Coinbase Research on Friday released a new report suggesting that the odds of approval for a U.S. spot Ethereum ETF are higher than what the current market pricing indicates.
What Happened: According to the research, prediction market platform Polymarket is pricing in a 16% chance of approval by May 31, 2024, while the Grayscale Ethereum Trust ETHE is trading at a 24% discount to its net asset value (NAV).
However, Coinbase believes the likelihood of approval is closer to 30-40%.
David Han, a research analyst at Coinbase, notes that despite Ethereum‘s ETH/USD underperformance year-to-date, its long-term positioning remains robust.
Han states, “We think Ethereum has the potential to surprise to the upside later in the cycle.”
The approval of spot Bitcoin ETFs in the U.S. has significantly bolstered Bitcoin's store-of-value narrative and its status as a macro asset.
Han points out that a similar approval for Ethereum could unlock new capital inflows, especially given the regulatory clarity such ETFs provide.
“The potential approval of a spot ETH ETF removes impediments, opening up ETH to the same capital pools that only BTC currently enjoys,” Han explains.
However, the report acknowledges challenges.
While Ethereum benefits from both “store-of-value” and “technology-token” narratives, competition from other layer-1s like Solana SOL/USD and the growth of Ethereum layer-2s (L2s) impact its value accrual mechanisms.
Han adds, “Despite these challenges, Ethereum’s unique advantages, such as the maturity of its developer ecosystem and the utility of ETH as DeFi collateral, distinguish it from other smart contract networks.”
The research highlights that the approval of a spot ETH ETF is a matter of “when, not if.”
Han states, “The primary rationale used to approve the spot BTC ETFs applies equally to spot ETH ETFs. The correlation between the CME futures product and the spot exchange rates is sufficiently high.”
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Why It Matters: Polymarket currently prices the odds of approval at 14%, but Coinbase COIN argues that the odds are significantly higher, between 30-40%.
Han believes that the current challenging regulatory environment and the SEC’s silence with issuers contribute to the uncertainty.
“Even if the first deadline on May 23, 2024, encounters a rejection, litigation could reverse that decision,” he says.
The report also addresses the impact of alternative L1s on Ethereum.
Solana, for instance, has grown its decentralized exchange (DEX) volume share from 2% to 21% over the past year.
However, stablecoin issuance remains heavily dominated by Ethereum, indicating its continued trust and reliability among large capital holders.
In addition, Ethereum's ability to innovate amid decentralization is highlighted. Han notes, “Ethereum has enabled dynamic transaction burns, transitioned to proof-of-stake, and created blob storage for L2 scaling, all within a short period.”
As the Ethereum community continues to innovate, the report concludes that Ethereum's long-term strengths, including its role in DeFi and the proliferation of the Ethereum Virtual Machine (EVM), will sustain its dominance.
Han emphasizes, “The importance of potential spot US ETH ETFs cannot be understated. We think the market may be underestimating the timing and odds of a potential approval.”
What’s Next: In light of these developments, market participants and investors should keep an eye on Benzinga’s Future of Digital Assets event on Nov. 19, where industry experts will discuss the latest trends and future prospects in the digital assets space.
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