Impact of Potential ETF approval

Discuss what would happen if an Ethereum ETF were to be approved, and which ETF's might be next up.

6 min read

28 May, 2024

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Ethereum has long been hailed as one of, if not the most successful altcoin, evidenced by its massive market cap and position as #2 coin in the world. With the prospect of an ETF (Exchange Traded Fund) getting approved for ETH, there is significant uncertainty in the market as to how it will affect price, and what the approval would mean for the rest of the market.

In order to talk about the benefits of Ethereum, we'll first review the benefits of a basic blockchain such as bitcoin, and then highlight the differences and the additional functionality. A basic blockchain was revolutionary technology when it was released, it effectively creates an immutable and publicly verifiable database; Bitcoin uses this underlying technology to store transaction data, and users use their wallets to determine how much money each user has.

It should be noted that this feature of blockchains is valuable because it solves the famous "double spend" problem; without a public ledger, it's possible for the same funds to be sent to two different recipients, effectively stealing money from the Centralized Financial institution that is storing that cash. With the ledger of the blockchain, double spend is impossible because validators of the network will not allow duplicate transactions, nor separate transactions that try and spend the same funds. Banks make billions every year through facilitating transfers, preventing double spend with human involvement, whereas bitcoin transactions are relatively cheap, although there is room for improvement.

⚡ TL;DR ⚡ A blockchain is valuable because the underlying technology is an immutable and public database, which allows funds to be sent securely, quickly, and cheaply.

Now that we've established the benefits of a blockchain, lets give a high level overview on how Ethereum has a competitive advantage over Bitcoin in multiple areas. We'll break the major differentiating factors into 2 major categories: Smart contracts, and the Ethereum Virtual Machine (EVM).

Smart Contracts

Unlike Bitcoin, Ethereum is designed to allow for smart contracts. This is a block of code that is self executing, and used to establish agreements with programs on the ethereum blockchain (called dApps). While seemingly arbitrary, it is powerful because it allows the authorization of blockchain applications to be stored on the public ledger, which allows the programs to be decentralized.

Ethereum Virtual Machine

Another unique feature of Ethereum is the EVM, which is a decentralized virtual machine. For those unfamiliar with this term, a virtual machine (VM) is a disposable instance of an operating system that is created or destroyed on demand. The EVM is the same concept, but instead of the VM's being run by a cloud provider such as AWS or Azure, the EVM is run by the ETH blockchain. Cloud computing is a large industry, projected to grow to 2.3T by 2032 (source Fortunte Business Insights), and the EVM is a decentralized model of this technology. The major difference here is that instead of passing on the generated value to shareholders, the value is passed to the people who stake their ETH token to validate the network, or those who provide computing power to the network.

What Would Happen If Ethereum Got Approved for an Etf?

It's looking increasingly likely that an ETH ETF will be approved in the near future, potenitally by this summer. If this did happen, it would likely cause a significant price increase in the short term as it would allow large funds to allocate a portion of their capital to ETH. Because of the limited supply of ETH, this would likely lead to an increase in price in the short term as demand will outpace supply. Another benefit to increased volume is that the more transaction volume there is on ethereum, the fewer coins will be created, which could be a strong deflationary factor. It should be noted that this deflationary factor is not guaranteed as the network can change the reward rate at any time, but it has been a significant factor in recent years. Bitcoin enjoyed similar price surges when it was approved for an ETF, Ethereum will likely follow suit. So far Bitcoin has 5x'ed from it's bear market price, and Ethereum has done about the same without ETF approval. Part of this has been priced in, but the inflows of a theoretical ETF would likely outpace the current demand.

What's Next after Ethereum?

If Ethereum were to be approved for an ETF, it would be a huge bullish signal for the AltCoin market in general. This would open the door for other coins to be selected for ETFs, and would also increase awareness of the utility of other cryptocurrencies. Some potential candidates for the next ETF's would be:

  1. Solana (SOL) ETF: Solana is a fast and inexpensive blockchain that has gained popularity originally as an ETH killer, but has since found it's own niche in the crypto space. It's a strong candidate for selection based on market cap, however there are concerns with the chain; it's heavily centralized, meaning a sizable percent of the network is operated by one entity, as well as the fact that it has somewhat frequent outages that stop all transactions and last for an indefinite length of time. We believe that Solana is a powerful tool for transferring value, but we're unsure if it will turn out to be a good store of value.

  2. Cardano (ADA) ETF: Cardano is another layer-1 blockchain that has gained great popularity in the space. Much like Ethereum, Cardano is based on a Proof-of-Stake (PoS) mechanism, which prevents validators from running expensive and non environmentally friendly hashing operations like Proof-of-Work (PoW) chains such as Bitcoin. Cardano has a development team that enogasuzes research based and peer reviewed approach when building the chain, and it has led to the creation of a very secure and inexpensive blockchain.

  3. General Market Index/ETF: This one is not a single coin, but we believe this is coming in the near future. Just like the S&P 500 tracks the top performing stocks in the stock market, we believe there will be a similar index for the crypto market. The number of coins and the allocation would be determined by the fund managers, and would allow for automatic diversification across the largest projects. This would be a great way for investors to gain exposure without having to keep up with the latest news and trends, or even understand the underlying technology. We believe the majority of value that blockchain technology will create will exist outside of coins that act simply as a store of value (ex Bitcoin). If you'd like to take advantage of this diversification now, you could invest in TCAP coin, "The Total Crypto Market Cap Token", a blockchain based solution that is already up and running.

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