How will the market develop after the approval of the Ethereum ETF? In my opinion, the market will enter a period of “altcoin season” during the bull run, but the process may not be as smooth as expected. Let me explain my observations:
1) The market reaction to the approval of the Bitcoin ETF has not been as grand as expected. The anticipated frenzy did not materialize, but the volatility of Bitcoin has decreased. The market’s ability to handle fluctuations has strengthened, and the mysterious power of Wall Street has become a “safety net” for Bitcoin stability. However, Bitcoin lacks a complete ecosystem to support its pure asset nature. The expectations of the secondary market for Bitcoin seem to be disconnected from the primary market that everyone is building. In the short term, the “benefits” of Bitcoin for the market cannot extend to the primary market, especially for the mainstream Ethereum Lego ecosystem, where the correlation is even weaker.
On the other hand, the approval of the Ethereum ETF is a different story. On one hand, the deflationary nature of ETH will directly affect the activity of the primary market. The price growth of Ethereum will highlight the advantages of layer2 with low gas fees and indirectly drive the development of the layer2 market. The reduction in the circulating supply of Ethereum will intensify Restaking and AVS staking, leading to value growth. Ethereum held by incremental funds will be used to invest in and support compliant DeFi projects, among other things. If this example seems far-fetched, just understand that the value of Ethereum today is gradually generated by this massive primary market. Conversely, Ethereum’s asset price and circulation will provide a continuous source of users, funds, and talent resources for the industry ecosystem. This is the fundamental reason why the Ethereum ETF will promote the arrival of the “altcoin season”.
2) When I mention “altcoins” here, I am referring to some “mainstream coins” that have VC support, a built team, but did not receive much attention before their token issuance, and whose token prices do not receive sufficient value support afterwards. In simple terms, the approval of the Ethereum ETF can attract mainstream funds into the massive ecosystem built on Ethereum, driving the continuous growth of value coins. This may break the curse that value coins are not as popular as meme coins.
However, ideals are beautiful, but it is not easy to attract mainstream funds into the ecosystem and drive the entrepreneurial ecosystem of web3. The passing of the FIT21 (21st Century Financial Innovation and Technology Act) by the US Congress has significant implications. This act explicitly aims to provide essential consumer protection and promote innovation in the US digital asset ecosystem. Let me briefly interpret:
1) The CFTC (Commodity Futures Trading Commission) in the US has greater regulatory power, and regulating digital assets under the “commodity” category will be more flexible and free. This forms a long-term stable foundation for policy stability with fewer variables.
2) “Compliance” will become the main theme of development in the crypto digital ecosystem, including the establishment of institutional systems for the issuance process and standard norms. This means that the virtual asset ecosystem will be divided into two extremes: those that comply with regulations will gradually find solutions to critical issues such as KYC and anti-money laundering, and will directly benefit from ETF gains. Those that do not comply with regulations will face stricter sanctions and crackdowns, gradually becoming niche markets (such as Tornado). Do you remember that in the wave of institutional inflows in 2021, we defined the market as the “year of compliance”? However, the unexpected incidents of FTX and Luna delayed this aspiration. The approval of the ETF will ultimately have to face the issue of “compliance”.
3) US regulatory bodies or financial conglomerates will exert strong “intervention” in key areas such as stablecoins, exchanges, digital asset custodians, and payment platforms. The probability of them directly controlling stablecoins through laws and regulations in the short term is low, but it is not ruled out that they will indirectly control the market through licensing, for example.
3) If the above speculations come true, we can foresee the following:
In the short term, the secondary market for crypto will be divided into two levels. Some behind-the-scenes manipulators will intensify speculation before a series of regulatory bills are introduced, leading to high volatility in meme coins and some mainstream coins, while altcoins will flourish.
In the medium term, some top DeFi projects, stablecoins, and exchanges will increase their compliance efforts. Value targets with good compliance orientation will have good market performance, while those that do not comply will lose value support gradually.
In the long term, the political influence on the crypto market will gradually align with the preferences of the web2 market. This may disappoint some adherents of highly decentralized originalism, but we can expect positive effects from policies, even though they also have a double-edged nature.
Web3 natives are not hiding behind the banner of decentralization to engage in fraud and money laundering. Under the big stick of compliance, the community will be divided, and product stratification will become the trend. Some complex technologies and protocols in the crypto space are difficult to regulate, but the market will only choose the most mainstream development path. The choice actually lies in the market.
In conclusion, it will either be the final frenzy of speculators or the gradual imposition of regulatory pressure. The high volatility caused by constraints will lead to the loss of speculative crowds. Each person has their own vision for the development of crypto. Overall, the crypto market under political influence will no longer maintain the pure dream of “decentralization” in the beginning, but it will allow the chaotic development of the crypto market over the years to eliminate the dross and give the mainstream value coins a chance to shine.
