ETH ETF Hype vs. Futures Reality

On May 23, the U.S. Securities and Exchange Commission (SEC) approved the introduction of spot Ethereum exchange-traded funds (ETFs). Before these funds can start trading in the U.S. markets, the regulator must still approve each of the eight individual S-1 filings. This regulatory delay has contributed to the uncertainty surrounding Ethereum’s market, particularly as the price of Ether (ETH) has struggled to break the $3,900 resistance level. Analyzing Ethereum futures markets may provide some insight into these price struggles.

One source of investor anxiety, despite the anticipation of the spot ETF approval, is the potential conversion of the Grayscale Ethereum Trust (ETHE) into a spot instrument. If the fund administrator opts to keep its fees significantly higher than its competitors, it could trigger outflows similar to those seen with Grayscale’s Bitcoin Trust (GBTC). Consequently, this could counterbalance any new inflows, impacting competitors like BlackRock, Fidelity, VanEck, and ARK 21Shares.

Some analysts suggest that political pressure from Democrats, eager to gain swing voters for the upcoming U.S. Presidential election in November, influenced the SEC’s decision to greenlight spot Ethereum ETFs. They also acknowledge that the SEC likely recognized that Ethereum ETFs share a similar regulatory framework to spot Bitcoin ETFs. Analysts from Bernstein believe the SEC adopted a pragmatic approach to avoid potential legal battles.

The ongoing debate among traders revolves around whether bullish bets are being made through ETH derivatives markets or if the price is being held down due to expectations that the spot Ether ETFs will take longer than anticipated to launch. This argument is compounded by mixed signals within the crypto market, particularly with President Joe Biden’s recent actions. Biden vetoed a Congressional resolution aimed at repealing SEC’s SAB 121 guidance, which has fueled concerns about the regulatory landscape for cryptocurrencies.

Accurately predicting when the SEC will approve the S-1 filings for each Ethereum spot ETF is nearly impossible. Hence, traders should focus on trading metrics to discern market sentiment, especially after numerous unsuccessful attempts to maintain ETH prices above $3,900. Inverse swaps, or perpetual contracts, have an embedded funding rate recalculated every eight hours. A positive rate indicates a higher leverage preference by buyers. Aside from a brief spike on May 21, the funding cost for leveraged ETH positions has remained minimal, suggesting balanced demand between long and short positions.

Monitoring the annualized premium (basis rate) of ETH monthly futures can provide additional insights, as these contracts tend not to track spot prices directly due to their longer settlement periods. Sellers often demand a 5% to 10% premium, but during periods of market excitement, this can climb to 20%. Following a price rally to $3,800, the premium for ETH monthly futures peaked at 15% on May 21 but then fell to 13% by June 3, indicating fading optimism.

This data doesn’t necessarily imply that investors lack confidence in the Ethereum spot ETF launch, considering global regulatory pressures. For instance, Hong Kong has banned unlicensed exchanges, Paraguay has seized unregistered crypto mining equipment, and U.S. senators have accused Iran of using digital assets to evade sanctions and fund terrorism.

Despite these broader regulatory challenges, ETH derivatives markets still reflect skepticism about significant U.S. spot ETF inflows. This skepticism persists regardless of whether it stems from delays in S-1 approvals or fears of potential outflows from Grayscale’s ETHE instrument.

Given the current sentiment in ETH futures markets, a substantial rally above $4,000 seems unlikely in the near term. The pricing of ETH futures suggests traders are maintaining a cautious stance amidst the uncertainties surrounding the Ethereum spot ETF approvals and broader regulatory environment.