Ethereum
Buy the rumor, sell the reality? By Investing.com
(ETH) has soared in the past 48 hours, led by favorable regulatory developments that increase the chances of an upcoming ether exchange-traded fund (ETF) being approved.
Still, the chances of a major “buy the rumor, sell the fact” reaction for ETH appear lower than , according to a recent report from Citi.
Bitcoin fell 17% after ETF approval due to hype and leveraged bets. In contrast, there was less anticipation about the potential approval of an ETH ETF, leading to less extreme prepositioning, the report said.
As of the release of these reports, ETH futures open interest (OI) and funding rates have been moderate compared to previous months. However, the OI began to increase, indicating growing anticipation of possible approval of the ETF.
Net flows into Bitcoin ETFs have been a major driver of returns since their launch in January, explaining much of the cryptocurrency’s performance. This trend is likely to continue with the introduction of ETH ETFs, indicating that overall crypto ETF flows will remain important for returns.
Reports indicate that robust conversations are underway behind the scenes between regulators and ETF providers, including nine fund providers whose applications are pending at various stages. Previous approvals of Bitcoin ETFs suggest that simultaneous ETH ETF launches are likely.
Historical data from Citi shows that net flows into spot Bitcoin ETFs significantly influence cryptocurrency returns. For example, BTC ETF net inflows totaled $12.9 billion through May 20, which translates to roughly a 6% rise in Bitcoin per $1 billion in flows. Assuming similar market cap-adjusted flows for ETH, estimated inflows could be between $3.8 billion and $4.5 billion, which could push ETH prices up 23-28%.
Several factors could impact these estimates, including different demand for ETH versus BTC, rotation from BTC to ETH among existing ETF holders, outflows from existing ETH funds upon conversion and the rapid creation of a position before SEC approval.
In the long term, Citi analysts said Bitcoin and Ethereum are likely to remain highly correlated, due to macroeconomic factors. Despite the different on-chain activities and potential use cases, such as Bitcoin’s role as “digital gold” and Ethereum’s smart contract functionality, the sentiment, adoption and further development of Use cases remain crucial for both cryptocurrencies.
“We expect major tokens to remain highly correlated and continue to be driven by long-term macroeconomic forces,” the Citi note concludes.