The Breakdown - Markets Surge as BlackRock Files ETH Spot ETF

Episode Date: November 11, 2023

The market return continues and the institutional narrative grows as BlackRock files their spot Ethereum ETF. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Friday, November 10th, and today we are talking about BlackRock's Ethereum ETF filing. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, happy Friday. Before we dive in, I just have to give you a little bit of information about the show and the weekend. Unfortunately, this show is going to be a little bit shorter than normal and there will be no weekend episodes.

Late last night, I started having to deal with an unexpected family situation that has cut way into the time for recording today, but I at least wanted to round out the bullish end to this week, and really capstone our shift away from the Sam-based world of last year and face forward into what's coming next. With that in mind, on Thursday morning, news broke that BlackRock had registered an entity called the I-Shares Ethereum Trust in Delaware. Although representatives for BlackRock refused to comment, the filing appeared legitimate. It named the managing director of BlackRock advisors as the filing agent. There was initially some skepticism at first and people not sure if it was rumors, but suspicions were confirmed in the afternoon after markets closed when it was revealed

that BlackRock had filed to launch a Spot Ethereum ETF. Now, this is not the first Spot Ethereum ETF to be filed. A few months after the flurry of Spot Bitcoin ETFs in June, asset managers doubled down on crypto products with matching Ethereum filings. Van Eck, Arkenvest slash 21 shares, hashtags, and Invesco slash Galaxy Digital all have applications awaiting approval. There's also a conversion application for Grayskills Ethereum Trust filed with the SEC. The difference with BlackRock's application is, of course, that they are BlackRock. They are an order of magnitude at least larger than the other asset managers. And of course, what that means, at least according to the markets, is that these ETF applications are not merely speculative,

but actually stand a good chance of being approved. BlackRock's track record speaks for itself. The firm has filed over 570 ETF applications with the SEC, and all but one of them have been approved. Now, the rationale for the legality of a spot Ethereum ETF is the same across all of the current applications. Following the grayscale court decision, it seems that the approval of spot Bitcoin ETFs is almost assured to happen. The court found that there was no material difference between spot Bitcoin markets and futures markets. As the SEC had already approved futures-based Bitcoin ETFs, they had no reason to deny spot-based products. Ethereum futures markets have grown massively over the past few years, achieving a similar size to Bitcoin futures in 2021 when those

ETFs were approved. Partly due to this increase in market size, a large number of asset managers were able to launch futures-based Ethereum ETFs last month. So then, using the same logic that was deployed in the Grayscale lawsuit, Ethereum spot markets are obviously tied to futures markets. This would dictate that spot-based Ethereum ETFs should be approved to trade alongside their futures-based counterparts. Nate Grassee, the president of the ETF store, put it more succinctly in a tweet. Grayscale court win plus SEC approval of Ether futures ETFs should equal spot ether ETF approval. Now, BlackRock pointed to this argument specifically in their filing, stating that, quote, given that the SEC has approved ETFs that offer exposure to

ETH futures, which themselves are priced based on the underlying spot ETH market, the sponsor believes that the SEC must also approve ETPs that offer exposure to spot ETH, end quote. Now, if the BlackRock application is approved, it will include a market surveillance agreement with Coinbase to monitor spot markets for manipulation. BlackRock also leaned on existing surveillance sharing agreements with the CME Ethereum Futures Market that are present in the other products. They wrote in their filing, EtherCME surveillance can detect spot market fraud that affects both futures ETFs and spot exchange traded products, or that surveillance cannot do so for either type of product.

Having approved ETH futures ETFs in part on the basis of such surveillance, the SEC has clearly determined that the CME surveillance can detect spot market fraud that would affect spot ETPs, and the sponsor thus believes that it must also approve Spot EIFTPs on that basis. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of leaving them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share, of detractors, but that's the way it always is when you're building something new.

Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclamer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, DBA, Cracken. Now, as you might imagine, there is a lot of excited commentary. Anthony Sasano writes, BlackRock spot ETH-E-TF is coming. Thanks for playing.

Lark Davis wrote, BlackRock will get Bitcoin Ethereum and, yes, eventually, chain link Solana, etc., ETFs. This cycle is when the institutional money shows up big time. It also means this could be the last cycle for insane life-changing generational wealth. Do not screw this up. Will Clemente pointed out, think it's pretty obvious that if BlackRock is filing for an ETH-E-TF, then the Bitcoin ETF must be a done deal. Still, one of my favorite comments came from bankless co-host Ryan Schott Adams, who wrote, for crypto natives who don't understand, an ETF is like

an ERC 20 token wrapper, but for old people. As you might imagine, Ethereum responded enthusiastically to the news. The price shot up by 8% throughout the morning, and some particularly sharp traders managed to scrape the news straight from the state of Delaware's registration website and were able to front-run broader reporting. After BlackRock refused to comment on the rumors, there was a rapid 3% sell-off. However, that dip was bought up for the next several hours and moved above the initial spike when the ETF filing was confirmed. Ethereum continued rising well into the evening, ending the day up more than 10%. It stopped just shy of its year-to-date high of 2140, which was set in April shortly after the Shanghai upgrade. At the same time, the big move for Ethereum seems to have sucked

liquidity from the long tail of all coin markets. Multiple top 30 coins saw declines of more than 4%. Flipside, a handful of tokens related to the Ethereum staking ecosystem caught a tailwind and outperform the ETH move. Bitcoin, for its part, also had a solid morning, touching 38,000 to put in a new year-to-date high. That was followed by a 5% drawdown over the next few hours, with Bitcoin closing the day flat after a big round trip. As tends to happen with such an unexpectedly volatile day in markets, liquidations piled up. Traders were shaken out of over $450 million worth of futures positions, making it the largest day of liquidation since prices crashed in mid-August. Unlike some recent heavy liquidation days, a roughly even amount of

volume was flushed out on both the long and the short side during the wild market gyrations. A huge number of traders also voluntarily closed out their leveraged positions. According to data from Coinalize, open interest plunged by over $3 billion across all crypto-native exchanges. The open interest wipeout was centered on finance, which processed over 45% of the liquidations throughout the day. Now, fascinatingly, with this reduction in open positions, the CME has finally overtaken Binance as the largest trading venue for Bitcoin futures in the world, at least for now. As we've been keeping track of, the Bitcoin market on the CME has been rapidly growing over recent months. Earlier this week, open interest on the CME ticked over 100,000 Bitcoin for the first

time. Now, of course, the CME is seen as a proxy for institutional interest in Bitcoin, as it's one of the few venues where regulated U.S.-based firms can trade Bitcoin futures. On Thursday, the CME surged ahead, adding more than 4% in additional open interest and snatch the top spot. Conversely, traders on Binance were much more severely affected by the volatile price moves, and open interest on that exchange dropped by 7.8% throughout the day. David Luant, the head of research at trading platform Falcon X, said, the CME has been gaining market share for almost all of 2023, but these gains intensified over the past few weeks as market excitement around the Bitcoin spot ETF application soared. Given the CME as a venue used almost exclusively by large

traditional financial institutions, it shows how much interest there has been from this audience in crypto. It's worth noting, the CME's rise to become the apex venue for Bitcoin trading could have symbolic importance in the narrative of professionalization and institutionalization of the crypto industry. During the SEC's long history of denying Bitcoin ETFs, the regulator has often argued that most crypto trading occurred on poorly regulated exchanges and were, to quote Gary Gensler, rife with fraud and manipulation. One of the standards for getting an ETF approved is that the underlying asset must trade on a regulated market of significant size.

This argument has largely fallen by the wayside after the approval of futures ETFs and the resolution of the grayscale case, but this passing of the torch from Binance to the CME still carries some weight. In other words, the largest futures exchange in the world is now also the largest Bitcoin exchange in the world. To claim that Bitcoin is easily manipulated on the CME would carry the implication that broader commodities markets are also easily manipulated. I think the perfect sum up came from Will Clemente. He wrote, wow, the real flippening that no one is talking about,

CME just flipped Binance for the largest share of Bitcoin. future's open interest. Bitter sweet, there will soon be more suits than hoodies here. Now, with all of this excitement, is there any skepticism going on? Some analysts are getting suspicious that this Bitcoin rally is too good to be true. The price rose by 30% in October and has already put in an extra 6.6% so far this month. On-chain research firm material indicators said that their data doesn't support this kind of price action due to subdued and declining volume. In a Twitter thread, they pointed to a chart of Bitcoin orderbook liquidity on Binance and wrote, there is no denying the fact that price has been challenging a number of different local top signals,

but there is also no denying that something doesn't seem right about this move. They added, The most obvious red flags that we're seeing price appreciate on declining volume. That typically doesn't end well, but we are going to have to watch to see if this time is different. Now, on the flip side, Bitwise CIO Matt Hogan gave his perspective as the driving force of one of the most crypto-native asset managers, and put simply, Hogan thinks that ETF approvals are not priced in. He explained, It's not at all priced in because the people who are going to buy this ETF are not aware

that it's coming or most likely coming. The majority of advisors who are the natural audience for this ETF don't expect it to come until 2025 or later. If the people who are going to buy this ETF don't think it's going to be approved in the next two months, then I don't see how it's priced in. Adding some additional reasoning and even a little bit of a survey, Hogan added, each year we survey hundreds of financial advisors about crypto. We're halfway through this year's survey.

One of the questions we asked this year was, when will a spot Bitcoin ETF be approved? 61% said 20, 25 or later. The ETF is not priced in if its intended audience doesn't think it's coming. And so, friends, we will wrap there on that excitable note. As I mentioned, a little bit shorter of an episode today, but I at least wanted to close things out. Big thanks one more time to today's sponsor, Cracken. Go to crackin.com slash the breakdown and see what crypto can be. Until next time, be safe and take care of each other.

Peace.