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Griffin Ardern is the head of the research department at BloFin Academy. Here is his analysis of the current cryptocurrency market situation. Some of the content has been translated by AI and may contain deviations.

Current Progress and Importance of Ethereum ETF Approval

Compared to Bitcoin ETFs, especially those based on Ethereum futures, Ethereum ETFs are relatively smaller in terms of scale and trading volume. The assets under management (AUM) of the largest Ethereum futures ETF are less than $100 million, significantly smaller than some Bitcoin ETFs. However, it is worth noting that this represents the largest AUM in Ethereum futures ETFs, with other AUMs even lower and considered negligible.

The approval of an Ethereum spot ETF may lead to increased investment, funding, and liquidity from the US stock market, supporting the price of Ethereum. This may mimic the impact of Bitcoin, where external liquidity significantly boosted its price, leading to new all-time highs in a relatively short period of time. However, challenges and uncertainties regarding the approval of Ethereum ETFs still exist.

If an Ethereum ETF is approved, it could set a new standard for other cryptocurrencies and provide an example for them to apply for their own ETFs, especially those seeking to launch spot ETFs for cryptocurrencies with similar features to Ethereum, such as proof of stake and staking mechanisms.

Entities like BlackRock approving an Ethereum ETF could pave the way for ETFs covering other cryptocurrencies, expanding the range of crypto assets available to investors through regulated financial products. Conversely, if the Ethereum ETF is rejected, it may mean that only cryptocurrencies following standards similar to Bitcoin, such as proof of reserves, will be considered for ETFs, excluding proof of stake (PoS) based cryptocurrencies from ETF consideration.

In summary, the approval of an Ethereum ETF is seen as a key and potentially transformative step for the future of cryptocurrency ETFs. It will not only benefit Ethereum but also set a precedent for how PoS-based cryptocurrencies can be integrated into mainstream financial products. The crypto community is eagerly anticipating this development as it could have a significant impact on liquidity, investment, and the broader acceptance of cryptocurrencies.

Given the current landscape and regulatory environment, the approval of an Ethereum ETF faces several significant challenges, especially from the perspective of the Securities and Exchange Commission (SEC). Under the leadership of Chairman Gary Gensler, the SEC has expressed a preference for cryptocurrencies that follow standards similar to Bitcoin. This presents a particular challenge for Ethereum due to its security and securitization risks. (The SEC recently began investigating the Ethereum Foundation after Ethereum's transition to PoS)

Concerns about centralization and security labels were raised due to Ethereum's initial coin offering (ICO) in 2014 and the distribution of its assets. A significant amount of Ethereum was sold during its ICO, and a considerable portion is still held by the Ethereum Foundation and early investors. This concentration of holdings may be seen as deviating from the decentralized characteristics unique to cryptocurrencies like Bitcoin.

Furthermore, the transition of Ethereum from proof of work (PoW) to proof of stake (PoS) introduces another layer of complexity. This transition could change the classification of Ethereum, moving it from the "commodity" category closer to the category of securities, as the staking mechanism and the rewards it generates are similar to stock dividends.

The SEC has also expressed concerns about potential market manipulation within the Ethereum ecosystem, particularly considering the influence that major holders and protocols involved in staking could exert on the network. Despite its deflationary mechanism, Ethereum's unlimited supply may also give the SEC pause, given its preference for assets with capped supply or explicit deflationary policies.

Based on these considerations, it appears that the likelihood of the SEC approving an Ethereum spot ETF in the short term is relatively low. Concerns surrounding security classification, centralization, market manipulation, and the shift to PoS pose significant obstacles. However, the future remains uncertain, especially if Ethereum's infrastructure and governance effectively address these concerns, regulatory perspectives may evolve. The possibility of approval exists but is overshadowed by significant regulatory challenges that need to be navigated.

Will the SEC Respect the Arguments in Greyscale's Court Order?

Greyscale's legal challenge to the SEC, rejecting similar applications for Ethereum ETF approval while approving Bitcoin ETFs, has raised significant concerns about the cryptocurrency regulatory environment. This challenge highlights the perceived inconsistency in the SEC's views on different cryptocurrencies and their evaluation standards.

The SEC's concerns about Ethereum, particularly regarding its transition from proof of work (PoW) to proof of stake (PoS), the potential for market manipulation, and Ethereum's overall security classification, are key to its hesitation in approving an Ethereum ETF. If Greyscale's arguments effectively challenge the SEC's position and if the court supports Greyscale's views, it may force the SEC to reconsider its stance.

If the court supports Greyscale, indicating that the SEC's handling of Ethereum ETF applications lacks consistency or fairness compared to Bitcoin, the SEC may come under pressure to make its approval process more consistent. This may involve re-evaluating Ethereum under its new PoS mechanism and addressing specific concerns about security, decentralization, and market manipulation risks.

However, it is important to note that the SEC's approval decision is complex and multifaceted, considering a range of regulatory, market stability, and investor protection concerns. The outcome of Greyscale's challenge may indeed influence the SEC's approach, but the extent of its impact on the approval of an Ethereum ETF remains uncertain.

Price Before and After the Announcement

In the cryptocurrency options market, traders have begun to consider the potential announcement of the approval or rejection of an Ethereum ETF. This anticipation is reflected in the implied volatility (IV) of Ethereum options, especially those expiring in May and June, showing higher IV. This indicates that traders expect greater volatility and price movements in Ethereum during the announcement period.

According to the latest data, if an Ethereum spot ETF is not approved or directly rejected, the price of Ethereum is expected to drop significantly, by over 20% to 25%. Conversely, if the ETF is approved, the price may rise by a similar magnitude, reflecting the market's response to positive news, similar to past significant cryptocurrency announcements.

Interestingly, the skewness of the options market—reflecting the imbalance between call and put option prices—shows a negative skew for options expiring in the near term, such as March and April. This indicates a market tendency to hedge against potential downward risks of ETF non-approval. For longer-term options, the skewness appears to be neutral to slightly positive, suggesting a more balanced or slightly optimistic view of Ethereum's future beyond the immediate announcement period.

Additionally, the butterfly index, which provides insights into pricing tail risks, shows that Ethereum's index is significantly higher than Bitcoin's. This may even exceed the index's annual average, indicating that traders, investors, and market makers have priced in higher tail risks for Ethereum. This heightened concern may be related to the uncertainty of ETF approval and its potential impact on Ethereum's price.

Impact of the Bank of Japan's Interest Rate Adjustment

The Bank of Japan's (BoJ) interest rate adjustment is of significant importance, especially considering yen carry trades, a popular strategy in the global financial market. Yen carry trades involve borrowing yen at historically low interest rates and investing in higher-yielding assets elsewhere, usually denominated in US dollars. This strategy profits from the interest rate differential between the two currencies and the potential appreciation of the investment assets.

Before the Bank of Japan potentially raises interest rates, investors can borrow yen at low costs, invest in high-yield assets in the US or other markets, and benefit as long as the yen remains weak against the dollar. Japanese government bonds (JGBs) used as collateral will maintain their value, facilitating this trade.

However, if the Bank of Japan decides to raise interest rates, the dynamics of this trade may undergo dramatic changes. Higher interest rates in Japan may strengthen the yen against the dollar, reducing the attractiveness of yen carry trades. Additionally, if the Bank of Japan ends its yield curve control (YCC) policy aimed at maintaining long-term rates at target levels, it may lead to an increase in JGB yields and a decrease in their prices, affecting the collateral value of carry trade participants.

Due to the increase in interest rates and the potential end of YCC, investors may be forced to liquidate their dollar-denominated investments to repay yen-denominated loans. This could lead to selling pressure on various assets, including US stocks, cryptocurrencies, precious metals such as gold and silver, oil, and other commodities. Essentially, assets that have benefited from the inflow of cheap yen may see reduced demand and price declines.

The impact of the Bank of Japan's interest rate adjustment extends beyond arbitrage trading itself. It marks a shift in Japan's monetary policy stance, potentially leading to a stronger yen. A stronger yen would make yen-denominated assets more attractive and could reverse the flow of funds from dollar-denominated assets to yen-denominated assets, affecting global asset prices and potentially prompting a reassessment of risk in global financial markets.

Discussion on the Current Cryptocurrency Market

The volatility of the cryptocurrency market has led to significant price declines, forcing those unable to meet their debt obligations in a timely manner to face additional margin calls or even liquidation. This situation requires the sale of assets to repay debts, potentially providing an opportunity for investments such as the yen or undervalued assets like the Nikkei 225. The strengthening of the yen implies an improvement in the performance of yen-denominated assets, encouraging investors to shift from dollar-denominated assets to yen-denominated assets, thereby affecting the liquidity and value of the former.

Under these conditions, Bitcoin appears to be performing better, benefiting from more diversified sources of liquidity, including the US stock market and the cryptocurrency market. Additionally, Bitcoin's price has been supported by market maker hedging activities during market downturns, unlike Ethereum, which relies more on cryptocurrency market liquidity and lacks similar support, leading to potential larger price declines.

Observation of on-chain data shows that despite recent price increases, large Ethereum holders ("whales") continue to sell, indicating a lack of confidence in the short-term price stability of Ethereum. This selling pressure is exacerbated by panic selling during price declines. The decline in the exchange rate between Ethereum and Bitcoin reflects investors' expectations of poor performance of Ethereum compared to Bitcoin.

It is expected that after the Federal Reserve rate cut, Ethereum's performance may improve, potentially increasing market liquidity. However, currently, Ethereum lacks diversified sources of liquidity, primarily relying on stablecoins such as USDT and USDC. In contrast, Bitcoin benefits from multiple liquidity channels, implying that any potential market downturn may be shorter for Bitcoin, while Ethereum and other altcoins may experience a longer period of stagnation.

The approval and launch of a Bitcoin spot ETF has solidified Bitcoin's position as a key global macro asset closely linked to traditional markets, unlike Ethereum and other altcoins, which lack such connections. This difference means that altcoins can only perform better when market conditions, such as an increase in cryptocurrency market liquidity due to a Federal Reserve rate cut, support them.

Market inflow dynamics are changing, and despite outflows from products like GBTC, Bitcoin asset allocation continues to drive sustained interest, especially in ETFs provided by BITO and BlackRock. Even in the overall market outflow scenario, this sustained inflow emphasizes Bitcoin's resilience and its attractiveness to US stock market and institutional sector investors, expected to receive continued support.

Altcoins vs. Bitcoin

When discussing altcoins and Bitcoin, we are essentially seeking the most favorable outcomes. However, focusing on more realistic scenarios, excluding external factors, reveals that the price movements of Ethereum and other altcoins are mainly influenced by two factors. Firstly, the allocation of liquidity in the cryptocurrency market plays a crucial role. Approximately $1.5 trillion in funds is allocated in the crypto market, with Ethereum and altcoins competing for this liquidity. However, in the long term, the Federal Reserve is expected to implement interest rate cuts, with two to three rate cuts expected this year and possibly more next year. This adjustment may reintroduce liquidity into the crypto market, subsequently supporting the prices of Ethereum and other altcoins.

Currently, Bitcoin is expected to perform stronger as overall market conditions are bullish. Meanwhile, altcoins may be relatively weak in limited liquidity conditions. This situation is particularly relevant for traders in the Asia-Pacific region, who play an important role in investing in lesser-known coins and altcoins. Currently, these traders tend to buy more Bitcoin and other mainstream cryptocurrencies, such as Ethereum or Solana.

The cryptocurrency market is increasingly segmented into submarkets. One focuses on Bitcoin and mainstream cryptocurrencies, driven by global macroeconomic changes. The other, referred to as the speculative market, includes Ethereum, certain emerging coins, and meme coins. In this segmented market, especially for traders from the Asia-Pacific region, they leverage limited liquidity through speculative trading.

Overall, while we are all exploring the best investment outcomes, considering various factors, including market liquidity, regulatory environment, and global macroeconomic impacts, the performance of Bitcoin, Ethereum, and other cryptocurrencies will differ. Future market trends will be influenced by numerous variables, including regulatory decisions, technological developments, and changes in investor sentiment. In this ever-changing environment, maintaining flexibility and continuous attention to market dynamics will be key to successful investment in the cryptocurrency market.

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