Vol Commentary: All Eyes On ETH

Cumberland is commenting on the recent volatility and potential opportunities to take advantage of it.

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This has been one of the more fascinating weeks for the crypto industry in some time. It’s very difficult to understand what exactly is happening behind the scenes in DC as the Ethereum ETF appears to have gone from on-track to be rejected to on-track to be approved. One of two things is true, and we likely won’t find out until some reporting digs up the details: either the ETF had already been on-track, and the market was just wrong in its expectations, or Democrats realized that anti-crypto was the wrong side of an increasingly political topic, in an election year, and they hastily changed direction. (If it is the latter, then we would expect the veto for the SAB 121 repeal to actually evaporate!) As details come out, we will publish some more comprehensive thoughts about how the politics and the regulatory landscape have potentially changed in a meaningful way over the past few days.

But let’s talk price action! ETH is up 22% on the week, on pace for the largest weekly candle in its history. The question now is, if an ETH ETF is in fact approved, what does it mean for the price of ETH going forward? We can look at the price action around BTC as a potential roadmap here. It is arguable that ETH had already seen some gains due to expectation of an ETH approval since January, but given that ETH has mostly underperformed both BTC to its left and SOL to its right, it seems more likely that an ETH ETF approval has not been priced in before this week.

The starting gun on the BTC ETF was on October 24, when Blackrock’s IBIT was listed at the DTCC, which caused BTC to rally about 17%. That was the moment the market realized the ETF was coming more likely than not, and I would argue that “we are here”. Between then and the time that the ETF was actually approved in January, BTC had rallied another 33%. In the two weeks following the ETF listings BTC, actually sold off, but once inflows started to outpace outflows, BTC’s Q1 rally began and did not stop for two months, rallying another 90% to new all-time highs.

ETH won’t follow the exact same price action; trading is not that easy. The numbers below are not price predictions, but they are the price levels we’d see if ETH matched BTC’s performance going into and then following an ETF approval (and it assumes we actually get an approval, which is still not guarangteed). But the analysis does suggest that the rally in ETH that we’ve seen so far this week could be just the beginning. The 20% rally on Monday’s headline looks a lot like BTC’s 17% rally on Oct 24. If we do grind towards an approval, we could expect ETH to continue to rally another 25% between now and the approval date. (That would take ETH to around $4600.)

Most interesting, though, is what happens after. On the end of the day of the BTC ETF approval, BTC was $45k. It had a 15% drawdown over the next two weeks, but then rallied to new ATHs of $72k in the following two months, up 60% from the price on the approval date. If ETH is at $4600 after the approval date, and has a similar price action to BTC, it would take it up to around $7400. Again, these are not price targets, but just the benchmarks established by BTC.

The first question, then, is what would ETH ETF subscriptions flows look like? Specifically, what will the ratio of ETH subscriptions be as compared to the initial BTC subscriptions. Probably the best indicator is the relative size of the GBTC Trust compared to the ETHE Trust, snapshotted before the GBTC product was converted to an ETF. ETHE was about 25% the size of GBTC, which is probably a decent indicator. There may be less interest in an ETH ETF relative to a BTC ETF because of the lack of staking yield, but we think that the ETF crowd will tend to be the group that generally doesn’t have access to spot, and therefore will not have access to staking anyway. The next question is what one dollar invested into ETH ETF will do to the ETH price compared to one dollar in BTC. The ETH market cap is about one-third the size of the BTC market cap, so the same notional should have a larger effect in ETH. Similarly, the liquidity in ETH is about one-third the liquidity in BTC. Combining these data points: if we expect roughly 25% as much ETH subscriptions as BTC, but ETH is only about 33% as liquid, the price impact of an ETH ETF should be in the same ballpark as it was for a BTC ETF.

In terms of trades, the easy answer is “strap in!”, but the strategy that we’re seeing deployed is mostly buy-side flow in meaningfully out-of-the-money ETH options. As a market, we get so conditioned to think in ranges, to the extent that a 22% move in ETH feels absolutely massive. However, if an ETH ETF is approved *and* ETH follows the same path as BTC did, it could put deep out-of-the money call strikes in play extremely quickly.