A recent report from Coinbase Research, authored by David Han, suggests that the likelihood and timing of a US spot Ethereum (ETH) exchange-traded fund (ETF) approval are significantly underestimated by the market.

The report draws parallels with the successful approval of spot BTC ETFs in the US, which provided regulatory clarity and attracted significant capital inflows, reinforcing Bitcoin’s status as a macro asset. Similarly, a spot ETF would open Ethereum to the same capital pools that currently favor Bitcoin, fundamentally altering investment patterns within the crypto ecosystem.

The report highlights the high correlation between CME ETH futures and spot prices, which was a key factor in the approval of spot BTC ETFs. Despite the significant market potential, the report recognizes the regulatory uncertainties, particularly around Ethereum’s proof-of-stake (PoS) mechanism. However, Han notes that these complexities should not impact the status of unstaked ETH. Market sentiment currently prices the odds of a spot ETH ETF approval by May 31, 2024, at 16%, but Coinbase’s analysis suggests these odds are significantly higher, closer to 30-40%.

The approval of a spot ETH ETF would not only align Ethereum with Bitcoin in terms of regulatory clarity and access to institutional capital but also disrupt traditional capital flow patterns within the crypto market.

Historically, capital has rotated from Bitcoin to Ethereum and then to higher-beta altcoins. A spot ETH ETF would potentially streamline this flow, directly channeling institutional investments into Ethereum. This approval would also mitigate one of the largest overhangs for ETH, especially in a challenging regulatory environment.

Beyond the immediate implications of a spot ETF, Coinbase’s report delves into Ethereum’s strong long-term positioning. Despite facing competition from other layer-1 networks like Solana, Ethereum’s advantages remain unparalleled, including the maturity of its developer ecosystem, the proliferation of its EVM platform, and its role as DeFi collateral. The growth of Ethereum layer-2 solutions and the reduced ETH burn post-EIP-1559 are highlighted as factors enhancing its value proposition. Additionally, Ethereum’s historical trading patterns reveal its dual role as both a store-of-value and a technology-token, adding to its unique market positioning.

In conclusion, Coinbase’s analysis presents a compelling case for the near-term approval of a spot ETH ETF in the US. The report suggests that market participants may be underestimating the odds and timing of such approval, leaving room for potential upside surprises.