What does the approval of the Ethereum spot ETF mean for altcoins?

Author: Jeff Owens, co-founder of Haven1, CoinTelegraph; Compiled by Wuzhu, Golden Finance

After the unexpected news that the application process for the spot Ethereum exchange-traded fund (ETF) was moving forward, the ETH price action surprised everyone. Most investors have accepted that the U.S. Securities and Exchange Commission (SEC) will almost certainly reject these applications.

So when Bloomberg's well-respected ETF analyst suddenly raised the probability of approval from 25% to 75%, ETH experienced a daily price surge that we haven't seen in a long time. As the rumor spread, the price of ETH soared above multiple support levels, rising by about 20% to $3,800.

This welcome (albeit unexpected) rebound shows how big the risk is for the spot ETH ETF to be approved. In fact, this means much more to decentralized finance (DeFi) than the approval of the spot Bitcoin ETF. While the BTC ETF solidified Bitcoin’s position as an institutional asset, an ETH ETF will legitimize altcoins and propel them into the next phase of their bull rally. The SEC has given the green light to the ETH ETF application today, and I think the following will now happen.

L2 and DeFi Rally

Ethereum Layer 2s including Optimism and Arbitrum will almost certainly benefit along with Ethereum itself. In fact, when the market rebounded earlier this week, these tokens saw similar price action to ETH itself, recording high double-digit percentage price increases. Rollups are now an integral part of the entire Ethereum ecosystem, and are therefore inseparable from its success.

Bloomberg ETF analysts raised the probability of spot ETH ETF approval from 25% to 75% in May. Source: X

DeFi veteran projects such as Uniswap or Aave also reflect the situation of Ethereum to a certain extent, as they have a direct connection with EVM technology. These DeFi stalwarts have performed very well in the recent market surge and may continue to benefit along with Ethereum, simply because the approval of an ETF provides legitimacy for projects built on top of this blockchain.

Projects that are compatible with the EVM will do well

Any project and blockchain that is compatible with the EVM will do better than a closed ecosystem. This puts companies like Avalanche and Polygon in a better situation than companies like Algorand, which are not yet compatible with the EVM.

Now that we have approval for a spot ETH ETF, EVM compatibility will become a more pressing issue than it has been in years. Part of the reason is that ETF approval provides some form of regulatory clarity for Ethereum.

Decentralized Exchanges and Lending Protocols FTW

Until now, we’ve struggled to see the coveted “mainstream adoption” of decentralized finance. It’s still not particularly user-friendly, it’s generally not very secure, and regulators tend not to like it. But an ETH ETF will change all that. It makes DeFi investing simpler and safer, so we could start to see everyday users flock to the space in search of big returns.

If this happens, projects that offer the most practical features will benefit the most.For example, this would be great news for decentralized exchanges like SushiSwap or Balancer, and lending protocols like Aave and Compound.

L1s Like Solana Could Fail

Ethereum competitors, including Solana, may have a hard time doing well in a post-ETH ETF environment. Of course, companies like Solana may still hit all-time highs in this cycle, as a spot ETH ETF creates some much-needed clarity for decentralized blockchains.

However, With the approval of the ETH ETF, Ethereum becomes the leading blockchain in the DeFi space. Any competitor that was previously touted as an “Ethereum killer” may be left behind.

Good news for zk-rollups and RWA tokens

Ethereum has been home to new technological developments, such as zero-knowledge proofs that power many Ethereum L2s, and experiments in tokenizing real-world assets (RWAs). In fact, BlackRock’s tokenized treasury fund, BUIDL, is built on Ethereum.

With the approval of the ETF, we could see even more Ethereum-based projects. Some may even transition from L1 to Ethereum Rollups, seeing this as a more profitable direction to move forward — like Celo, which recently decided to migrate to Ethereum using the OP Stack.

With all of these developments, we could see a slew of new tokens being launched. An increase in the number of altcoins naturally means growth in DeFi TVL, but there is a caveat. More opportunities often mean more risk, and nowhere is this more evident than in the DeFi space. As a result, we may also see more fraud, scams, and ultimately, greater losses.

For investors, this means stepping up their security game and making sure they do their own research before investing in any project, no matter how exciting and innovative it sounds. Not only that, but investors also need to avoid getting caught up in the excitement and momentum when the market is rising.

The old adage — buy the rumor, sell the news — applies just as much in crypto as it does in traditional markets. Given ETH’s rally when rumors of an ETF approval broke, we fully expect a sell-off in the coming days and weeks. This short-term volatility is normal and welcome for a sustainable, long-term market rally. But prudent investors will avoid making trading decisions based on FOMO and wait for a pullback to make their next move.