Approved for listing, ten years in the making: An article reviews the journey of Ethereum ETF

Author: Jessy, Climber, Golden Finance

On July 23, Beijing time, the U.S. SEC officially announced that Ethereum spot ETF products can be listed for trading, which is undoubtedly a historic and glorious moment for Ethereum.

Yesterday also happened to be the tenth anniversary of Ethereum's official launch of ICO financing. Along the way, Ethereum has continued to prove its value. After years of regulatory resistance and countless revised registration documents, the 19 b-4 form of the spot Ethereum ETF was approved in May this year, but it still needs its S-1 registration statement to take effect before it can officially start trading. Two months later, the spot Ethereum ETF finally entered the market and became the representative of cryptocurrency after Bitcoin.

The official approval for listing and trading also directly proves that Ethereum is worthy of the reputation of "the king of ten thousand chains". After a long ten-year journey, we might as well re-understand Ethereum and explore the true value of this "world computer" that has been questioned and controversial, as well as the impact of the Ethereum spot ETF on the development of the entire encryption industry.

1. The past and present of Ethereum

Ethereum is a decentralized open-source blockchain platform with smart contract functions. ETH is the native cryptocurrency of the platform and is the second largest cryptocurrency after Bitcoin in terms of market value. As of the time of writing, its market value is approximately US$420 billion.

Ethereum is a programmable blockchain network and ETH is the token that drives this network. Bitcoin is the first killer application of blockchain, but due to the lack of programmability, it is difficult to extend more functions beyond the function of value storage. Vitalik Buterin, as an early researcher of Bitcoin, hopes to support more decentralized applications based on blockchain network programming, so Ethereum came into being.

Chronology:

2013

At the end of 2013, Ethereum founder Vitalik Buterin released the first version of the Ethereum white paper, and gradually gathered a group of developers who recognized the concept of Ethereum in the global cryptocurrency community and launched the project.

From December 2013 to January 2014, the focus of Ethereum's work was on how to launch the vision described by Vitalik in the Ethereum white paper. The team finally agreed that the Genesis presale was a good idea. After a long and multi-faceted discussion, in order to create a suitable infrastructure and legal strategy, the team decided to postpone the original ether presale in February 2014.

2014

February 2014 was a very important month for Ethereum. Ethereum made rapid progress in all aspects: community growth, code writing, wiki content writing, business infrastructure and legal strategy. In this month, Vitalik first announced the Ethereum project at the Miami Bitcoin Conference and held the first "Ask Us Anything" event on Reddit. The core development team became a world-class cryptocurrency team.

In July 2014, Ethereum conducted a 42-day pre-sale of ether, raising a total of 31,531 bitcoins, which was equivalent to $18.43 million based on the bitcoin price at the time, making it the second largest crowdfunding project at the time. The final number of ethers sold was 60,102,216.

2015

In March 2015, the team released a series of statements about the release of the Genesis block. In May, the team released the last test network (POC9), codenamed Olympic. In order to better test the network, during the Olympic stage, members who participated in the test network will receive ether rewards from the team. There are many forms of rewards, mainly including test mining rewards and bug submission rewards.

In July 2015, the official Ethereum network was released, which also marked the official operation of the Ethereum blockchain.

2016

On March 14, 2016 (Pi Day), Ethereum launched the Homestead phase. In this phase, Ethereum provided a graphical wallet, and the usability was greatly improved. Ethereum was no longer exclusive to developers, and ordinary users could also experience and use Ethereum conveniently.

2017

On March 1, 2017, the Enterprise Ethereum Alliance (EEA) was announced, which stated that it aimed to create an enterprise-level blockchain solution and jointly develop industry standards.

In July 2017, hackers made unauthorized function calls based on vulnerabilities in Parity wallet 1.5 or higher, launched attacks, and stole more than 150,000 ethers from three multi-signature contracts, causing a loss of about 30 million US dollars based on the market value at the time. In November, due to a code vulnerability accidentally triggered by "misoperation" by developers and users, all Parity multi-signature wallets that were repaired and created after July 20th were paralyzed, resulting in the freezing and locking of 930,000 Ethereum coins worth more than $154 million, which have not been recovered so far.

2018

In September 2018, Bitcoin core developer Jeremy Rubin published an article on the American technology media TechCrunch titled "The Collapse of ETH is Inevitable", saying that even if the Ethereum network continues to exist, the value of ETH will inevitably return to zero. Ethereum founder Vitalik acknowledged the existence of the problem in his response: "If Ethereum does not change, Jeremy Rubin's remarks may be correct." This remark caused the price of ETH to fall for a time. At the same time, many Ethereum projects began to move to other public chains such as EOS and TRON, and some people worried that Ethereum would be replaced. Under the influence of ETH's price, Ethereum's total network computing power began to shrink. According to etherscan.io's computing power statistics, Ethereum's total network computing power fell by 20% from September to November, from nearly 300TH/s to 240TH/s.

On December 10, 2018, Vitalik declared on Twitter that the future blockchain using sharding technology based on proof of stake (PoS) "will be thousands of times more efficient."

2019

In 2019, the Ethereum project carried out the Constantinople hard fork, which is a code that stimulates the Ethereum network to change its core consensus mechanism algorithm. After this code is launched, Ethereum will face the so-called "Ice Age", and the difficulty of creating new blocks on the network will continue to increase, and eventually slow down to a complete stop. After the hard fork upgrade, the state of the Ethereum blockchain will be "permanently" changed.

2020

Beacon chain genesis block. The beacon chain requires 16,384 accounts storing 32 staked ether to ensure a safe launch. This happened on November 27, 2020, meaning the beacon chain began producing blocks on December 1, 2020. This is an important first step in realizing Ethereum's vision.

2021

April 15, Berlin upgrade. The Berlin upgrade optimizes the fuel cost of certain Ethereum virtual machine operations and adds support for multiple transaction types.

August 5, London upgrade introduced EIP-1559(opens in a new tab), reforming the transaction fee market, along with changes to how gas fee refunds are handled and the Ice Age schedule.

October 27, Aquila upgrade. Aquila is the first planned beacon chain upgrade. It adds support for “sync committees” — support for light clients, and increases penalties for validator inactivity and slashable behavior as it progresses toward a merge.

December 9, Arrow Glacier network upgrade postpones the difficulty bomb by several months. This is the only change introduced in this upgrade, which is similar in nature to the Muir Glacier upgrade. Similar changes were made to the Byzantium, Constantinople, and London network upgrades.

2022

September 6, Bellatrix upgrade. The Bellatrix upgrade is the second planned beacon chain upgrade, preparing the beacon chain for the merge. It increases the penalty for validators due to inactivity and slashable behavior to their full value.

September 15, Paris upgrade (merge).

The Paris upgrade is a merge transition, and Ethereum's main function ends the proof-of-work mining algorithm and related consensus logic and starts proof-of-stake.

2023

April 12, Shanghai upgrade introduces stake withdrawals to the execution layer. The Shanghai upgrade runs in parallel with the Capella upgrade, enabling blocks to accept withdrawal operations, so stakers can withdraw ether from the beacon chain to the execution layer.

2024

March, Cancun upgrade. Deneb is the name of the upgrade to Ethereum's consensus layer (CL), while Cancun refers to the update to Ethereum's execution layer (EL).

2. ETHPrice Peaks and Valleys

ETH's price of nearly $4,000 and its achievement of becoming the second largest cryptocurrency by market value were not achieved in one day. From the Ethereum price trend chart below, we can intuitively see its glory and dark periods.

From the historical price trend chart of ETH, we can see that it has experienced several bull-bear conversion cycles, and this second-ranked cryptocurrency has also experienced a period of price frost and valley, which has been questioned by the market.

In January 2018, ETH reached its first historical high, with a price of about $1,300. Just a year ago, ETH was only around $10, and it rose 130 times during this period.

But the subsequent bear market caused ETH to fall to as low as around $100, a drop of more than 90%. This also made people doubt whether the Ethereum project really has huge value.

And with the arrival of the historical bull market in the crypto market in 2021, ETH has continuously refreshed its price history. It rose to about $3,900 in May of that year and to around $4,900 in November, with the highest point rising about 49 times from the lowest position in the previous bear market.

However, with the arrival of the bear market and the subsequent collapse of Terra and FTX, ETH fell from a high again, falling to as low as around $1,000 during the period. After that, this wave of silence did not improve until October 2023.

With the expected blessing of the passage of the US Bitcoin spot ETF, the crypto market ushered in a recovery, and ETH also rose accordingly. But the performance of ETH in this cycle has disappointed investors. Not only did it fail to follow the footsteps of its big brother BTC to set a new high, but its growth rate was also far behind that of similar public chains. On the other hand, Solana can be said to have been reborn from the ashes, with the price of the currency rising from around $20 to $210, almost recovering the decline in the bear market.

Entering 2024, ETH has twice tested $4,000, but the growth has been weak. However, this stalemate is expected to be broken with the approval of the Ethereum spot ETF.

3. Where is the price of Ethereum going?

The approval and launch of the Ethereum spot ETF indicates that the era of crypto integration into the mainstream has arrived.  

From the perspective of the market, the most direct benefit of ETF is ETH itself.  

There are different views on the market expectations. At present, the price of Ethereum has exceeded $3,500. Will it continue to rise after the spot ETF is passed?  

One view is that the price trend after the Bitcoin spot ETF was approved can be used as a reference to the BTC spot ETF, which fell slightly first and then rose sharply.  

The Bitcoin ETF was fully approved on January 10. Before its launch, we saw a strong rise in the price of BTC to $49,000, and then fell 21% to $38,500 in the next 12 days. After that, traders saw the optimistic daily cumulative inflows of 10 BTC spot ETFs (excluding Grayscale) and actively bought, and finally BTC rose 90% to $73,000.  

Following the pattern, so falling first and then rising is a view, and there are several arguments to support this view:  

First, ETH’s increase in this round is not much. The price of $3,500 is only about three times the bottom, while Bitcoin has reached a four to five-fold increase after the spot ETF was approved. It is generally believed in the industry that the price of ETH has been suppressed for too long in this round.  

However, the possibility of the same price trend repeating itself in ETH is clearly a risk, and when everyone expects this to happen, it often doesn’t actually happen, or at least the pullback should be much shallower.

The fundamental reason that supports the continuous rise in Ethereum prices is that the Ethereum spot ETF can attract a large amount of institutional capital inflows.  

If there is a large inflow of funds, then the rule in investment that "good news landing is bad news" will not hold true.  

Spot Ethereum ETFs may not attract the enthusiasm of investors like spot Bitcoin ETFs. For ETFs that target traditional institutions such as pension funds, endowment funds, and sovereign wealth funds, Ethereum is not popular. The reason may be that the institutional market holdings of Ethereum itself are smaller than those of Bitcoin. In the US market, ETH futures ETFs only account for about 5% of BTC futures ETF assets, of course, this does not represent the possible demand for spot ETH ETFs.  

Outside the United States, both Bitcoin and Ethereum exchange-traded products (ETPs) are listed, and the assets in the Ethereum ETP account for about 25%-30% of the assets of the Bitcoin ETP. Compared with the asset share of ETFs, Grayscale Research predicts that the net inflow of US spot Ethereum ETFs will reach 25%-30% of the net inflow of spot Bitcoin ETFs; or about $3.5 billion to $4 billion will flow in in the first four months or so (accounting for 25%-30% of the net inflow of $13.7 billion in spot Bitcoin ETFs since January).  

In general, the estimated demand for US spot Ethereum ETFs is about 25%-30% of the demand for spot Bitcoin ETFs. Ethereum's market value is about one-third of Bitcoin's market value. Calculated by market value, every $1 inflow into the spot Ethereum ETF may have a comparable impact on the price. However, if the estimated amount of inflows is one-third of the Bitcoin spot ETF, then in general, after the launch of the Ethereum spot ETF, its price trend and increase will actually be similar to that of Bitcoin.  

However, when everyone expects a fall before an increase, the price of Ethereum may not fall much, especially after the fall of the US election and the macroeconomic positive expectations such as interest rate cuts, everyone will hold the currency and wait to sell.  

There is also a view that Ethereum can no longer rise, and the current price has basically reached the stage top.  

From a valuation perspective, Ethereum's valuation can be said to be higher than Bitcoin when the spot Bitcoin ETF was launched in January. For example, a popular valuation indicator is the MVRV z-score. This indicator is based on the ratio of the total market value of a token to its "realized value": the market value based on the price at which the token last moved on the chain (rather than the price traded on the exchange). In January of this year, when the spot Bitcoin ETF was launched, its MVRV z-score was relatively low, indicating that the valuation was moderate and there may be more room for price increases. Since then, the crypto market has appreciated, and the MVRV ratios of Bitcoin and Ethereum have increased. This may indicate that there is less room for price increases after the spot ETH ETF is approved compared to the approval of the US spot Bitcoin ETF in January.  

Fourth, the impact of the Ethereum spot ETF on the development of the industry 

Why did the Ethereum spot ETF pass suddenly? One of the biggest reasons is that it was influenced by the election of the two parties in the United States and the shift in the attitude of the two parties towards encryption.  

On May 22 this year, the U.S. House of Representatives passed the Financial Innovation and Technology Act of the 21st Century ("FIT21"). This is a landmark legislation for the encryption market. The bill aims to establish a comprehensive regulatory framework for digital assets. The bill has received bipartisan support and received 279 votes in favor (67%). This event also shows that cryptocurrencies are becoming more and more important in the political landscape, and the attitudes of both parties towards encryption have undoubtedly turned to support. The two parties quickly turned to support cryptocurrencies, and the most direct promotion was the approval of the Ethereum spot ETF by the SEC.  

A common understanding in the industry is that the Ethereum of POS has passed the spot ETF, so the next SOL spot ETF also has a chance. After all, some institutions have submitted applications for SOL spot ETFs to the SEC.  

Following this, more spot ETFs for cryptocurrencies will be launched. People will begin to expect the approval of spot ETFs such as AVAX, PEPE, and DOGE. Even if SOL has been designated as a security by the SEC, it is not important. The cryptocurrency circle relies on emotions and expectations.  

On the other hand, even if it is defined as a security, will the spot ETF not be approved?  

Whether Ethereum is a security has always been a hot topic in the legal discussion of cryptocurrencies. In June this year, the SEC ended its investigation into Ethereum 2.0, which means that the SEC will not charge that ETH sales are securities transactions.  

When the SEC approves the Ethereum spot ETF, it will have to clearly acknowledge that non-pledged ETH is not a security. This will be a major policy move by the SEC. The agency has previously refused to recognize any asset other than Bitcoin as a non-securities commodity.

This move will also immediately affect the cases between the SEC and major cryptocurrency exchanges. If Ethereum is not considered a security, then many other tokens may also be identified as commodities using similar logic, allowing cryptocurrency exchanges to win these legal cases. After the launch of the Ethereum spot ETF, the crypto industry may usher in a big explosion of the altcoin season. The previous market cycle development law is generally that Bitcoin rises first, then Ethereum rises. As the leader of the altcoins, Ethereum drives the altcoins to soar. The logic of this round of bull market is actually that after the Ethereum spot ETF is passed, more and more virtual currencies or mixed virtual currency ETFs will enter the market, and BlackRock and similar institutions will issue crypto index products, which will greatly promote the liquidity of the crypto market. In summary, the launch of the Ethereum spot ETF is a top-down benefit at the crypto policy level, and the policy benefits will bring about a comprehensive embrace of capital, embracing not only Ethereum, but also perhaps a large number of altcoins.  

Summary 

Looking back on the long road to Ethereum ETF, it can be said to be full of difficulties and obstacles. From being questioned by the market to being accepted by the US SEC as one of the mainstream products in the traditional financial market, the success of Ethereum has once again confirmed that the crypto market has an infinitely bright future.  

The current stagnation of ETH prices is only a temporary market reaction. The value of Ethereum can eventually be proven with the blessing of long-termism. But the real significance lies in the fact that the recognition of the US regulatory level will also leave a sign and seed of hope for other altcoins to embark on the ETF path of Bitcoin and Ethereum.