Market Preps for ETF Bummer

Bracing for denial? ETH’s relative value to BTC has been walloped throughout the month of May. Why can’t Ether catch a bid, and what impact could the looming spot ETH ETF final decision next week have on your bags?

The likelihood of the Securities and Exchange Commission (SEC) approving a spot ETH ETF by the end of May has doubled from last week, rising from 7% to 14%, but this probability has steadily declined throughout 2024 and remains at dismal levels compared to the peak of 76% seen at the beginning of the year.

Prediction market speculators were emboldened by news last Friday that Ark Invest had removed staking from its spot ETH ETF application, seemingly suggesting that approval of non-staking applications is imminent, yet participants in more liquid spot markets appear to be operating on the assumption that this announcement was a nothing burger.

While the prediction market-implied odds of approval have ticked up slightly, the ETH/BTC ratio fell an additional 2% this weekend, compounding on losses accrued throughout May; it currently rests beneath the key 0.05 level and is pressed into 2024 lows.

According to a Fortune report from March, the SEC began subpoenaing crypto companies for information about their dealings with the Ethereum Foundation shortly after the network’s transition to proof-of-stake in September 2022 with the hopes of classifying the asset as a security.

Yesterday, Van Buren Capital's Scott Johnsson highlighted that documents released by the SEC note the agency “is providing notice of the grounds for disapproval under consideration.”

While this provision was included in every spot ETH ETF request for comment, it was notably absent from all spot BTC ETF filings, suggesting that the SEC may deny spot ETH ETFs on the grounds that they are improperly filed as commodity-based trust shares as they actually hold securities, a point potentially proven by information received from subpoenas.

Despite the SEC's apparent efforts to classify Ether as a security, it's important to note that the regulator approved ETH commodity futures-based ETFs last October.

This decision came after Ethereum’s transition to PoS, indicating that the SEC has already ceded jurisdiction of the asset and solidified its status as a commodity, as the instruments would be illegal (and therefore not trading) if the underlying asset was a security.

Market participants are overwhelmingly anticipating denial for spot ETH ETFs come the SEC’s first final decision deadline for VanEck's application on May 23; however, given the agency’s prior approval of commodity futures ETFs, it is difficult to see how the SEC could justify not listing these products in the absence of new information generated from their subpoenas.