Monday Momentum: Spot ETF's

Wait, what happened?

This past week on Thursday, May 23, the U.S. Securities and Exchange Commission (SEC) approved several applications to list ETF’s tied to the price of Ether, the token for the Ethereum blockchain. A similar approval came for ETF’s to mirror the price of Bitcoin on January 10 of this year, so we have some historical data (albeit recent) to show what happens after these approvals.

As a very brief overview, once these applications are approved and these products are created, several large institutional investors will begin buying the underlying token (in this case ETH) in order to offer their clients exposure to these products. In short, there is a lot of money waiting on the sidelines that will start pouring into ETH as these big fish start buying tokens.

In anticipation of this, ETH prices increased the most in a single day in history following the approval to the tune of 20+%. There will be some near-term volatility as prices fluctuate, but this approval is a net-positive for the crypto space. My goal this week is to break down what this means for token prices but, more broadly, what this means for the adoption of blockchain tech.

Liquidity

Liquidity is a primary force behind the movement of markets. It essentially encapsulates the free flow of capital and the willingness of buyers and sellers to come to the trading table. By definition:

When money pours into these tokens following ETF approvals, liquidity is massively increased. There are now willing buyers purchasing large quantities of these assets. More money and more interest is a good thing as it gives long-term holders the ability to cash out if needed, which in turn increases the overall trading volume. Volume and liquidity drive markets.

A nice side-effect of increased volume and liquidity combined with buying pressure is that it protects the floor of these underlying assets in the short term. This creates “safer” entry points for people interested in crypto who may have been on the sidelines. All of this is a secondary benefit - the real juice lies in mass adoption.

Mass Adoption

I built a crypto startup briefly because I believed in the real-world applications of this technology. Many people, at the time, thought I was crazy for doing so. Many people still think this stuff is crazy. That said, as large institutions start purchasing these tokens and household names speak more about them, we will continue to get closer to a world where this technology is seen as normal. As tokens become less speculative, and people trust the tech more, there are several real-world applications that will benefit humanity.

Why is blockchain technology useful in the first place? A blockchain, by definition, is a decentralized, distributed ledger that records transactions in a secure, immutable, and transparent manner across a network of computers. I liken it to a shared Google doc where you can see which edits have been made and everyone is viewing a live, current version of the document. If you’re working on a project and someone types something crazy, the other people involved can correct this AND see who contributed the bad idea. As Chris Dixon from A16Z often says, technology where you can’t do harm is better than a world where you “shouldn’t” do harm.

To avoid going too deeply down the rabbit hole, I think it’s better to just provide some real-world examples of how this technology, once adopted, can improve how things are currently done:

1. Supply Chain Management: Blockchain can enhance transparency and traceability in supply chains by providing an immutable record of the journey of goods from origin to consumer. This helps in reducing fraud, ensuring product authenticity, and improving efficiency in logistics.

2. Financial Services: Blockchain can streamline and secure financial transactions, reduce costs, and increase the speed of cross-border payments. It can also enable decentralized finance (DeFi) applications, providing more accessible and inclusive financial services.

3. Healthcare: Blockchain can improve the management of patient records, ensuring they are secure, immutable, and accessible only to authorized parties. It can also streamline the sharing of medical data across different healthcare providers, improving patient care coordination and reducing administrative costs.

4. Voting Systems: Blockchain can create more secure and transparent voting systems, reducing the risk of fraud and increasing trust in electoral processes. Each vote can be securely recorded and verified on a blockchain, ensuring the integrity of election results.

5. Digital Identity Verification: Blockchain can provide a secure and decentralized way to verify digital identities, reducing the risk of identity theft and fraud. Individuals can have control over their personal data, sharing it only with trusted parties.

6. Real Estate Transactions: Blockchain can simplify and secure real estate transactions by providing a transparent and tamper-proof record of property ownership and transaction history. This can reduce the need for intermediaries, lower transaction costs, and speed up the transfer of property ownership.

7. Intellectual Property Protection: Blockchain can help protect intellectual property rights by providing an immutable record of ownership and provenance of digital assets, such as art, music, and patents. This can help creators and inventors prove ownership and receive fair compensation for their work.

TL; DR - Long story short, the approval of (now two) Spot ETF’s brings bigger players into the space. This creates better liquidity and more predictable market cycles. Additionally, it can potentially lead to mass adoption where the real benefits of this technology can be implemented across a wide range of sectors. The future is bright and technology can, and will, continue to enhance our quality of life.

What I’m interested in this week

1. “US SEC approves exchange applications to list spot ether ETFs” in Reuters

2. Read Write Own by Chris Dixon (I know I’ve shared this before, but it’s worth reading if you’re interested in real-world examples of blockchain applications)

3. “The Rise and Fall of Simon Sadler's Segantii, One of Asia's Most Successful Hedge Funds” in Bloomberg 

4. “How Successful People Fulfill Their Full Potential” by Ed Mylett