Spot ETF and Cancun upgrade will Ethereum usher in an explosion?

The narrative of Bitcoin spot ETF is still ongoing. Against the backdrop of Bitcoin's surge, Ethereum is also unwilling to be left out and stand out.

From the perspective of the external environment, the ETF narrative has come to Ethereum again. In addition to Grayscale, six institutions including BlackRock, Fidelity, and VanEck have submitted applications for the issuance of spot ETFs to the SEC, and the latest wave of approvals will come in March.

In terms of internal conditions, Ethereum's deterministic benefits from the imminent Cancun upgrade; the resurgence of the re-staking agreement at the beginning of the year also attracted much attention to Ethereum, which had been silent for a long time. On February 20, the price of Ethereum briefly exceeded $3,000, setting a record high since April 2022.

Judging from all the performance, the spotlight on the stage seems to have really shone on Ethereum.

The ETF Game, This Time It Comes to Ethereum

While Bitcoin broke through $53,000, Ethereum was not to be outdone. On February 20, Ethereum briefly broke through $3,000. Although it subsequently slipped to around $2,900 and is now at $2,958, it still successfully set a record high in the past two years. In fact, slightly different from the 2023 year when Bitcoin led the market growth, from this year alone, Ethereum has driven more than Bitcoin. As of February 22, Ethereum rose 28%, while Bitcoin rose 21%. It can be seen that from a certain perspective, the current crypto narrative has gradually shifted to Ethereum.

Ethereum price trend in the past 7 days, source: OKX

From a narrative perspective, Ethereum currently has two main driving factors: one is the wave of applications for spot ETFs, and the other is the upcoming Cancun upgrade. The most important thing at this stage is undoubtedly the ETF that can attract traditional funds into the market.

From the perspective of Bitcoin, since 11 Bitcoin spot ETFs were approved, although Bitcoin has experienced a short period of profit-taking and selling, with the support of institutions, more than US$5.2 billion has flowed into the Bitcoin ETF market, driving Bitcoin to successfully recover its lost ground and is now trading at US$51,759.

Because of the successful experience of Bitcoin ETF, the narrative of Ethereum ETF has also attracted widespread attention. So far, in addition to Grayscale's application for a convertible spot ETF in the original trust, six other institutions including BlackRock, Fidelity, Invesco, Hashdex, 21shares, and VanEck have submitted applications for Ethereum spot ETFs. Previously, the SEC postponed the first and second rounds of applications for all applicants. The current approval date is March 5, and the latest approval date is July, with March and May being intensive approval periods.

Ethereum spot ETF application list, source: Bloomberg

Looking at the application history of Bitcoin, the period close to the approval date is actually the most likely time for the price to rise and accumulate. This short-term rise of Ethereum is also due to this reason. From the external environment alone, Ethereum is very similar to Bitcoin before. First, the futures ETF has been approved and listed as a regulated futures contract on the Chicago Mercantile Exchange; second, the application institutions are quite consistent, and large financial giants have entered.

However, from the perspective of the approval result prediction, there are still differences in the prediction caliber within the industry. Institutions based on the approval generally hold the argument that it is difficult to reject spot since futures have been approved. After all, in the application for Bitcoin, it was this point that successfully promoted the approval of the Bitcoin spot ETF. Bloomberg analyst Eric Balchunas said that the Ethereum ETF has a 70% chance of approval because the SEC cannot reject the spot ETF based on the approval of the futures ETF, otherwise it will lead to litigation. Brokerage firm Bernstein said that the Ethereum spot ETF has about a 50% chance of approval in May and will almost certainly be approved within the next 12 months. Standard Chartered Bank directly believes that the SEC will approve the Ethereum spot ETF on May 23.

Judging from the rejection caliber, the current situation faced by Ethereum is slightly different from that of Bitcoin. The core issue is the issue of Ethereum's attribute identification.

In the crypto world, the debate between commodity theory and securities theory has been protracted. Securities theory usually means that stricter supervision must be followed, and Ethereum, as one of the typical mainstream currencies, has a significant qualitative representative significance. In public, the SEC has clearly stated that Bitcoin is a commodity, but Ethereum has characteristics such as interest-bearing on pledges, so in March last year, SEC Chairman Gary Gensler stated that under US law, tokens using pledge agreements should be considered securities.

But it is worth noting that in Binance’s lawsuit last year, the SEC explicitly listed more than a dozen tokens as securities, including but not limited to Solana (SOL), Cardano (ADA), Polygon (MATIC), Coti (COTI), Algorand (ALGO), Filecoin (FIL), Cosmos (ATOM), Sandbox (SAND), Axie Infinity (AXS), and Decentraland (MANA). However, the SEC did not mention Ethereum throughout the lawsuit, and when asked about its attributes, the SEC chairman also avoided talking about it, making the regulatory attributes of Ethereum even more confusing.

In this context, many institutions also believe that the approval of Ethereum spot ETFs is difficult to be smooth. A report from JPMorgan Chase stated that Ethereum spot ETFs are unlikely to be approved in the next three months. It supports the view that Ethereum should be classified as a commodity, but believes that the US SEC is unlikely to make a decision before May. Regarding the argument that Ethereum spot ETFs will be approved by the end of March 2024, Bloomberg analyst James Seyffart said bluntly on the X platform, "I bet 4 ETH that this will not happen."

The debate has continued to this day. Just recently, the US SEC solicited opinions on the application of Grayscale Ethereum Trust (ETHE) to convert into a spot ETF. Coinbase explained in a 27-page comment letter why the SEC should approve the application from the legal, technical and economic aspects. It believes that the current market consensus has made it clear that ETH is a commodity rather than a security. At the same time, it emphasizes that ETH's proof of stake (PoS) has significant governance capabilities and exhibits strong characteristics in terms of ownership concentration, consensus, liquidity and governance, thereby reducing the risk of fraud and manipulation. Economic theory also shows that both ETH and BTC are resilient in meeting the SEC ETP approval standards and can cope with systemic and market risks.

Of course, the SEC has not yet responded to this.

Cancun Upgrades, Ethereum’s Deterministic Narrative

Compared with the spot ETF that is still under discussion, Ethereum’s second major narrative is quite clear - the Cancun upgrade (Dencun).

Upgrading is one of the important drivers of Ethereum over the years, especially after the switch to POS, which usually benefits many scalability sectors. Looking at the price performance of each upgrade proposal, Cesare Fracassi and Moazzam Khoja of the University of Texas at Austin believe that the price of Ethereum will rise by 18% in the weeks before the last Ethereum conference call before the main proposal. The facts are basically the same. During the Shanghai upgrade last year, despite the pressure of selling due to the unlocking of pledges, the price of Ethereum did not fall but rose to US$2,100.

Ethereum price trend in the past year, source: OKX

Specifically, the Cancun upgrade was originally scheduled for October 2023, but was continuously postponed for various reasons. According to the latest news, the Cancun upgrade is scheduled for March 13, 2024. For this reason, the Ethereum client Geth has released version v1.13.12 on February 9, laying the foundation for the Ethereum mainnet Cancun hard fork. This upgrade is the key to further expansion of Ethereum. It can increase the number of transactions that the Ethereum network can respond to per second, and will also open a new stage of development for Ethereum data storage and retrieval capabilities. After the upgrade is completed, the Gas fee required for digital asset transactions on the Ethereum Layer2 network will be significantly reduced, and the reduction may be as much as 14 times. It can be seen that the performance improvement brought about by the upgrade will greatly benefit the long-term development of Ethereum.

In addition to the upgrade, the popularity of the re-staking protocol in recent months has also driven the market's attention to Ethereum. According to DefiLlama data, after the temporary cancellation of the staking cap, the re-staking protocol has grown rapidly and is currently ranked sixth among many protocols, with a total TVL of over $6.99 billion. Taking the typical project EigenLayer as an example, EigenLayer's TVL increased from $2.15 billion on February 5 to $6.05 billion on February 10.

Ethereum hype has already begun

With all the above expectations, Ethereum lived up to expectations and broke through $3,000 again. From the market point of view, large institutions have also shown their bullish trend on Ethereum with their actions. According to the on-chain tracker Spotonchain, a large number of whales have begun to hoard Ethereum. Data shows that about 65,000 ETH were purchased by unknown wallet addresses in the past three days. The supply of stablecoins also reflects a similar trend. According to DefiLlama data, the supply of Ethereum stablecoins has increased by 4.4% since January 1, from $68 billion to $71 billion.

It seems that everything is going well, but many industry insiders have expressed other concerns. After the Bitcoin ETF was approved, Bitcoin quickly fell by 15% and did not return to its highs until a month later. This situation also made many people believe that the Ethereum ETF will also face a huge sell-off after it is approved. In addition, considering the existence of the pledge mechanism, analysts at the rating agency Standard & Poor's Global said that the Ethereum ETF may "bring new centralization risks to the blockchain network" because institutional custody will make the control of ETH more centralized, although the decentralized protocol Lido currently accounts for 31% of the Ethereum share.

But in any case, the hype around Ethereum has already begun. A typical data is that since BlackRock first submitted an application for an Ethereum spot ETF on November 9, 2023, the price of Ethereum has risen by 27.9%. Prior to this, after BlackRock first submitted an application for a Bitcoin spot ETF, Bitcoin soared by 55%.

From this point of view, before the ETF application is finalized, opportunities and risks coexist, and the participants can only remain vigilant and manage their positions. After all, no matter how FOMO the outside world is, the final outcome of profits and losses will still be borne by themselves.