Direxion Withdraws ETF to Short Bitcoin, Ether Futures ETF Expected to be Approved Next as ETH Enjoys First-ever Deflationary Week
Ether price has hit a new ATH at $4,645, up more than 530% YTD, as the supply shocks become real, making ETH scarcer amid rising demand.
Direxion has filed a request with the US Securities and Exchange Commission (SEC) to withdraw the Bitcoin Strategy Bear ETF.
The exchange-traded fund issuer first made the ETF application on October 26. The SEC staff asked for the filing to be withdrawn on the day it was filed.
The Direxion Bitcoin Strategy Bear ETF would have offered short exposure to Bitcoin futures contracts listed on CME, which means betting that the cryptocurrency's price would fall.
“While it does seem a bit inconsistent given their acceptance of the Bitcoin futures markets, it isn’t surprising and is likely part of a ‘baby steps’ regulatory mindset,” said Eric Balchunas, an analyst with Bloomberg Intelligence, about the SEC’s request. “I bet we will see one someday, but only when they feel ready.”
The day Direxion filed for its Bear ETF, Valkyrie also filed for a leveraged fund, XBTO Levered BTC Futures ETF, which would have delivered 1.25x the reference price of Bitcoin. Much like Direxion’s ETF, SEC staff asked Valkyrie to withdraw its leveraged Bitcoin ETF, which it did last week.
At the time, the WSJ reported that the SEC has signaled that it wants to limit new bitcoin-related products to those that provide unleveraged exposure to bitcoin futures contracts.
The first US bitcoin futures-based, ProShares Bitcoin Strategy ETF, was approved a couple of weeks back, amassing $1.1 billion in assets.
As we reported this week, the SEC also postponed its decision on asset manager Valkyrie's proposed spot bitcoin ETF until early next year, January 7. Valkyrie was also the second company to see its bitcoin-futures ETF launch last month.
Benefit From The Same Regulatory Comfort
According to ETF experts, it is likely that an Ethereum futures ETF would get a green light before a fund that holds physical bitcoin does.
“Most market participants agree that a spot Bitcoin ETF would be superior to existing futures ETFs, yet SEC approval of the former may be delayed until late 2022 or beyond,” wrote James Seyffart, a Bloomberg analyst, in a note.
He estimated that an Ethereum futures ETF could be approved as soon as the first quarter of next year.
Given that Ether futures ETFs are also traded at CME, it follows the same path that had SEC comfortable with Bitcoin futures ETF, so “they’re likely to benefit from the same regulatory comfort,” said Carlo di Florio, a former SEC official.
This week, CME Group also announced that it is launching Micro Ether Futures, which will be 1/10 the size of one Ether. Amidst all this, the price of Ether hit a new all-time high at $4,645, up more than 530% YTD.
ETH long-dated implied volatility is well supported as investors position for ETH2 launch catalyst next year. The Mar22 15k calls are already open in 50k+ ether options, >$750mln notional. pic.twitter.com/Ye6v1bUZlh
— Coinbase Institutional (@CoinbaseInsto) November 3, 2021
Ether’s supply percentage on exchanges has also been trending down since August last year, going from ~27% to ~12%. In contrast, the % supply of ETH deposited in smart contracts has been making new highs during this period, climbing from ~10% in June 2020 to now ~21%.
“We are witnessing a structural shift in which more digital assets are shifting from centralized custodians & service providers to decentralized counterparts. The biggest tailwind that’s driving this phenomenon is hot money searching for higher yields on Ethereum,” noted Delphi Digital.
The growing activity on Ethereum also has the median gas prices climbing beyond levels seen during the August-September NFT frenzy. While NFT activity is dropping, the increased volatility in the market means arbitrage opportunities.
Rising gas fees also means an increasing amount of ETH getting burned. While since the implementation of EIP-1559, OpenSea was leading the way as the number one contributor to ETH burning, now Uniswap v2, USDT, and ETH transfers stepped up to fill the void with NFT activity cooling down.
Thanks to the increased on-chain activity and high gas prices, Ethereum had its first-ever deflationary week since its inception. Additionally, with more liquidity leaving exchanges and being locked up in smart contracts, a sustained deflationary scenario will contribute to a supply shock as ETH becomes scarcer amid rising demand.
Moreover, after the Beacon Chain Altair update late last month, the network is moving closer to Etherum 2.0 merge.