Coinbase says market 'underestimating' timing and odds of spot Ethereum ETF approval

Coinbase analyst David Han said the market may be underestimating the chances of a potential spot Ethereum exchange-traded fund approvals, despite broad market consensus that won’t happen anytime soon.

“We think the market may be underestimating the timing and odds of a potential approval,” Han wrote in a Thursday report. “Ether may yet have the potential to surprise to the upside in the coming months [and] does not appear to have major sources of supply-side overhangs such as token unlocks or miner sell pressure.”

The Securities and Exchange Commission has key deadlines coming up on May 23 and May 24 to decide whether to approve the applications for spot Ethereum ETFs submitted by VanEck and ArkInvest/21 Shares, respectively.

Expectations of approval this month have declined considerably, with Bloomberg ETF analyst Eric Balchunas describing the odds of approval as “slim to none” amid the SEC’s apparent silence with issuers.

However, Coinbase said the existence of a U.S. spot Ethereum ETF remains a question of “when, not if,” given a rationale used to approve the spot Bitcoin ETFs — that the correlation between the CME futures product and the spot exchange rates is sufficiently high — also applies to Ethereum. 

Assuming the correlation holds, remaining possible justifications for disapproval are likely to relate to the differences between Ethereum and Bitcoin, Han said, the most relevant being Ethereum’s proof-of-stake mechanism.

Without clear regulatory guidance on staking, Coinbase believes spot Ethereum ETFs that include staking rewards are unlikely to be approved soon. Interestingly, Ark Invest cut the staking component of its spot Ethereum ETF application last week. “That said, this shouldn’t impact the status of unstaked ether in our view,” Han noted. 

The Ethereum-based decentralized prediction market platform Polymarket is pricing in odds of a May approval at 16%, and the Grayscale Ethereum Trust (ETHE) is trading at a 24% discount to net asset value. 

However, as crypto increasingly becomes an election issue, and with possible litigation on the horizon in the event of denials, Coinbase believes the odds of approval are closer to 30-40%.

On Tuesday, Balchunas suggested that a newly unearthed detail in a spot Ethereum ETF filing showed that the SEC was potentially considering ether a security in likely ETF denials.

Ether’s underperformance in 2024

Ether has underperformed many other large-cap cryptocurrencies year-to-date, gaining around 33% in 2024 compared to bitcoin’s 57% price increase and solana’s 64%. 

The ETH/BTC ratio is at its lowest level since April 2021 at 0.045, according to TradingView.

ETH/BTC chart. Image: TradingView.

Meanwhile, the SOL/ETH chart is near all-time highs.

SOL/ETH chart. Image: TradingView.

Ether's other potential tailwinds

Despite poorer sentiment surrounding ether of late, the Coinbase analyst remained positive on its longer-term prospects. “Ethereum has some of the strongest persistent demand drivers in crypto,” benefitting from a mix of both “store-of-value” and “technology-token” narratives, Han said.

While the approval of spot bitcoin ETFs helped to reinforce bitcoin’s store-of-value narrative and status as a macro asset, ether faces open questions about its position in the crypto market, with competing Layer 1 blockchains like Solana detract from Ethereum’s prior dominance as the “go-to” network for decentralized app (dApp) deployment, according to Han.

Nevertheless, Coinbase believes that Ethereum still offers important advantages that distinguish it from other smart contract networks, such as the maturity of its developer ecosystem, the proliferation of its Ethereum Virtual Machine platform, the utility of ether as collateral in DeFi and the decentralization and security of the network.

“We find that ether’s ability to capture both store-of-value and technology-token narratives is demonstrated by its historical trading patterns. Ether trades at high levels of correlation to bitcoin, exhibiting behavior in line with bitcoin’s store-of-value patterns. At the same time, it also decouples from bitcoin during periods of prolonged bitcoin price appreciation like other altcoins, trading like a tech-orientated crypto. We think that ether will continue to straddle these roles, and has room to outperform in 2H24 despite underperforming YTD,” Han concluded.