Analysis of the “Giant Effect”: How BlackRock’s Ethereum and Bitcoin Spot ETFs Affect the Crypto Market

After submitting an application for a Bitcoin spot ETF to the U.S. Securities and Exchange Commission, regulatory documents showed on the evening of November 9 that global asset management giant BlackRock had registered the iShares Ethereum Trust in Delaware. After the news was released, Coingecko data showed that the ETH price briefly broke through $2,000 and once broke through the $2,100 resistance level, setting a record high in the past year.

In fact, the same thing is happening with spot Bitcoin ETFs. In June of this year, BlackRock submitted an application for a spot Bitcoin ETF to the U.S. Securities and Exchange Commission, which also triggered widespread discussion in the crypto community, making the crypto community increasingly concerned about the so-called "giant effect."

We know that in the early days of cryptocurrency development, the connection between Bitcoin and Ethereum and the global macroeconomy was not close. However, as time goes by, as the two largest decentralized networks in the world, the application of Bitcoin and Ethereum has become more and more extensive, and their price trends have gradually converged with the global economic trend. The following figure shows the year-on-year growth rate of Bitcoin and global M2 money supply from 2014 to 2023:

So why are spot ETFs from traditional financial giants helping to drive up Bitcoin and Ethereum prices?

First, spot ETFs from traditional financial giants can quickly bring liquidity to the crypto market: spot ETFs incorporate cryptocurrencies such as Bitcoin and Ethereum into the traditional financial market, and investors can trade them through traditional securities accounts, which will improve investment convenience. Spot ETFs provide investors with a safe way to invest in cryptocurrencies, which is bound to increase the liquidity of cryptocurrencies. Increased liquidity means that investors can buy and sell cryptocurrencies more easily, which will help stabilize prices.

Secondly, the spot ETFs of traditional financial giants can reduce the investment costs of Bitcoin and Ethereum: Spot ETFs reduce the investment costs of cryptocurrencies such as Bitcoin and Ethereum to the level of traditional financial markets, and also lower the threshold for investing in cryptocurrencies, which will attract more individual investors to enter the cryptocurrency market. Individual investors' funds are usually small in scale, but they are numerous, and their entry will also have a certain driving effect on market prices.

In fact, this trend has already been seen in Bitcoin futures ETFs. Data do not lie. Since 2021, institutional investment preferences for Bitcoin exposure have been rising. According to statistics disclosed by VettaFi, a financial index analysis agency (as shown in the figure below), as of November 2023, the ProShares Bitcoin Strategy ETF (BITO) has become the most actively traded pan-foreign exchange ETF, and its average trading volume is significantly higher than that of gold ETFs.

Finally, spot ETFs from traditional financial giants can attract institutional investors: spot ETFs expand the investment scope of cryptocurrencies such as Bitcoin and Ethereum to investors in traditional financial markets, thereby promoting the healthy development of the entire market. In fact, the approval of spot ETFs is seen as a symbol of the legitimacy of the cryptocurrency market, which will attract more institutional investors to enter the cryptocurrency market. Institutional investors usually have larger funds, so their entry will have a greater driving effect on market prices.

Another question that concerns the crypto community is how spot ETFs from traditional financial giants affect the prices of Bitcoin and Ethereum?

First, in terms of time, the rising trend of Bitcoin and Ethereum prices is basically consistent with the approval process of spot ETFs by traditional financial giants. On November 10, 2023, it was reported that the U.S. Securities and Exchange Commission (SEC) may approve 12 spot Bitcoin ETFs by November 17. Affected by this, Bitcoin and Ethereum prices rose by 6% and 8% respectively on November 10.

Secondly, from the perspective of market sentiment, the approval of spot ETFs by traditional financial giants is seen as a symbol of the legitimacy of the cryptocurrency market, which will attract more institutional investors to enter the cryptocurrency market. Institutional investors usually have larger funds, so their entry will have a greater driving effect on market prices.

Third, from a technical perspective, the prices of Bitcoin and Ethereum broke through their previous highs on November 10, indicating that the market's bullish sentiment towards the two cryptocurrencies has increased.

Of course, the application of spot ETF by traditional financial giants is not the only factor affecting the cryptocurrency market. Other factors may also have an impact on the prices of Bitcoin and Ethereum. For example, factors such as the global economic situation and inflation expectations will also affect investors' confidence in cryptocurrency investment. But overall, the spot ETF brought by traditional financial giants is good news for the development of the cryptocurrency market.