Nine Spot ETFs Plunge ETH Prices. Will ETH Tank Further?
The SEC approved the listing of nine spot ETH ETFs on 23/July. The launch of these ETFs was expected to drive capital flows with spot buying. But it didn’t. ETH prices plunged by 9% over the following two days. Crucially, the decline in the ETH/BTC ratio was a similar 9% as BTC remained resilient.
Following what appears to be a sell-the-news event, the outlook for ETH remains mixed as GETH outflows are more than offsetting inflows to the other ETFs.
The sharp price decline offers a buying opportunity. Take caution as the risk of further decline persists. Implied Volatility (IV) on puts increased while IV on call declined after spot ETF approvals.
ETH ETF APPROVAL ACCOMPANIED BY PRICE DECLINE
The SEC provided final approval for eight spot ETH ETFs to trade while also allowing the conversion of the ETHE trust to a spot ETF, making it nine spot ETH ETFs in total.
ETH prices dropped by 1.3% on launch day clearly marking a "sell the news" event. ETH plunged nearly 9% over the next two days, returning to its 20/May levels. This earlier date in May marked the onset of rumors about the SEC's likely approval as covered previously.
Crucially, the ETH/BTC ratio also declined, highlighting the specific negative impact on ETH distinct from the broader crypto market.
OUTFLOWS FROM GRAYSCALE ETHEREUM TRUST DOMINATE NET ETF FLOWS
ETH prices were pressured down by massive net outflows led by fund movement out from Grayscale Ethereum Trust (ETHE) chiefly due to steep expense ratio. These outflows far outpaced the inflows to other ETFs.
Grayscale offers a lower cost alternative in the mini ETH ETF (ETH), inflows into it are small and inadequate to stem the outflow from the much larger ETHE.
Launch of Spot BTC ETFs caused outflows from Grayscale Bitcoin Trust ETF (GBTC). Investors then switched over to lower cost ETFs. This time though, the net effect on ETH ETFs has been much more negative.
Crucially, outflows from GBTC continued for almost four months after spot ETF launch. ETHE outflows could also continue for a considerable period, dominating net flows in spot ETH ETFs for the foreseeable future.
CALL IV HAS DECLINED FOLLOWING ETF LAUNCH
IV skew for 25-delta options showed that calls were far more expensive than puts. This reversed sharply after the ETF launch on 24/July, making puts expensive relative to calls, signaling rising fears of pain for ETH prices in the near term.
Though ATM IV has dipped somewhat following approval, it still remains elevated from last month.
HYPOTHETICAL TRADE SETUP
ETH ETF launch has been a stark sell-the-news event. Prices have reversed gains. While spot buying may drive positive price action, recent flow analysis from ETH ETFs shows outflows from ETHE dominating.
Like GBTC, this trend could continue for many months, with inflows to other ETFs muted, the net effect may be higher selling pressure in the coming weeks.
Still, ETH prices have corrected sharply. It trades 12.5% higher from a major YTD support level and above the 200-day moving average. Consequently, ETH prices are unlikely to trend much lower from current levels. Breakout to the upside also remains unlikely in the near-term given the lack of major news flow.
A bullish put spread is an astute trade set up to harvest elevated put IVs amid a narrow trading range. A bullish put spread consists of a short put at a higher strike combined with a long put at a lower strike.
This position benefits from the net credit earned from the short put position net off the premium paid for the long put. Long put provides the crucial downside risk protection while also reducing the margin required.
The proposed hypothetical trade set up comprises of short 3100 put combined with a long 3000 put on CME Micro Ether Options expiring in August.
While the position offers a fixed upside and downside, it is crucial to note that the maximum loss for this position (USD -6.5) is higher than the maximum profit (USD 3.5). As such, the position would lose money in case the present downturn in ETH prices continues.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Following what appears to be a sell-the-news event, the outlook for ETH remains mixed as GETH outflows are more than offsetting inflows to the other ETFs.
The sharp price decline offers a buying opportunity. Take caution as the risk of further decline persists. Implied Volatility (IV) on puts increased while IV on call declined after spot ETF approvals.
ETH ETF APPROVAL ACCOMPANIED BY PRICE DECLINE
The SEC provided final approval for eight spot ETH ETFs to trade while also allowing the conversion of the ETHE trust to a spot ETF, making it nine spot ETH ETFs in total.
Source: Farside
ETH prices dropped by 1.3% on launch day clearly marking a "sell the news" event. ETH plunged nearly 9% over the next two days, returning to its 20/May levels. This earlier date in May marked the onset of rumors about the SEC's likely approval as covered previously.
Crucially, the ETH/BTC ratio also declined, highlighting the specific negative impact on ETH distinct from the broader crypto market.
OUTFLOWS FROM GRAYSCALE ETHEREUM TRUST DOMINATE NET ETF FLOWS
ETH prices were pressured down by massive net outflows led by fund movement out from Grayscale Ethereum Trust (ETHE) chiefly due to steep expense ratio. These outflows far outpaced the inflows to other ETFs.
Source: Farside
Grayscale offers a lower cost alternative in the mini ETH ETF (ETH), inflows into it are small and inadequate to stem the outflow from the much larger ETHE.
Launch of Spot BTC ETFs caused outflows from Grayscale Bitcoin Trust ETF (GBTC). Investors then switched over to lower cost ETFs. This time though, the net effect on ETH ETFs has been much more negative.
Crucially, outflows from GBTC continued for almost four months after spot ETF launch. ETHE outflows could also continue for a considerable period, dominating net flows in spot ETH ETFs for the foreseeable future.
CALL IV HAS DECLINED FOLLOWING ETF LAUNCH
IV skew for 25-delta options showed that calls were far more expensive than puts. This reversed sharply after the ETF launch on 24/July, making puts expensive relative to calls, signaling rising fears of pain for ETH prices in the near term.
Source: CME QuikVol
Though ATM IV has dipped somewhat following approval, it still remains elevated from last month.
Source: CME QuikVol
HYPOTHETICAL TRADE SETUP
ETH ETF launch has been a stark sell-the-news event. Prices have reversed gains. While spot buying may drive positive price action, recent flow analysis from ETH ETFs shows outflows from ETHE dominating.
Like GBTC, this trend could continue for many months, with inflows to other ETFs muted, the net effect may be higher selling pressure in the coming weeks.
Still, ETH prices have corrected sharply. It trades 12.5% higher from a major YTD support level and above the 200-day moving average. Consequently, ETH prices are unlikely to trend much lower from current levels. Breakout to the upside also remains unlikely in the near-term given the lack of major news flow.
A bullish put spread is an astute trade set up to harvest elevated put IVs amid a narrow trading range. A bullish put spread consists of a short put at a higher strike combined with a long put at a lower strike.
This position benefits from the net credit earned from the short put position net off the premium paid for the long put. Long put provides the crucial downside risk protection while also reducing the margin required.
The proposed hypothetical trade set up comprises of short 3100 put combined with a long 3000 put on CME Micro Ether Options expiring in August.
While the position offers a fixed upside and downside, it is crucial to note that the maximum loss for this position (USD -6.5) is higher than the maximum profit (USD 3.5). As such, the position would lose money in case the present downturn in ETH prices continues.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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