Co-founder of Ethereum: Potential approval of ETF will lead to supply tightening.

Ethereum co-founder and CEO of blockchain technology company ConsenSys, Joseph Lubin, said that the potential approval of a spot Ethereum ETF by the Securities and Exchange Commission (SEC) in the United States could significantly restrict the supply of Ether (ETH). This development is expected to be a watershed moment for Ethereum.

Joseph Lubin’s perspective

In an exclusive interview with DL News, Lubin predicts that the approval of the Spot Ethereum ETF will trigger a significant institutional demand. Considering that many institutions have already started their cryptocurrency investment journey through Spot Bitcoin ETFs, Ethereum has naturally become an important asset for diversifying investments.

“Lubin said, ‘Buying Ethereum through these ETFs will create a significant natural accumulation demand.’ But he also emphasized that the market situation of Ethereum will be significantly different from Bitcoin due to potential supply dynamics.”

In the context of creating ETFs, a key difference between Ethereum and Bitcoin lies in the availability of assets. On-chain data on the Ethereum network shows that over 27% of Ether has been staked in various protocols. These funds are locked in contracts to support the security and operation of the network, making them not easily tradable on the market.

Lubin pointed out: “A large amount of Ether is being invested in core protocols, decentralized finance (DeFi) platforms, or decentralized autonomous organizations (DAOs).” This structural difference indicates that ETF providers have limited Ether available for purchasing and allocating new ETF shares.

In August 2021, the Ethereum network implemented a transformative burning mechanism through the EIP 1559 proposal. This mechanism stipulates that a portion of Ether as transaction fees is permanently removed from circulation. This design aims to offset the growth of Ether’s supply and, in the long term, potentially enhance its scarcity.

With the growth of online activities, especially the possible further interest of new institutions in Ethereum through ETF, the burning mechanism introduced by EIP 1559 will gradually reduce the available supply of Ether, adding a new dimension to the potential supply tightening issue. Lubin commented on this change, saying, “This may represent a significant turning point.”

Ethereum price targets and concerns

The approval of the Ethereum spot ETF could have a significant impact on the market. Cryptocurrency analyst Miles Deutscher expects that once the Ethereum ETF is approved, it could replicate the significant price pump that Bitcoin ETF experienced after approval.

According to Deutscher’s analysis, Bitcoin (BTC) surged 75% within 63 days after the approval of Spot ETF. If Ethereum (ETH) ETF is approved and follows the same trend, according to his prediction, the price of Ethereum could reach $6446 on July 23rd.

Cryptocurrency analyst Miles Deutscher’s perspective | Source: X

However, there have been divergent opinions among analysts. Vetle Lunde, senior analyst at K33 Research, put forward some challenging views comparing Ethereum futures ETFs with Bitcoin futures ETFs. Lunde observed that Ethereum futures ETFs attract much less funding compared to Bitcoin futures ETFs before spot ETFs are approved.

“He pointed out: “Since its launch, the futures-based ETH ETF has attracted a total inflow of $126 million, which is roughly equivalent to the amount of funds flowing into BITX in the past three days. Moreover, the total assets under management (AUM) of the futures-based ETH ETF are only 7.4% of the AUM of the Bitcoin futures ETF before obtaining spot approval.””

This indicates that although the market is interested in Ethereum ETFs, the amount of funds attracted is relatively smaller compared to Bitcoin ETFs, which may suggest that Ethereum ETFs face some difficulties in replicating the success of Bitcoin ETFs.

“Meanwhile, cryptocurrency analyst Vijay Boyapati expressed his concerns about the structural differences of ETFs, particularly pointing out that the current ETF structure cannot achieve staking functionality. Boyapati stated, ‘It is worth noting that even if an ETH ETF is approved, it will fall far short of representing its underlying assets compared to a BTC ETF, as the Securities and Exchange Commission (SEC) is likely to continue disallowing ETF applicants from staking.’ This implies that an ETH ETF may not fully reflect the value growth brought by Ethereum staking.”

This structural limitation could result in ETFs not fully capturing the potential appreciation of Ethereum prices. As emphasized by Alex Thorn, the Head of Research at Galaxy, a cryptocurrency financial services company, if an investor purchased $10,000 worth of ETH on the day of the Ethereum merge in September 2022 and held it without staking, their returns would be 8% lower compared to investors who purchased ETH and staked it to receive additional issuance, fees, and MEV rewards. This demonstrates that the lack of staking opportunities in ETH ETPs could have a significant negative impact on investors’ overall returns.

Conclusion:

With discussions and predictions emerging about the potential approval of Ethereum spot ETF, market participants are closely following how this development will shape the future of Ethereum. Despite concerns about the ETF structure, supply dynamics, and regulatory environment, it is undeniable that Ethereum, as an innovative encrypted asset, is gradually being recognized by the mainstream financial industry for its potential in both technology and socio-economic structure.

With the further integration of institutional investors and traditional financial markets, Ethereum may usher in new development opportunities and also face a series of new challenges. In any case, the approval of Ethereum ETF will undoubtedly become an important milestone in the history of cryptocurrencies, and its impact on the market is worth our continued attention.