Why is the current ETH market so bad? What impact will the Ethereum ETF decision have?

Author: Jack Inabinet, Bankless; Compiler: Wuzhu, Golden Finance

Ready to deny? ETH's relative value to BTC has been hit hard in May. Why is Ethereum in a poor market? What impact will the final decision on the spot Ethereum ETF, which is imminent next week, have on your assets?

The probability that the U.S. Securities and Exchange Commission (SEC) will approve a spot Ethereum ETF by the end of May doubled from last week, rising from 7% to 14%, but the probability has steadily declined throughout 2024 and remains at a depressed level compared to the peak of 76% at the beginning of this year.

The news on Friday that Ark Invest had removed equity from its spot Ethereum ETF application seemed to indicate that the non-equity application was about to be approved has emboldened speculators in the prediction market. Participants in the more liquid spot market, however, appear to view the announcement as insignificant.

While the prediction market’s implied odds of approval have risen slightly, the ETH/BTC ratio fell another 2% this weekend, exacerbating losses seen throughout May; it is now trading below the key 0.05 level and pressed into 2024 lows.

As Fortune reported in March, shortly after the Ethereum network transitioned to proof-of-stake in September 2022, the U.S. Securities and Exchange Commission (SEC) began subpoenaing cryptocurrency companies for information about their dealings with the Ethereum Foundation in hopes of classifying the asset as a security.

Yesterday, Scott Johnsson of Van Buren Capital highlighted the SEC’s release of a document stating that the agency is “providing notice of the grounds for disapproval being considered.”

While this document is included in every request for comment on a spot Ethereum ETF, it is notable that this provision is absent from any spot Bitcoin ETF filings,which suggests that the SEC may reject spot Ethereum ETFs on the grounds that they are improperly filed as commodity-based trust shares because they actually hold securities,which the information received from the subpoena may support.

Despite the SEC’s apparent efforts to classify Ethereum as a security, it’s worth noting that the regulator approved an ETF based on ETH commodity futures last October.

This decision came after Ethereum’s transition to PoS, indicating that the SEC has relinquished jurisdiction over the asset and solidified its status as a commodity, as these instruments would be illegal (and therefore not tradeable) if the underlying asset were a security.

Market participants overwhelmingly expected the SEC’s first final decision deadline on VanEck’s application on May 23 to result in a rejection of the spot Ethereum ETF; however, given the agency’s prior approval of commodity futures ETFs, it is difficult to see how the SEC could justify not listing these products in the absence of new information provided in the subpoena.