Last week, there was a dramatic shift in market sentiment towards ETH with the unexpected approval of a spot ETH ETF plan by the U.S. Securities and Exchange Commission (SEC). The SEC approved the 19b-4 applications from the New York Stock Exchange (NYSE), Chicago Board Options Exchange (Cboe), and Nasdaq. Key issuers such as BlackRock, Fidelity, and VanEck have their S-1 forms under review, and the trading of ETH ETFs will only be officially launched after these forms receive final approval.
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Kaiko Analysis: Implications of Increased Implied Volatility
Reaction in the Derivatives Market
General Rally in the Spot Market
Concerns Surrounding Grayscale ETHE
Comparison with BTC ETF: ETH Selling Pressure Impacting Up to 30% of Coinbase’s Daily Trading Volume
Market Depth as Another Consideration
Institutional Analysis by Kaiko
Recently, the implied volatility of expiring ETH options sharply increased from less than 60% on May 20 to nearly 90% on May 22 before dropping back by the end of the week. Additionally, short-term implied volatility exceeded the long-term indicator, a situation known as an inverted volatility structure, which usually indicates market pressure.
The drastic change in ETH sentiment is also evident in the derivatives market. Within just three days, the funding rate for ETH perpetual futures skyrocketed from its lowest level in over a year to multi-month highs. The open interest for ETH futures reached a historical high of $11 billion, indicating a significant influx of capital into the field. The ratio of ETH to BTC also increased, although it remains below the high point in February.
Since May 21, both the U.S. and offshore spot markets have seen strong net buying, whereas offshore exchanges had been recording net selling previously.
The introduction of ETH ETFs could lead to selling pressure on ETH as Grayscale’s ETHE may experience outflows or redemptions. The discount rate of this fund has ranged between 6% and 26% in the past three months. ETHE currently holds over $11 billion in assets, making it the largest ETH investment tool.
Taking the precedent of Bitcoin ETFs into account, GBTC experienced outflows of $6.5 billion within its first month of trading, accounting for approximately 23% of its initial assets under management (AUM). If ETHE were to experience similar outflows, it could mean daily average outflows of $110 million, equivalent to 30% of ETH’s daily trading volume on Coinbase. However, the outflows from GBTC were ultimately offset by inflows from other BTC ETFs, making the overall market impact of ETHE redemptions uncertain.
The market depth for ETH on centralized exchanges is currently around $226 million, which is 42% lower than the average level before FTX. Compared to about 50% in early 2023, only 40% of market depth is concentrated on U.S. exchanges.
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Further Reading
Grayscale CEO Michael Sonnenshein Steps Down, Former Goldman Sachs Executive to Take Over
DCG Successfully Weathers the Crypto Winter, Q1 Revenue Exceeds $200 Million