Ethereum in May 2024: Will ETF Approvals Boost ETH Price

• ETH Price Volatility: Ethereum’s price remained volatile throughout May. The approval of spot Ethereum ETFs initially drove the price up, but it struggled to hold gains above $4,000.
• Investment Influx: Research firm K33 estimates that these new Ethereum ETFs could trigger a substantial influx of investment capital, ranging from $3.1 billion to $4.8 billion within the first five months of trading.
• Network Activity: On-chain data shows a decrease in Ethereum network activity (daily transactions and addresses) in May. However, there was a notable influx of new users to the network, suggesting continued interest.
• Petra Upgrade: Scheduled for release in Q1 2025, this upgrade aims to optimize transaction processing and reduce latency across the Ethereum network.
• ENS Migration: Ethereum Name Service (ENS) plans to migrate to Layer 2, a scaling solution that can significantly reduce gas fees and improve transaction speed.
• NFT Market Decline: Ethereum’s NFT market saw a sales volume drop in May, falling from $1 billion in April to $624 million. Ethereum-based digital collectibles were hit particularly hard, with sales volume reaching $164.2 million (down 46% from April).

Ethereum Overview

Founded in 2013 by Vitalik Buterin, Ethereum is a distributed blockchain computing platform designed for executing smart contracts and decentralized applications (dApps). The network enables users to innovate with smart contracts, catalyzing the emergence of decentralized finance (DeFi), non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and more. Ethereum employs a proof-of-stake (PoS) consensus mechanism, enhancing its scalability and sustainability.

ETF Approvals and ETH Price Dynamics

Throughout May, Ethereum’s (ETH) price reflected a mix of market optimism and underlying challenges. ETH began the month trading below $3,000 and despite several rallies, struggled to sustain significant gains above this level.

The approval and anticipation of spot Ethereum exchange-traded funds (ETFs) were key in driving market sentiment. On May 17, ETH began to rise above $3,000 and nearly reached $4,000 on May 23, driven by investor optimism about institutional investment via these ETFs. The approval of the ETFs by the United States Securities and Exchange Commission (SEC) brought renewed hope for a bullish market, causing ETH to surge approximately 27%.

However, despite these gains, ETH’s price faced resistance and was unable to sustain levels above $3,900 for a prolonged period. The announcement of the ETFs alone was not enough to break through the $4,000 resistance level, as evidenced by ETH’s repeated pullbacks below $3,800.

Green Light for Spot Ethereum ETFs

On May 23, the SEC approved spot Ethereum ETFs, potentially expanding access to cryptocurrency investing. However, excitement was tempered by the reality that individual ETF applications (S-1 filings) still need approval, delaying actual trading for weeks or months. This uncertainty may have contributed to Ethereum’s struggle to reach $4,000.

Approved applications come from industry heavyweights like VanEck, Grayscale, iShares, Fidelity, ARK 21Shares, Bitwise, Franklin Templeton, and Invesco. These ETFs will allow investors to buy shares that track the Ether price through their brokerage accounts, making it a more accessible investment than directly buying the cryptocurrency.

Investment Impact

The launch of spot Ethereum ETFs could trigger a significant influx of investment capital, with estimates suggesting net inflows between $3.1 billion and $4.8 billion within the first five months of trading. This surge in investment could translate into a substantial absorption of Ethereum from the market. Analysts predict a range of 800,000 ETH to 1.26 million ETH being pulled out of circulation, representing a potential reduction in circulating supply by 0.7% to 1.05%.

Limited ETH Supply and Price Volatility

Over half of Ethereum’s circulating supply might be considered relatively illiquid and unavailable for trading. 38% of ETH is locked in smart contracts, and about 11% of the supply resides in dormant accounts that haven’t shown any activity for at least five years.

Ethereum investment products (ETPs) hold 3.3%, while entities like the Ethereum Foundation and blockchain projects collectively hold another 0.7%. There might be some overlap here, for example, with ETH held by protocol treasuries that are staked (locked for rewards).

Recently, issuers of spot Ethereum ETF applications, including Grayscale, have removed references to staking from their public filings. This change indicates that the SEC may permit these products to trade in the United States without including staked ETH, which could further limit the supply accessible to ETFs. Additionally, ETH, which is used as gas for network transactions, accounts for $2.8 billion annually, representing an additional 0.6% of the supply at current prices. Altogether, these categories comprise around 52% of the ETH supply, despite some overlap.

In comparison, Bitcoin boasts a much higher illiquid supply (around 72%). This means that for new U.S.-listed spot Ethereum ETFs, their purchases of ETH will likely come from the remaining, more actively traded portion of the supply. “As existing uses limit the available supply for the new spot ETF products, any increase in demand could have a significant impact on price.”

Hong Kong’s Stance on Ethereum ETFs

The Hong Kong Securities and Futures Commission (SFC) is reportedly considering allowing ETH staking for ETF issuers. If approved, this move would allow ETFs to participate in Ethereum’s staking mechanism, potentially increasing returns for investors through staking rewards.

Ethereum ETPs on London Stock Exchange

Ethereum and Bitcoin-based exchange-traded products (ETPs) debuted on the London Stock Exchange (LSE) following approval by the UK Financial Conduct Authority (FCA) on May 22.

The WisdomTree Physical Bitcoin ETP and the WisdomTree Physical Ethereum ETP were among the first crypto ETPs to be listed in the UK. These ETPs will be available exclusively to professional and institutional investors.

Ethereum On-Chain Data Analysis

Following the approval of eight spot Ether ETF listings on May 23, Ether experienced $91.79 million in long liquidations. Meanwhile, data from on-chain metrics provider CryptoQuant shows ETH balance on exchanges has been decreasing over the last 12 months to reach a six-year low of 13.62 million ETH in May.

Additional data reveals a decline in Ethereum’s network activity over the last month. Daily active addresses on Ethereum dropped from 474k addresses on May 1 to 384k addresses on May 31. Ethereum also witnessed a decline in daily transactions in May – from 1.3 million on May 1 to 1 million on May 19, but this number increased at the end of the month to reach 1.1k on May 31.

However, there was a notable influx of new users to the Ethereum network in May. The number of new wallet addresses created rose slightly – from 3.26 million to 3.83 million, indicating increased interest from both retail and institutional investors.

Ethereum Supply No Longer Deflationary After Dencun Upgrade

The Dencun upgrade has made ETH inflationary, potentially undermining the “ultra sound” money narrative. This shift is due to a structurally lower amount of transaction fees being burned, which prevents the reduction of the overall supply of ETH needed to maintain its deflationary status.

Following the Dencun upgrade, Ethereum’s transaction fees have significantly decreased, with the median fee now up to four times lower for the same level of network activity. Consequently, the amount of ETH being burned has dropped to one of the lowest levels since the Merge, causing the supply to grow at the fastest daily rate since then.

Ethereum Ecosystem Updates

The Ethereum ecosystem continues to evolve rapidly with several significant updates and proposals aimed at enhancing its functionality, reducing costs, and addressing governance issues.

Ethereum Name Service Layer 2 Migration

One of the notable developments is the Ethereum Name Service (ENS) planning a migration to Layer 2 to address the high gas fees and slow transaction speeds on the Ethereum mainnet. ENS, which allows users to register human-readable names for their Ethereum addresses, has seen substantial adoption but faces challenges due to the high costs associated with transactions.

The proposed migration to Layer 2 aims to significantly reduce these gas fees and improve transaction speeds, making the service more accessible and efficient for users.

Conflict of Interest Policy by Ethereum Foundation

The Ethereum Foundation introduced a conflict of interest policy on May 24, following concerns about a crossover with EigenLayer.

EigenLayer is a protocol that allows Ethereum validators to re-use their assets on other services. The announcement of the policy comes after Ethereum researcher Dankrad Feist joined EigenLayer, sparking community backlash over potential conflicts of interest.

The community raised concerns that Feist’s dual roles could lead to conflicting incentives, where decisions could favor EigenLayer at the expense of the broader Ethereum ecosystem. The new policy aims to mitigate such risks by establishing clear guidelines for managing and disclosing potential conflicts of interest, ensuring transparency and trust within the community.

Vitalik Buterin’s Proposals: Gas Model Overhaul and EIP-7702

Ethereum co-founder Vitalik Buterin has proposed a new Ethereum improvement protocol, EIP-7706, focused on a new gas model for transaction call data. The current gas system, while functional, has been criticized for its inefficiencies and high costs during peak usage times. Buterin’s proposal aims