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What We See in the Markets: Looming Ethereum ETF Approval and Price and Market Dynamics

Cumberland

Keep up with the latest in crypto research as we share the insights from leading institutional research players.

In this edition, we share what Cumberland sees in the markets with the potential Ethereum ETF approval.

This has been one of the more fascinating weeks for the crypto industry in some time. It’s very difficult to understand what exactly is happening behind the scenes in DC as the Ethereum ETF appears to have gone from on-track to be rejected to on-track to be approved. One of two things is true, and we likely won’t find out until some reporting digs up the details: either the ETF had already been on-track, and the market was just wrong in its expectations, or political considerations prompted key policymakers to change their views on crypto. Further datapoints could suggest changing political winds. The deadline for a veto on the SAB 121 repeal bill is May 28, and despite a threat to veto prior to passage of the bill, the White House has thus far been silent since it passed in the Senate with bipartisan support. In addition, the House is poised to pass a crypto market structure bill later today (H.R. 4763), and we expect this bill too to attract significant bipartisan support.

As details come out, we will publish some more comprehensive thoughts about how the politics and the regulatory landscape have potentially changed in a meaningful way over the past few days.

But let’s talk price action! ETH is up 22% on the week, on pace for the largest weekly candle in its history. The question now is, if an ETH ETF is in fact approved, what does it mean for the price of ETH going forward? We can look at the price action around BTC as a potential roadmap here. It is arguable that ETH had already seen some gains due to expectation of an ETH approval since January, but given that ETH has mostly underperformed both BTC to its left and SOL to its right, it seems more likely that an ETH ETF approval has not been priced in before this week.

The starting gun on the BTC ETF was on October 24, when Blackrock’s IBIT was listed at the DTCC, which caused BTC to rally about 17%. That was the moment the market realized the ETF was coming more likely than not, and I would argue that “we are here”. Between then and the time that the ETF was actually approved in January, BTC had rallied another 33%. In the two weeks following the ETF listings BTC, actually sold off, but once inflows started to outpace outflows, BTC’s Q1 rally began and did not stop for two months, rallying another 90% to new all-time highs.

ETH won’t follow the exact same price action; trading is not that easy. The numbers below are not price predictions, but they are the price levels we’d see if ETH matched BTC’s performance going into and then following an ETF approval (and it assumes we actually get an approval, which is still not guaranteed). But the analysis does suggest that the rally in ETH that we’ve seen so far this week could be just the beginning. The 20% rally on Monday’s headline looks a lot like BTC’s 17% rally on Oct 24. If we do grind towards an approval, we could expect ETH to continue to rally another 25% between now and the approval date. (That would take ETH to around $4600.)

Most interesting, though, is what happens after. On the end of the day of the BTC ETF approval, BTC was $45k. It had a 15% drawdown over the next two weeks, but then rallied to new ATHs of $72k in the following two months, up 60% from the price on the approval date. If ETH is at $4600 after the approval date, and has a similar price action to BTC, it would take it up to around $7400. Again, these are not price targets, but just the benchmarks established by BTC.

The first question, then, is what would ETH ETF subscriptions flows look like? Specifically, what will the ratio of ETH subscriptions be as compared to the initial BTC subscriptions. Probably the best indicator is the relative size of the GBTC Trust compared to the ETHE Trust, snapshotted before the GBTC product was converted to an ETF. ETHE was about 25% the size of GBTC, which is probably a decent indicator. There may be less interest in an ETH ETF relative to a BTC ETF because of the lack of staking yield, but we think that the ETF crowd will tend to be the group that generally doesn’t have access to spot, and therefore will not have access to staking anyway. The next question is what one dollar invested into ETH ETF will do to the ETH price compared to one dollar in BTC. The ETH market cap is about one-third the size of the BTC market cap, so the same notional should have a larger effect in ETH. Similarly, the liquidity in ETH is about one-third the liquidity in BTC. Combining these data points: if we expect roughly 25% as much ETH subscriptions as BTC, but ETH is only about 33% as liquid, the price impact of an ETH ETF should be in the same ballpark as it was for a BTC ETF.

In terms of trades, the easy answer is “strap in!”, but the strategy that we’re seeing deployed is mostly buy-side flow in meaningfully out-of-the-money ETH options. As a market, we get so conditioned to think in ranges, to the extent that a 22% move in ETH feels absolutely massive. However, if an ETH ETF is approved and ETH follows the same path as BTC did, it could put deep out-of-the money call strikes in play extremely quickly.

Disclaimer

The information (“Information”) provided by Cumberland DRW LLC and its affiliated or related companies (collectively, “Cumberland”), either in this document or otherwise, is for informational purposes only and is provided without charge. Cumberland is a principal trading firm; it is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances, or requirements of any person, and it should not be the basis for making any investment or transaction decision. THE INFORMATION IS NOT A RECOMMENDATION TO ENGAGE IN ANY TRANSACTION.

If any person elects to enter into transactions with Cumberland, whether as a result of the Information or otherwise, Cumberland will enter into such transactions as principal only and will act solely in its own best interests, which may be adverse to the interests of such person. Before entering into any such transaction, you should conduct your own research and obtain your own advice as to whether the transaction is appropriate for your specific circumstances. In addition, any person wishing to enter into transactions with Cumberland must satisfy Cumberland’s eligibility requirements. Cumberland may be subject to certain conflicts of interest in connection with the provision of the Information. For example, Cumberland may, but does not necessarily, hold or control positions in the cryptoasset(s) discussed in the Information, and transactions entered into by Cumberland could affect the relevant markets in ways that are adverse to a counterparty of Cumberland. Cumberland may engage in transactions in a manner inconsistent with the views expressed in the Information.

Cumberland makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness, or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. Cumberland undertakes no duty to amend, correct, update, or otherwise supplement the Information.

The virtual currency industry is subject to a range of risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or cryptoassets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products, or cryptoassets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance. Investing in virtual currencies involves significant risks and is not appropriate for many investors, including those without significant investment experience and capacity to assume significant risks.

Cumberland SG Pte. Ltd. is exempted by the Monetary Authority of Singapore (“MAS”) from holding a license to provide digital payment token (“DPT”) services. Please note that you may not be able to recover all the money or DPTs you paid to a DPT service provider if the DPT service provider’s business fails. You should not transact in a DPT if you are not familiar with the DPT. This includes how the DPT is created, and how the DPT you intend to transact is transferred or held by your DPT service provider. You should be aware that the value of DPTs may fluctuate greatly. You should buy DPTs only if you are prepared to accept the risk of losing all of the money you put into such tokens. You should be aware that your DPT service provider, as part of its license to provide DPT services, may offer services related to DPTs which are promoted as having a stable value, commonly known as “stablecoins.”

The information provided in this document by Cumberland DRW LLC is for informational purposes only and does not necessarily represent the views of OKX. Any additional disclaimers issued by these third parties are also applicable and should be considered as part of this document.

This report is not intended as financial advice, investment recommendation, or an endorsement of specific trading strategies. The contents of this report, including but not limited to any graphs, charts, and numerical data, are provided “as is” without warranty of any kind, express or implied. The warranties disclaimed include but are not limited to performance, merchantability, fitness for a particular purpose, accuracy, omissions, completeness, currentness, and delays.

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