Who is the biggest winner after the spot Bitcoin ETF is approved?

• Ethereum and altcoins rallied strongly last week in response to the approval of a slew of Bitcoin ETFs. ETH outperformed BTC for the first time since October 2022.

• Activity in ETH derivatives markets has also increased, suggesting a possible shift in capital flows. Bitcoin still dominates in terms of open interest and trading volume, but Ethereum has recovered some of its losses since the ETF was approved.

• We also evaluate the relative performance of Solana, scaling tokens, and various sector indices versus BTC and ETH as a measure of risk appetite in a post-ETF world.

Prior to the approval of the Bitcoin ETF, there was an increase in speculation in the digital asset market, followed by a widespread sell-off in the days following the news event. As we discussed, the market priced this event in close to perfection. As of this writing, the price of Bitcoin has fallen 18% to $39,500.

Despite this correction, investors continue to look to the future and ask questions like: Who’s next? Will there be a new round of speculation regarding Ethereum ETF approval? Will Solana continue to outperform both ETH and BTC? Or is there now an appetite for risk and smaller-cap tokens?

ETF speculation

Since mid-October, the digital asset market has performed very strongly, with ETF speculation and capital rotation dominating.

Since BlackRock’s initial ETF filing, Bitcoin’s market cap has grown +68.8%, with the total altcoin market cap also growing +68.9%. However, Ethereum’s relative momentum has been weaker, underperforming the broader altcoin space by 17%.

Zooming out, we can see that Bitcoin has generally become more dominant over the past few years. Since the FTX crash in November 2022, BTC’s market cap dominance has risen from 38.9% to 49.8%.

On the other hand, ETH maintained its market capitalization dominance, accounting for 18.9% to 18.2%. In the cryptocurrency market, it was mainly altcoins that lost market share, with their market capitalization dominance falling from 28.3% to 24.2%, while the share of stablecoins also fell from 13.9% to 7.8%.

Shortly after the Bitcoin ETF was approved, several issuers have submitted or expressed their willingness to advocate for Ethereum spot ETFs. Although it may be more challenging to get approval for ETH-based ETFs as the SEC may view Ethereum more as an investment contract, the market seems to be expressing optimism.

In recent weeks, ETH prices have surged more than 20% relative to BTC, posting its strongest quarterly, monthly, and weekly performance since the end of 2022.

Meanwhile, ETH and altcoin market cap dominance in general have seen a small rebound. ETH’s market cap dominance has risen by 2.9% compared to Bitcoin.

Meanwhile, the amount of net profit locked by ETH investors has hit a multi-year high. While profit-taking has increased since mid-October, the peak on January 13 reached over $900 million per day, consistent with investors taking advantage of the “sell the news” momentum.

ETH’s positive market sentiment is supported by another indicator: the net unrealized profit and loss (NUPL) of short-term token holders. STH-NUPL broke above 0.25 for the first time since its ATH in November 2021.

This suggests that ETH sentiment is gradually warming up, but the market tends to pause and digest profit-taking allocation pressure. Historically, such sentiment shifts among short-term holders have coincided with local peaks during macro uptrends.

Derivatives shift focus

Given Ethereum's recent rally, it's worth checking its derivatives markets to gauge how leverage markets are reacting. In recent weeks, we can see a significant increase in trading volume for futures and options contracts. The total volume of ETH markets is $21.3 billion per day, exceeding the average volume in 2023 ($13.9 billion), but still far from the typical levels of 2021-2022.

Given the dominance of futures open interest, we can also compare the relative size of the ETH derivatives market to BTC. In January 2022, BTC perpetual swaps accounted for 55% of open interest, and have since risen to 66.2%.

Conversely, ETH open interest dominance fell from 45% to 33.8% between 2022 and 2024. However, after the ETF was approved, ETH regained some market share, rebounding to about 40% dominance by this metric.

The funding rate premium for ETH futures is also relatively large, indicating a relatively high risk premium compared to Bitcoin. ETH funding rates have exceeded BTC over the past three months, but have not seen a significant increase in recent weeks. This suggests that speculative interest in Ethereum's relatively high price movements has not yet increased significantly.

Interestingly, when the ETH-BTC funding rate spread spikes above its 1-year average, it often coincides with local peaks in ETH price.

Ethereum or altcoins?

Competition in the digital asset market is extremely fierce. ETH not only competes with Bitcoin for capital flow, but also competes with other Layer 1 blockchain tokens for capital flow.

Solana (SOL) has had an excellent 2023, with last year’s price performance still outstanding despite a major setback due to its association with FTX. SOL has gained considerable market share over the past 12 months, with the SOL/BTC ratio fluctuating between 0.0011 and 0.0005 SOL/BTC.

The SOL/BTC ratio has increased by 290% since October 2023, significantly outperforming ETH during this period. Interestingly, unlike ETH, SOL’s price did not see any significant upward revaluation after the BTC ETF was approved.

As mentioned at the beginning of this report, altcoin market capitalization has risen by nearly 69% since the BlackRock Bitcoin ETF filing. When we break down the altcoin market into different sectors, it becomes clear that the main drivers of this trend are related to tokens related to Ethereum scaling solutions such as OP, ARB, and MATIC.

Stake and GameFi tokens have also outperformed BTC since the end of last year. In early 2023, the Stake-Token/BTC ratio increased by +103%, but then fell by 65% ​​until bottoming out in December. Similarly, the GameFi-Token/BTC ratio increased by +55% in February 2023 and has since fallen by 75%.

Scaling tokens reached their peak performance later in the year, with the Scaling token/BTC ratio rising 95% in Q2 and Q3 2023. It is worth noting that Arbitrum tokens were not launched until March 2023.

All indexes saw small gains following the approval of the Bitcoin ETF, again showing some risk appetite as Bitcoin sold off following the news.

However, altcoins have underperformed in recent weeks compared to ETH. ETH has outperformed altcoins overall, with a 4.2% increase in global dominance. This makes ETH the biggest winner of the market movement following the ETF approval.

Summarize

The approval of a new Bitcoin ETF has become a classic sell-off news event, leading to a few weeks of volatility in the market. ETH has performed strongly and has become a short-term winner. ETH investors have seen a multi-year high in net profits, indicating that they have some willingness to sell potential ETH ETF capital rotation for speculation.

Solana has also emerged as a strong competitor in the race for Layer 1 blockchains in 2023, despite not seeing any noticeable strength in recent weeks. The entire altcoin industry has also gained some momentum from the excitement about ETFs, and investors will begin to face another wave of speculation.