The likelihood of another exchange-traded fund (ETF) being created in the United States may depend on…
The prospect of another US-based exchange-traded fund (ETF) could depend on political changes after the upcoming 2024 US presidential election.
This comes despite the US Securities and Exchange Commission (SEC) giving fund managers the green light to list Ethereum (ETH) ETFs on May 23.
Although SEC Chairman Gary Gensler admitted that “it will take some time for Ethereum ETFs to launch,” speculation about the next cryptocurrency ETF has already begun, with Solana (SOL) emerging as a major contender.
O stranger @CNBC He says $ Civilian is the next ETF.
Hmm, where have I heard that before? pic.twitter.com/aYAedMhcM0
— ◢ J ◎ E McCann (@joemccanna) May 22, 2024
Despite the enthusiasm for more cryptocurrency ETFs, Ophelia Snyder, co-founder and president of 21.co – sponsor and sub-advisor of ARK Invest’s Ether ETF – told Cointelegraph that expectations for new altcoin ETFs should not be too high.
“The approval of ETH is unlikely to lead to a large wave of approvals.”
However, as Bitcoin (BTC) and Ethereum ETFs have shown, growing demand from institutional investors for altcoin ETFs could force ETF issuers to place orders.
In a report released in April, CoinShares – an alternative asset management firm specializing in digital assets – found that hedge funds and wealth managers had significantly increased their holdings of altcoins, particularly Solana.
Snyder highlighted significant interest in 21.co’s Solana exchange-traded product (ETP) on European exchanges, noting that it has approximately $990 million in assets under management.
The SEC has shown no signs of adopting other cryptocurrencies for future ETFs. The approval of spot ETFs was a tough pill to swallow for commissions.
Acceptance of altcoin ETFs may be more difficult for the SEC; However, a number of different factors can change this situation.
US elections could be catalyst for approval of altcoin ETFs
Bitcoin, Ether and altcoin ETFs exist all over the world. However, US regulators are more restrictive. Snyder noted that foreign altcoin ETFs are not of interest to the SEC because “US regulators tend not to rely on foreign regulators.”
Eric Balchunas, a Bloomberg ETF analyst, explained to Cointelegraph that the SEC follows a specific timeline for approving ETFs, and if it follows it again, it could take years for another altcoin ETF to get the nod agency green.
One of the key elements that allowed the SEC to investigate market integrity was the use of data from the Chicago Mercantile Exchange (CME) to compare the correlation with spot prices on spot exchanges like Coinbase and Kraken. “The analysis used a 32-month sample, which requires a significant holding of the asset on the Chicago Mercantile Exchange,” explained Joshua de Vos, head of research for cryptocurrency data firm CCData, at Cointelegraph.
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With current U.S. regulators, Balchunas said they are “probably following the same process” that a cryptocurrency asset must be actively futures traded on the Chicago Mercantile Exchange to track the price behavior.
No altcoin futures ETFs have yet been listed in the U.S., suggesting a long wait before the U.S. market sees spot altcoin ETFs. However, Balchunas said: “There is a big variable here, which is the US elections. »
The upcoming US elections on November 5, 2024 could be crucial for the future of altcoin ETFs as the regulation of cryptocurrencies in the US becomes a political topic. Donald Trump has positioned himself as a pro-crypto candidate in reaction to President Joe Biden’s somewhat anti-crypto stance towards the regulation of cryptocurrencies in the United States.
The results could radically change the price of altcoin ETFs. Balchunas noted:
“If Trump wins, we could see other coins like ETFs, in my opinion.”
Balchunas added that if Trump wins, he could become “really liberal on cryptocurrencies and support them in everything,” he promised. In this case, Balchunas said Trump could appoint “a new SEC commissioner who doesn’t care” about the process the SEC has followed over the past several years, where obtaining futures data has been an essential part of the perfect approval process for ETF.
Additionally, Balchunas believes that a Trump victory could prompt ETF issuers to apply en masse for new cryptocurrency ETFs: “If Trump wins, I think people will test the waters and try all kinds of things (AND F). »
On the other hand, Balchunas believes that “if Democrats remain in power, there is unlikely to be an altcoin ETF,” even if Biden fires Gensler and appoints another Democrat as SEC chair.
The prospects of creating an altcoin ETF in the United States appear to be strongly linked to the outcome of the next presidential election, and the possibility of creating an altcoin ETF in 2024 is slim, since the president-elect will take office in January 2025.
In addition to the upcoming US elections, some specific conditions must generally be met to obtain approval for the creation of an ETF: it must offer good levels of liquidity, decentralization, resistance to price manipulation and, if possible, accurate rating from regulators. . Are altcoins ready to meet these conditions?
Manipulate prices on alternative currency markets
The market capitalization of Bitcoin and Ether is much higher than that of other altcoins. As Balchunas points out, this is a concern for ETFs because “the smaller the market size, the greater the opportunities for price manipulation.”
CCData’s De Vos concluded that as it stands, “the altcoin market is vulnerable to market manipulation as the markets are still very nascent.”
However, price gouging may not be as big a barrier as some think.
De Vos noted that spot Bitcoin ETFs had been rejected several times in the past due to concerns about market manipulation before the SEC “ultimately reluctantly approved them.” Balchunas said ETFs can handle some price manipulation:
“Just because there’s a little bit of price manipulation or prices move and fluctuate a lot doesn’t mean you can’t have an ETF.”
For example, he said two active ETFs have GameStop as their largest holding, and that while there has certainly been manipulation of GameStop stock prices, the ETFs are still active.
Can ETFs Support Low Liquidity Crypto Assets?
Another problem is that altcoin markets lack liquidity due to their lower volume than Bitcoin or Ether.
Sebastian Hein, head of risk and compliance at institutional partner Northstake, told Cointelegraph that he believes an altcoin needs a large market capitalization and significant daily trading volume to justify an ETF.
However, Balchunas explained how ETFs can exist without a lot of liquidity. He pointed to the existence of junk bond ETFs, where “even the biggest of them don’t trade every day.” So, if junk bond ETFs exist, why not altcoin ETFs?
Although some ETFs may be illiquid, this factor can be problematic.
Balchunas explained that the main problem in a market with low liquidity is the appearance of bonuses and discounts. This is not beneficial for the ETF because it may offer a different price than the actual asset. At this stage, market makers can help avoid these arbitrage gaps.
Alexis Sirkia, founder and former CEO of market maker GSR, told Cointelegraph that market makers should have no difficulty ensuring liquidity in more mature altcoin markets, such as Solana.
Additionally, the emergence of ETFs “will attract market makers from other markets, leading to an overall improvement in market liquidity and equity.”
In the case of altcoins with smaller markets, lower liquidity metrics may prove insufficient for a single ETF. Therefore, a basket of altcoins could be an option.
Justin Danithan, head of business development at market maker Keyrock, believes that multiple altcoins would need to be consolidated to have a sustainable ETF. He believes there could be “a layer 2 Ethereum ETF or even a meme ETF” in the future.
However, investors do not seem to prefer baskets of altcoins. Snyder said 21.co had discovered “more demand for individual asset trackers” than for the baskets of altcoins offered. Additionally, she explained that an ETF containing a basket of altcoins is unlikely, as US ETF wrappers would likely require “additional regulatory involvement.”
Is a Solana ETF Likely?
Solana is the main contender for the next altcoin ETF because it has the highest market capitalization compared to other altcoins, Snyder said. However, Solana has a centralization problem.
De Vos explained that the scoring metrics used in its cryptocurrency ESG benchmark assessed decentralization metrics, including the percentage of coins in Solana’s top 10 wallets, the Nakamoto coefficient, and the type of security system. governance.
Solana is not in the top 10 of the CCData ranking for decentralization.
Solana’s top 10 holders hold 7.29% of the supply and play a critical role in driving price action, De Vos said.
The high concentration of wealth among a small number of portfolios is not just a problem for Solana; This is a common problem for altcoins. The top 10 wallets hold 5.58% of XRP (XRP), 4.88% of Stellar Lumens (XLM) and 3.90% of Chainlink (LINK), CCData showed.
Basil Ismail, CEO of investment analytics firm Blockcircle, told Cointelegraph that Solana auditors receive the most support from a small group that, if colluded, could manipulate the network.
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Ismail also noted that Solana had already suffered several outages that halted trading with no indication of when the blockchain would come back online. He said this issue needs to be resolved before an ETF is considered.
If the current regulators are not changed after the next election, the Solana Spot ETF will face significant obstacles. The SEC directly classified Solana as a security, “which makes approval of an exchange-traded fund very unlikely until its treatment is clear,” De Vos said.
Solana has the market cap and size to warrant an ETF, but – like other altcoins – it may need to improve its fundamentals to overcome current US regulatory requirements and become a viable ETF option.
