Joseph Lubin, co-founder of Ethereum and CEO of blockchain technology company Consensys, stated that the potential approval of spot Ethereum ETFs by the US Securities and Exchange Commission (SEC) could lead to significant restrictions on the supply of Ether. This development is expected to be a “watershed” moment for Ethereum.

In an exclusive one interview from DL News Lubin predicted that the approval of spot Ethereum ETFs would unlock significant institutional demand. Given that many institutions started their cryptocurrency investments with spot Bitcoin ETFs, Ethereum is naturally another crucial asset to diversify into.

“There will be quite a lot of natural, pent-up pressure to buy ether” through these ETFs, Lubin commented. However, he also noted that Ethereum’s situation is very different from Bitcoin’s due to underlying supply dynamics.

The main factor that distinguishes Ethereum from Bitcoin in the context of creating ETFs is the availability of assets. On-chain data indicates that over 27% of all Ether is staked via various protocols on the Ethereum network. These funds are locked in contracts and contribute to the security and operation of the network and are therefore not readily available in the market.

“Most of the ether is used in the underlying protocol, DeFi or DAO systems,” Lubin explained. This structural difference means ETF providers have less Ether to purchase and allocate to recent ETF shares.

In August 2021, the Ethereum EIP 1559 network introduced an incineration mechanism in which a portion of Ether used for transaction fees is permanently removed from circulation. This deflationary mechanism is intended to offset the enhance in ether supply and potentially enhance ether scarcity over time.

As network activity increases – potentially further stimulated by recent institutional interest in Ethereum via ETFs – this combustion mechanism will gradually reduce available supply, adding another layer to a potential supply crunch. “This could be quite a pivotal moment,” Lubin said.

Ethereum Price Targets and Doubts

The market impact of an approved Ethereum spot ETF could be significant. Crypto analyst Miles Deutscher predicted a possible scenario in which Ethereum could see a price surge similar to what Bitcoin experienced after the approval of its own ETF.

According to Deutscher’s analysis, “BTC surged 75% in 63 days after spot ETF approval. If ETH follows the same trend (if approved), it will rise to $6,446 by July 23.”

$BTC rose 75% within 63 days of spot ETF approval.

If $ETH follows the same trend (if approved), it will enhance to $6,446 by July 23. pic.twitter.com/FfWg9VGUMx

— Miles Deutscher (@milesdeutscher) May 21, 2024

However, opinions among analysts differ. Vetle Lunde from K33 Research indicated challenges in replicating Bitcoin’s success, noting that futures-based Ethereum ETFs captured only a compact portion of assets compared to their Bitcoin counterparts before the approval of spot ETFs. “Since launch, Fut-based ETFs have seen cumulative net inflows of $126 million, which roughly matches the inflows into BITX over the last 3 days. “The aggregate AUM of Fut-based ETH ETFs is only 7.4% of the AUM of fut-based BTC ETFs before spot approval,” he noted.

Meanwhile, cryptocurrency analyst Vijay Boyapati lifted up concerns about structural differences in ETFs, in particular the inability to accommodate staking in ETF structures. “It is important to note that ETH ETFs, if approved, will be a much poorer proxy for the underlying than BTC ETFs as it remains highly unlikely that the SEC will allow applicants to invest in ETFs,” he said.

This may result in ETFs not fully reflecting the underlying enhance in Ethereum price value highlighted Alex Thorn, head of research at cryptocurrency firm Galaxy, commented: “Not investing in the ETH ETP would have a material impact on returns. If you bought $10,000 worth of ETH on the Sep 22 call and held on today without staking it, you underperformed by 8% over that period compared to someone who bought and staked to collect issuance, tips, and MEV .

At the time of publication, the price of ETH was $3,759.

Featured image from Consensys, chart from TradingView.com