Potential Approval of Ethereum ETF Could Surprise Investors, Coinbase Research Suggests

Coinbase Institutional recently shared insights suggesting that the approval of a spot Ethereum (ETH) exchange-traded fund (ETF) by the U.S. Securities and Exchange Commission (SEC) might surprise investors. In their new note, Coinbase asserts that it’s not a matter of if, but when an ETH ETF will be approved. They believe the SEC is likely evaluating the decision with a rationale similar to that used for approving Bitcoin (BTC) ETFs earlier this year.

Coinbase highlights the strong correlation between the price of spot BTC on the Chicago Mercantile Exchange (CME) and Ethereum, suggesting a similar rationale for ETH ETF approval. “While there is uncertainty around a timely approval given the SEC’s apparent silence with issuers, we think that the existence of a US spot ETH ETF remains a question of when, not if. In fact, the primary rationale used to approve the spot BTC ETFs applies equally to spot ETH ETFs. That is, the correlation between the CME futures product and the spot exchange rates is sufficiently high such that ‘CME’s surveillance can be reasonably expected to detect… misconduct [in the spot market],” Coinbase explains.

Correlation and Market Dynamics

Coinbase further elaborates that the SEC’s correlation study period for spot BTC began in March 2021, just one month after CME ETH futures were launched. They believe this was a deliberate choice to facilitate a similar reasoning for ETH markets. “Correlation analysis previously presented by Coinbase and Grayscale suggests that the spot and futures correlation for ETH markets is similar to that for BTC,” they state.

Despite the low probability of an Ethereum ETF being approved by the end of May, Coinbase notes that markets could still experience an unexpected approval from the SEC. “We think there is room for surprise to the upside on this decision. Polymarket is pricing in odds of a May 31, 2024 approval at 16%, and the Grayscale Ethereum Trust (ETHE) is trading at a 24% discount to net asset value (NAV). We believe the odds of approval are closer to 30-40%,” Coinbase suggests.

As cryptocurrency becomes an increasingly significant election issue, Coinbase argues that the SEC might be reluctant to expend political capital to support a denial of the ETF. “Even if the first deadline on May 23, 2024 encounters a rejection, we think there is a high likelihood that litigation could reverse that decision,” they posit. Additionally, not all spot ETH ETF applications need to be approved simultaneously. Coinbase points to Commissioner Uyeda’s statement regarding the spot BTC ETF, which criticized the motivation to prevent a first-mover advantage.