The recent surge in Ethereum’s (ETH) price has taken many by surprise following the unexpected news of progress in the application process for spot Ether exchange-traded funds (ETFs). Most investors had already accepted the likelihood of the Securities and Exchange Commission (SEC) rejecting these applications. However, when Bloomberg’s respected ETF analysts suddenly increased their approval odds from 25% to 75%, ETH experienced a significant price surge, reaching over $3,800.
This rally demonstrates the importance of the spot ETH ETF approval, especially for decentralized finance (DeFi), which is more significant than the approval of spot Bitcoin ETFs. While Bitcoin ETFs established Bitcoin as an institutional asset, an ETH ETF would legitimize altcoins and propel them further in the bull market rally. Here’s what I believe will happen now that the SEC has given the green light to ETH ETF applications.
L2 and DeFi OG rally
Ethereum layer-2 solutions like Optimism and Arbitrum will undoubtedly benefit alongside Ethereum itself. These tokens have already seen significant price increases when the market bounced earlier this week. Rollups have become a crucial part of the entire Ethereum ecosystem and are closely linked to its success.
DeFi OGs, such as Uniswap and Aave, also represent a promising investment opportunity due to their direct ties to Ethereum Virtual Machine (EVM) technology. These DeFi projects performed well during the recent market surge and are likely to continue benefiting from Ethereum’s legitimacy through the ETF approval.
EVM-compatible projects will thrive
EVM-compatible projects and blockchains will outperform closed ecosystems. This puts platforms like Avalanche and Polygon in a better position than Algorand, which is not yet EVM-compatible. Now that we have the approval for a spot ETH ETF, EVM compatibility will become a more pressing issue. The ETF approval provides Ethereum with regulatory clarity and generates hype around the second-largest blockchain in the world.
Decentralized exchanges and lending protocols for the win
Decentralized finance has struggled to achieve mainstream adoption due to its lack of user-friendliness, security concerns, and regulatory challenges. However, an ETH ETF approval could change this. It would make investing in DeFi simpler and more secure, potentially attracting everyday users looking for high returns. Projects that offer functional utility, such as decentralized exchanges like SushiSwap and Balancer, as well as borrowing/lending protocols like Aave and Compound, would benefit the most.
L1s like Solana may face challenges
Competing blockchains like Solana may struggle to outperform Ethereum in a post-ETH ETF environment. While Solana and other competitors may still reach all-time highs, Ethereum will become the leading blockchain for DeFi with the ETF approvals. Any platforms previously considered “Ethereum killers” will likely be left behind.
Good news for zk-rollups and RWA tokens
Ethereum has been at the forefront of technological advancements like zero-knowledge proofs, which power many Ethereum layer-2 solutions, and real-world asset (RWA) tokenization experiments. The approval of an ETF could lead to more projects being built on Ethereum, including transitions from layer-1 solutions to Ethereum rollups. This has already been seen with Celo’s decision to migrate to Ethereum using OP Stack.
With these developments, we can expect a wave of new token launches. While this growth in altcoins will contribute to the growth of DeFi’s total value locked (TVL), it also comes with risks. Investors must prioritize security and conduct thorough research before investing in any project, regardless of its innovation and potential. Additionally, investors should avoid being swept up in the excitement and momentum of the market rally and instead make informed decisions based on market trends.
The old adage of “buy the rumor, sell the news” holds true in the crypto market. Given the recent upswing in ETH’s price due to the ETF approval rumors, a sell-off is expected in the coming days or weeks. This short-term volatility is normal and healthy for a sustainable long-term market rally. Prudent investors should avoid making impulsive trading decisions based on fear of missing out (FOMO) and wait for a pullback before making their next moves.