate just how much Ethereum's price might move (emphasis on speculate). Since the Bitcoin ETFs launched, around $425 billion was added to its market cap. Not all of this was the direct result of the ETFs buying Bitcoin, but we can use it as a proxy to measure the effect of the ETFs.
If Ethereum ETFs were to be half as successful as the Bitcoin ETFs, then it would add $212 billion to its market cap, or roughly a 45% increase. If this were to occur, Ethereum's price would soar to $5,300, a new all-time high.
The road ahead
While we can only speculate about the exact demand the Ethereum ETFs will generate, one thing is certain: Ethereum is about to be unlocked to a new class of deep-pocketed investors.
The impact of these ETFs will unfold over time, as institutional investors typically require extensive research and due diligence before making allocations. However, considering the success of Bitcoin ETFs and the recent trend of institutions revealing Bitcoin holdings, it's arguably not a question of if, but when these investments will materialize.
In the meantime, Ethereum presents a compelling investment opportunity. Despite its current price being around 25% below its all-time high, Ethereum's fundamentals have never been stronger. As we approach full ETF approval, expect increasing demand for the world's second-most valuable cryptocurrency.
