Long ETH, Short BTC on Expected ETH ETF Approval

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SEC's unexpected nod for Ethereum Spot ETFs (“ETH ETFs”) through the approval of 19b-4 forms has ignited a fresh wave of excitement in crypto markets. This paper delves into the impact on ETH/BTC Ratio fuelled by this development. The ratio has been a laggard throughout the current bull run.


ETHER ETF ADVANCES TOWARDS APPROVAL

On 23rd May, the SEC unexpectedly approved the 19b-4 forms, permitting CBOE, Nasdaq, and NYSE to list ETH ETFs. This surprised participants who anticipated a rejection.

Take note that this does not signify that spot ETH ETFs are approved for trading yet. The applications must still clear the next hurdle, which is the approval of the S-1 form. This process could potentially be drawn out over the next couple of months but there are encouraging signs.

Last week, Blackrock updated its S-1 form for its iShares Ethereum Trust (ETHA), suggesting that the issuers and SEC were working towards fine-tuning the details. The Block reported that other issuers were told to send in their updated S-1 filings by Friday 31/May.

Additional rounds of revisions are expected before a final decision. Bloomberg analyst Eric Balchunas opines that approval could come as soon as June.

A key point of interest for ETH ETFs will be whether the ETH held in these instruments can be staked. Staking Ethereum generates 3.4% APR (Annual Percentage Rate) as of 3rd June. Staking is exposed to risk of losses through slashing. Yet, it makes Spot ETFs attractive to investors.


ETH ETF WILL DRIVE SPOT DEMAND

Like the spot Bitcoin ETFs, ETH ETFs will drive additional spot demand for the cryptocurrency. Since launch, Bitcoin ETFs have seen more than USD 13 billion of capital inflows.

Spot ETFs represents new source of demand and in the month following its launch, inflows drove large price moves.

ETH ETFs are unlikely to attract the same level of demand as Bitcoin ETFs. Inflows into ETH ETFs are expected to be a fraction of those into BTC ETFs, with ETH assets constituting about 10%-20% of BTC assets in various regions, according to comparisons of currently listed instruments.

Source: Eric Balchunas on X

Projecting this level of spot demand, ETH ETFs could witness inflows between USD 1.1 billion (10% of BTC inflows) to USD 2.2 billion (20% of BTC inflows) over the next three months.




ETH HAS LAGGED IN THE CURRENT CRYPTO RALLY

BTC has been the clear winner in the current crypto rally. BTC is the only large crypto to exceed its previous all-time-high until now. In terms of relative performance, other cryptocurrencies have displayed robust performance too.

Other crypto-assets Solana, Dogecoin and Binance Coin have surged to outperform BTC over the last six months. ETH has been a noticeable laggard.



ETH had been underperforming even BTC until 20th May. Following the rally after approval, ETH has just managed to catch up to BTC performance but still lags relative to smaller (and riskier) crypto assets SOL, DOGE, and BNB.

To get a sense of relative performance, we can plot the ratios of these crypto assets with BTC. This chart makes ETH underperformance relative to BTC even clearer.



This underperformance might suggest that investors have moved away from ETH. That risk when flipped could also present an opportunity for ETH to outperform BTC in the coming weeks.

ETH/BTC ratio is a mean-reverting quantity and relative to the peaks seen during past cryptocurrency bull runs, the ratio is low. Notably, the ratio rallied sharply after BTC reached new all-time-high levels in the past.




HYPOTHETICAL TRADE SETUP

Approval of ETH ETFs in the near term is likely to translate into spot buying, driving up prices. A hypothetical trade consisting of a long position in the ETH/BTC ratio will benefit as ETH outperforms BTC.

Investors can execute a spread trade on the ETH/BTC ratio using CME Micro Bitcoin and CME Micro Ether futures. Each contract of Micro Bitcoin futures provide exposure to 0.1 Bitcoin and each contract of Micro Ether futures provide exposure to 0.1 Ether. Eighteen contracts of Micro Ether are required to balance notional value on both legs of the trade.





• Entry: 0.0547
• Target: 0.0600
• Stop Loss: 0.0520
• Profit at Target: USD 655
• Loss at Stop: USD 336
• Reward/Risk: 1.95x

Notably, this trade does not match notional exactly as the current BTC/ETH ratio is 18.28. Alternatively, CME offers Ether/Bitcoin Ratio (EBR) futures that enable investors to gain exposure to the ETH/BTC ratio through a single transaction and match notional exactly.

Each contract of these futures corresponds to an exposure of USD 1,000,000 multiplied by the index value (approximately USD 54,810 at a ratio of 0.05481 as of May 31).

These contracts enable investors to obtain relative value exposure on these closely correlated assets without taking a directional stance. The EBR contract is also substantially more margin efficient than individual futures on both legs (USD 6,800 vs USD 28,000 for the same notional value). However, investors should be aware that these newly introduced futures have poor liquidity compared to individual Ether and Bitcoin full-size and micro futures contracts.


MARKET DATA

CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.


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