What does the approval of the Ethereum spot ETF mean for altcoins?

ETH price action has taken everyone by surprise following the unexpected news that the application process for a spot Ethereum exchange-traded fund (ETF) is moving forward. Most investors have already accepted that the U.S. Securities and Exchange Commission (SEC) will almost certainly reject these applications.

So when Bloomberg’s well-respected ETF analyst suddenly raised the probability of approval from 25% to 75%, ETH experienced a daily price surge that we haven’t seen in a long time. As the rumor spread, ETH’s price surged past multiple support levels, rising by about 20% to $3,800.

This welcome (albeit unexpected) rally shows how high the stakes are for a spot ETH ETF to be approved. In fact, this means far more for decentralized finance (DeFi) than the approval of a spot Bitcoin ETF. While the BTC ETF solidified Bitcoin as an institutional asset, an ETH ETF would legitimize altcoins and propel them into the next phase of their bull rally. The SEC has given the green light to the ETH ETF application today, and here’s what I think will happen now.

L2 and DeFi rebound

Ethereum Layer 2, including Optimism and Arbitrum, will almost certainly benefit along with Ethereum itself. In fact, when the market rebounded earlier this week, the price action of these tokens was similar to that of ETH itself, recording high double-digit percentage price increases. Rollups are now an integral part of the entire Ethereum ecosystem and are therefore inseparable from its success.

Bloomberg ETF analysts raised the probability of spot ETH ETF approval from 25% to 75% in May. Source: X

DeFi veterans like Uniswap or Aave also mirror the situation on Ethereum to some extent, as they have a direct connection to EVM technology. These DeFi stalwarts have performed extremely well in the recent market surge and will likely continue to benefit along with Ethereum, simply because the approval of an ETF provides legitimacy to projects built on top of this blockchain.

Projects that are compatible with the EVM will perform well

Any project and blockchain that is compatible with the EVM will do better than a closed ecosystem. This puts companies like Avalanche and Polygon in a better situation than companies like Algorand, which are not yet compatible with the EVM.

Now that we have approval for a spot ETH ETF, EVM compatibility will become a more pressing issue than in past years. This is in part because the approval of an ETF provides some form of regulatory clarity for Ethereum.

Decentralized exchange and lending protocol FTW

Up until now, we’ve struggled to see the coveted “mainstream adoption” of decentralized finance. It’s still not particularly user-friendly, it’s generally not very secure, and regulators tend not to like it. But an ETH ETF will change all that. It makes DeFi investing simpler and safer, so we could start to see everyday users flock to the space in search of big returns.

If this happens, projects that offer the most useful features will benefit the most. For example, this will be good news for decentralized exchanges like SushiSwap or Balancer, and lending protocols like Aave and Compound.

L1s like Solana may fail

Ethereum competitors, including Solana, may have a hard time performing well in a post-ETH ETF environment. Of course, companies like Solana may still hit new all-time highs in this cycle as a spot ETH ETF creates some much-needed clarity for the decentralized blockchain.

However, with the approval of the ETH ETF, Ethereum has become the leading blockchain in the DeFi space. Any competitor that was previously touted as the “Ethereum killer” may be left behind.

Good news for zk-rollups and RWA tokens

Ethereum has been home to new technological developments, such as zero-knowledge proofs, which power many Ethereum L2s, and experiments in tokenizing real-world assets (RWAs). In fact, BlackRock’s tokenized treasury fund, BUIDL, is built on Ethereum.

After the ETF is approved, we could see more Ethereum-based projects. Some may even transition from L1 to Ethereum Rollups, seeing this as a more profitable direction to move forward — like Celo, which recently decided to migrate to Ethereum using the OP Stack.

With all of these developments, we could see a slew of new tokens launched. An increase in the number of altcoins naturally means growth in DeFi TVL, but there is a caveat. More opportunities often mean more risk, and nowhere is this more evident than in the DeFi space. As a result, we may also see more fraud, scams, and ultimately, greater losses.

For investors, this means stepping up their safety game and making sure they do their own research before investing in any project, no matter how exciting and innovative it sounds. Not only that, but investors also need to avoid getting caught up in the excitement and momentum when the market is rising.

The old adage — buy the rumor, sell the news — applies just as much in crypto as it does in traditional markets. Given ETH’s rally when rumors of an ETF approval emerged, we fully expect a sell-off in the coming days and weeks. This short-term volatility is normal and welcome for a sustainable long-term market rally. But prudent investors will avoid making trading decisions based on FOMO and wait for a pullback to make their next move.