It's all politics: Quarter of a trillion ready to hit Ethereum ETFs

BlackRock in: we have lift off

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I planned to write a different piece for you this week.

But then out of nowhere, Ethereum had its breakthrough moment. At around 11pm UK time last night, the notoriously anti-crypto American market regulator, the SEC, approved filings by a swathe of would-be Ethereum ETF issuers.

These include a bid by the $10 trillion asset manager BlackRock. Approving these forms paves the way to eight asset managers with Ethereum products trading on the Nasdaq and New York Stock Exchange.

It may be several weeks until Ethereum ETFs hear the opening bell. There’s the little matter of clearing another set of filings, called an S-1, before investors can buy and sell these ETFs. But it’s clear now: they will follow Bitcoin onto the biggest markets on the planet.

Long-term, this move opens the door to hundreds of millions of dollars of institutional capital. If ETH follows BTC’s moves post-ETF approval — unlikely, but for argument’s sake — it would mean a 60% price hike, adding more than a quarter of a trillion dollars to the market cap of the second-largest cryptocurrency.

I gave my opinion a few months back that £10k ETH was a reasonable target within five years. That was contingent on four main things.

1. Broad-based adoption beyond crypto-native companies

2. Better UI and lower transaction fees

3. Continued market share dominance of all the major subsectors and use cases (DeFi, gaming, infrastructure, stablecoins)

4. A US ETF approval

The last point might seem the least important. Ethereum futures have been traded on regular, institutional exchanges like the CME for years. But an ETF spells mass adoption. It opens the door to conversations about tax-advantaged allocations. And we know what that means. Liquidity. Acceptance. No longer an outsider looking in.

We really weren’t expecting this

Only a few weeks ago, the chances of Ethereum making it through the same tortuous process Bitcoin endured looked close to nil. That squeaked up to a 25% chance, then got rapidly upped to 75% after word spread that the US market regulator was briefing (or leaking to, depending on your point of view) Wall Street that a decision was imminent.

What makes this all the stranger is that the SEC chair Gary Gensler has been on a years-long mission to kneecap the crypto industry. Regulation by enforcement. Refusing to say whether ETH was a security (it’s not). But now a comprehensive crypto legislation bill has been passed by Congress by 279 to 136, setting the stage for a Senate debate. And Gensler is starting to look like a man out of time, out of step, and probably out on his arse in November.

Politics makes for strange bedfellows

This line, paraphrased from The Tempest, finds the jester Trinculo seeking shelter from a great storm, and forced to huddle under a cloak with the monster Caliban. Circumstance make this odd couple join forces in pursuit of a common goal: survival.  

So the US crypto cohort — ramping up its K Street lobbying budget and hammering the Stand With Crypto campaign — found an unlikely friend in former President Donald Trump.

At the same time Joe Biden, polling neck-and-neck despite his opponent facing multiple criminal trials, made a curious decision. He decided to die on the hill of an obscure legal opinion called SAB121. This document is notably only for two facts.

1. It was pushed through without the normal comment period or industry consultation, and

2. It makes it effectively impossible for US banks to custody crypto. 

In an unusual show of defiance, 11 Democratic Senators, including the party’s Senate Leader Chuck Schumer, bucked Biden, voting to reverse the decision. Cynthia Lummis of Wyoming (by far the most welcoming crypto state other than New York) voiced the common opinion that keeping SAB121 in place it would ultimately harm consumers.

Donald Trump tried to seize the moment to directly court the crypto industry. Memorably ‘not a fan’ of Bitcoin, his move was pure political theatre, of course.

Crypto stalwarts like the Messari CEO Ryan Selkis have since appeared on stage at Mar-a-Lago, a rite of passage for anyone who wants grace and favour in his notoriously transactional autocratic cabal. One imagines these execs will follow one of the only two viable options to keep his favour: bow down and kiss the ring, or tread lightly, and carry as much compromising material as possible.

Why this, why now

Trump has released also NFTs in the past. It never hurt that these are tradeable assets with uncertain value. His blatant cash grabs are legendary, too. Right now, these are a bit more pressing, post-Deutsche Bank scandal, and facing down the barrel of $454m in fines. To fund his gargantuan legal fees, Trump has engaged in a bloodless coup of the Republican National Committee by installing his daughter in law as leader, as alongside more tawdry ventures, such as selling bibles, gold trainers, and illegal university courses.

His MO has been buoyed in part by Vivek Ramaswamy. The former Presidential candidate (and possible VP) exists on the political spectrum somewhere to the right of Ghengis Khan, but made his millions as a tech entrepreneur. Long before the independent candidate RFK Jr announced he would make the American government budget transparent by registering all transactions on the blockchain, Ramaswamy was crypto’s biggest political advocate, appearing on the wildly popular Ethereum-centric podcast Bankless.

And another chance at the keys to the Oval Office looks closer than is generally comfortable. Trump’s current and pending court appearances have not budged the US voter polling one iota, with some surveys seeing him several percentage points higher than before the Stormy Daniels case went to trial.

What next?

Politics aside, Ethereum has always been a more complicated technology than Bitcoin. One fits fairly neatly into the existing bucket of a commodity, if you agree with the digital gold narrative. The other is brain-meltingly confusing to understand at first, but is basically a lauchpad for new types of businesses and new forms of money. You can use it 24/7, and move money around the world very quickly.

I’d say it’s probably not that well known that Ethereum shifts more value around the globe daily than Bitcoin by a factor of three.

That’s because: moving around on the Ethereum blockchain alongside the native currency ETH (which is used to pay transaction fees), are thousands of other Ethereum-compatible tokens. Quite a lot are stupid dog or frog coins. You’ll know them when you see them. They only really exist so traders can play a high-stakes game of chicken to see who can run up the price, and who blinks first.

But there are many other projects. These include the Ethereum token launched by BlackRock. But that’s for next week’s piece. It’s a doozy.

Right now, anything high beta crypto (which means its price moves sharply in tandem with another asset) is likely to go nutso bananas.

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Standard disclaimer: None of this is meant as an inducement to buy anything. I could be totally wrong. I don’t think I am, but I definitely could be.

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BlackRock leads the charge

BlackRock’s Bitcoin ETF, called IBIT, is now the largest crypto exchange traded product, at about $20bn. My old company ETC Group has the world’s fourth-largest, worth around $1.5bn.

And we heard yesterday that the UK is about to finally allow these crypto exchange traded products on the London Stock Exchange. But not for retail investors. Oh no. Not for the likes of us. Institutions can make a directional bet in their tax-advantaged accounts. But the letter of the law says crypto ‘derivatives’ are too risky for normal folk.

This is a simple category error by the powers that be (the UK market regulator, the Financial Conduct Authority). exchange-traded products are not derivatives. Not in the way of options and futures and the dangerously leveraged stuff that tends to wipe out people’s savings.

I won’t bore you with the details, but the rules say that ETFs have to contain more than one asset in them to fit into existing boxes about what they can be called.

Because there’s only one asset in these investment products (Bitcoin or Ethereum, or Solana), they’re registered as crypto derivatives — which usually means: leveraged options or futures contracts. I agree you should only trade options if you’re a pro. But ETPs which track the price of one cryptocurrency? No. Wrong.

Proxies

For anyone sitting on the sidelines with cash in hand, there are not many good options. Proxy trades are the most popular, but totally inaccurate on a direct exposure basis.

None of our political parties give a shit about crypto. None are even remotely campaigning on the issue. Over 10% of people in the UK reportedly hold or have held cryptocurrency, and the UK is in the top 20 countries in the world for adoption.

Under 25s are the largest cohort of holders. By denying this group easy, secure, safe access we are keeping more assets out of ISA and SIPPs and pushing people into risky options when a plainly more sensible choice exists.

Not everyone wants crypto. Not everyone should have exposure to it. But if I want to, on Monday, I could drop 50 grand on a 3x Leveraged ETF that trades wheat futures contracts. In my ISA or SIPP. I would be crazy, because I know nothing about wheat. But it’s my money. I should be able to profit (or lose it all) however I like. Why not let me buy an Ethereum ETF?

Anyway. Rant over for today. Have a great weekend and I’ll see you here next week.