Good Morning & Happy Friday! The good news from the Fed kept markets buzzing yesterday. Numerous stocks hit new highs as well as the S&P 500 index. Bitcoin pulled back again which some analysts have pointed out is not unusual behavior before a halving event. Other popular cryptos such as ETH and Dogecoin also pulled back this last week.
ETH tends to follow bitcoin in terms of price, and in fact, their 3 month correlation is .98 (1 is 100% correlation). Will this correlation also bleed into an ETH ETF coming next? Some investors are betting on it as many of the institutions who offer a bitcoin spot ETF have active applications out to the SEC for an ETH ETF. ETH and BTC, however, are not the same and their networks have very different capabilities. We’ll discuss some of the big themes to know in today’s Crypto Spotlight - check it out!
Crypto Spotlight: What Does A Potential ETH ETF Mean for the #2 Crypto?
We are now 3 months into the Bitcoin ETFs, and bitcoin has since punched through its previous all-time high. Crypto moves fast though, and already talk of the next ETF is getting investors’ attention: an ETH ETF.
Grayscale aims to lead the charge. Earlier this week they amended their 19b-4 form for an ether spot ETF as they now attempt to list and trade shares of their Ether Trust on the New York Stock Exchange. These applications, however, continue to face delays, including one from Black Rock.
The move has caught the attention of two US Senators, Senator Jack Reed from Rhode Island and Senator Laphonza Butler of California. The Senators have written a public letter to the SEC urging the organization not to approve any more ETPs for any other cryptocurrencies. They admit that though the “bitcoin market has displayed serious weaknesses, it is nonetheless far more established and scrutinized than the market for any other cryptocurrency.”
They aren’t necessarily wrong. As the ‘original’ crypto, it certainly does have a longer and more established track record. Ether is certainly not far behind, though, and is certainly the second most established crypto that’s out there.
On a basic level, however, ETH and BTC are fundamentally not the same. The bitcoin network is for trading bitcoin. The Ethereum network is an entire ecosystem of decentralized applications that run utilizing smart contract technology. To use these applications, users need ETH to pay for gas fees and to move around the ecosystem. Tying up the crypto asset in a fund or ETF has more reverberations for the Ethereum network than it does for bitcoin being tied up away from the bitcoin network.
Furthermore, Bitcoin’s tokenomics (tokenomics is the study of the supply, demand, distribution and valuation of cryptocurrencies) is much more straightforward than Ethereum’s. There will only ever be 21 million bitcoins in circulation, and the supply of new bitcoins dwindles down over time until the supply cap is reached. The projected supply cap is set to hit in 2140 with the next decrease-in-supply event coming next month.
Ether has a much more complex mint and burn strategy. ETH has no supply cap and therefore its ‘burning’ or removing of tokens from the ecosystem is very important. This is similar to a share buyback in traditional public markets. A portion of fees paid by users in ETH for using Ethereum gets burned which means the more active a market, the higher the burn rate and the greater the deflation.
This burn mechanism was implemented in August 2021 during a major upgrade to the network. Upgrades are common (every 1-2 years) for the ETH network, with one of the biggest occurring in September 2022 called the ‘Merge’. This upgrade cut ETH’s power consumption by ‘up to 99%’ and reduced ETH’s issuance by as much as 90%. Since the ‘historic merge’ in September 2022, ETH’s supply has been on a steady decline.
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