Research conducted by Coinbase suggests that investors may be surprised by decisions regarding a spot Ethereum (ETH) exchange-traded fund (ETF). In a recent statement, Coinbase Institutional expresses the belief that it is not a question of if, but when an ETH ETF will be approved, and that the U.S. Securities and Exchange Commission (SEC) is likely to approach the decision in a similar manner to how it approved Bitcoin (BTC) ETFs earlier this year.

Coinbase points out that the SEC considered the strong correlation between the price of spot BTC on the Chicago Mercantile Exchange (CME), which is also true for Ethereum. It states, “While there is uncertainty surrounding the timing of the approval due to the SEC’s apparent silence with issuers, we believe that the existence of a US spot ETH ETF is a matter of when, not if. In fact, the primary reasoning used to approve spot BTC ETFs applies equally to spot ETH ETFs. The correlation between the CME futures product and the spot exchange rates is high enough that ‘CME’s surveillance can be reasonably expected to detect… misconduct [in the spot market].'”

The period of correlation study mentioned in the BTC approval notice began in March 2021, one month after CME ETH futures were launched. Coinbase suggests that this evaluation period was deliberately chosen so that similar reasoning could be applied to ETH markets. In fact, correlation analysis conducted by Coinbase and Grayscale indicates that the spot and futures correlation for ETH markets is similar to that of BTC.

Despite the low chances of an Ethereum ETF getting approved in May, Coinbase believes that there could be an unexpected approval from the SEC. It states, “We believe there is potential for a positive surprise in this decision. Polymarket is currently pricing in a 16% chance of approval by May 31, 2024, and the Grayscale Ethereum Trust (ETHE) is trading at a 24% discount to its net asset value (NAV). We estimate that the approval odds are closer to 30-40%.”

As cryptocurrencies become an election issue, Coinbase suggests that it is less certain whether the SEC would be willing to expend the political capital necessary to support a denial. Even if the initial deadline on May 23, 2024 faces rejection, Coinbase believes that there is a high likelihood of litigation reversing that decision. It is also important to note that not all spot ETH ETF applications need to be approved simultaneously. In fact, Commissioner Uyeda’s approval statement regarding the spot BTC ETF criticized the hidden “motivation for accelerating the approval of the applications, which is to prevent a first-mover advantage.”

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