ETH ETF Trading Ideas: Detailed Analysis of the Best ETH Trading Strategies

Author: 0xkyle, chain analyst Source: substack, @Oxkyle Translation: Shan Ouba, Golden Finance

Congratulations, dear cryptocurrency enthusiasts! In a move that no one expected, the U.S. Securities and Exchange Commission (SEC) approved a rule change on the creation of an Ethereum ETF - despite Gary Gensler's public tough stance on Ethereum.

I won't go into the details of the reasons behind this, that's left for the political commentators on Twitter to discuss. Our main focus is that this has happened, which suggests a major shift in the U.S. government's attitude towards cryptocurrencies.

Additionally, the passage of the FIT21 Act ("FIT21 provides the necessary regulatory clarity and strong consumer protections for the digital asset ecosystem to thrive in the United States") furthers this progress. A new era of regulatory compliance is upon businesses.

The US government's new soft stance on cryptocurrencies is very bullish, and you can see how the market is digesting this information - the Real World Assets (RWA) and Ethereum sectors have been the standouts so far this month.

I believe that with the launch of the Ethereum ETF and the recent soft stance on cryptocurrencies, these two sectors will continue to outperform in the coming weeks and months.

Introduction

Overview

The argument of this article can be divided into two parts: first, the outstanding performance of Ethereum as an asset class and its related alternatives, and second, the RWA sector as a manifestation of the overall "bullish cryptocurrency government stance".

These two sectors are closely linked because:

• With the SEC approving an Ethereum ETF, this signals a softer attitude towards cryptocurrencies, which means that RWA assets driven by institutions will also see more inflows (as we have already seen with ONDO's relationship with Blackrock).

• The institutional "investment thesis" for Ethereum has always been tokenization, stablecoins, and real-world settlement - the major institutions will have discussions around RWA assets on Ethereum, which has been the main narrative of Ethereum.

So, to sum it up:

• Long Ethereum and its best alternatives

• Long RWAs - ONDO is my favorite

Other RWAs can also be considered, but the reason I don't do this is because ONDO itself is an altcoin of Ethereum, and going down the risk curve means you are more exposed to market risk in the event of a downside move. I prefer to keep it simple.

In-depth Analysis of Ethereum ETFs

Now let's break down the Ethereum ETF trade. I think this is very interesting because unlike the Bitcoin ETF, which we had a lot of time to "prepare" - the Ethereum ETF caught many market participants off guard. This is why we saw a huge 25% increase in a day when the probability of approval of the Ethereum ETF changed dramatically overnight.

The problem is that markets rarely let you repeat the same trade — and this trade’s thesis is based on the idea that an Ethereum ETF has not yet been priced in by the market. To gauge this, we first have to look at the performance of Bitcoin ETFs:

Key Dates for Bitcoin ETFs

• June 15, 2023: A critical week for Bitcoin, Blackrock shows their intent and files for a spot Bitcoin ETF

• October 23, 2023: Perhaps the moment that really solidified the possibility of a Bitcoin ETF was the SEC not appealing Grayscale’s court ruling, meaning they were seriously considering → markets got confirmation as a result

• 

  

  

  • The Blackrock ETF announcement basically started the narrowing of the discount

  • The Blackrock ETF announcement basically started the narrowing of the discount

  • The Blackrock ETF announcement basically started the narrowing of the discount

  • The Blackrock ETF announcement basically started the narrowing of the discount

  • The Blackrock ETF announcement basically started the narrowing of the discount

  • The Blackrock ETF announcement basically started the narrowing of the discount

  • Open Interest (OI) surges after June 15th, drops sometime in August, but starts an upward trend in October, peaking in February

  • I look at CME’s Open Interest because it’s the best tool to watch for institutional positioning

  Now, let’s look at Ethereum.

  Key dates for Ethereum ETFs

  • May 20, 2024: Bloomberg analysts raise the probability of Ethereum ETF approval from 25% to 75%

  • May 23, 2024: SEC approves exchange applications to allow listing of spot Ethereum ETFs

  

  

  

  

  Interesting things:

  • - The ETHE discount narrowed from -24% to -1.28% in 2 days, compared to GBTC which took months to narrow its discount.

  • - CME open interest growth was not as strong as the Bitcoin ETF.

  • - Ethereum’s major gains were already reflected in the probability adjustment, not in the event itself - that is, the market priced in the ETF announcement in advance, which is the opposite of the case for Bitcoin. Bitcoin has seen a large price increase every time it was announced; as I said, the same trade will not work twice.

  With that background, let’s break it down:

  Arguments and Risks

  I’ll start with the risks of the trade, as I believe it’s more important to weigh the downside of the trade than the upside potential – manage the downside and let the upside unfold naturally.

  Risks:

  1.Main Risk: Market has topped or is close to a top/timed stops.

  Arguments in favor of this view are the rapidly narrowing discount and Ethereum’s price performance prior to the announcement. Arguably, these guys knew how to trade – this was essentially an upside-only trade, but CME and total open interest were largely stagnant.

  The fact that Ethereum open interest is only 4 billion less than Bitcoin open interest on January 10th could be a sign of “everyone who’s long is already long, who’s going to buy?”

  I find this argument pretty strong to be honest. I think the market is seriously ahead of the game on this trade – even though the ETF has just launched, open interest is already exceeding all-time highs, unlike Bitcoin’s trade where the market only saw such high open interest when the ETF was launched.

  The market equated “ETF approval” with “Ethereum ETF launch”, which are completely different things. Looking at how the price reacted to the approval announcement, and how quickly the discount narrowed, this argument makes sense. I actually agree with this view, which is why I said at the beginning of the article: "These two sectors will continue to outperform in the coming weeks and months."

  

  

  I actually agree with this view, which is why I said at the beginning of the article: "These two sectors will continue to outperform in the coming weeks and months."

  

  2. Unique Regulatory Risk

  I can’t comment much on this because I don’t understand how regulatory risk works. But from what I read on Twitter, people are saying that only 19b-4 was approved, not S-1.

  This basically means it “can be challenged within the next 10 days” (?) ←I don’t know if this is true! But if it is, it certainly poses a huge risk to the trade if the whole thing is a scam.

  Or, there may be some other “hidden between the lines” risk associated with this approval – don’t know. But it’s definitely something to keep in mind.

  I like this trade, what to go long on?

  I know this post is already long, but we’re getting to the good stuff. The story so far is: Ethereum is good, but the market may have gotten ahead of itself. Still a bullish catalyst in the long term, though. So, what to buy?

  When choosing Ethereum-related bets, many participants will fall into choice difficulties - after all, you can choose liquid staking derivatives (LSDs), Layer 2, ZK-Rollups, decentralized financial protocols (DeFi), meme coins, etc.

  

  So when we plot the performance of all of these coins, we can see that the best performers are (in order of performance from highest to lowest):

  PEPE, LDO, UNI, PENDLE, METIS, AAVE

  This is based on a 1-week lookback period (i.e. May 18th to May 26th). This is a crude measure - a more scientific way would be to calculate the beta of these coins over a more "correct" lookback period - but for me, this method works.

  I personally choose to go long on PEPE and PENDLE because they have been popular in the market all year. Not only have they performed well, but they are also among the best performing currencies so far this year.

  

  Therefore, I believe that PEPE and PENDLE offer the greatest upside. They have the added advantage that the market loves high-profile currencies; I would not ignore the strength of the PEPENDLE combination.

  It’s time for an RWA deal

  I’ve spent too long talking about the ETH ETF deal, and now I’m running out of energy to write about the RWA side of the deal. The thesis is simple: RWAs have been something institutions have been pushing for since the beginning of crypto, and ETH has been the main chain for this - ONDO’s work with Blackrock is built on ETH.

  

  

  So this is equivalent to betting on the overall narrative development of Ethereum. For asset selection, I mainly choose ONDO, and some people I know also shill CANTO/DUSK. Personally, my approach is simple - 1 ONDO = 1 CONDO.

  

  

  By the way, I think the ETH/SOL pair is a good pair to trade. Overall, my feeling is that SOL has peaked for now, and going long ETH/short SOL beta will be very attractive.