Will Grayscale Sue the SEC and Flip the Crypto Market? An Upside Catalyst for Ethereum?

👇1-11) Two months ago, we presented our crypto market structure analysis, which indicated that consolidation was ahead, with downside pressure for Bitcoin (and other cryptocurrencies). Although many claimed that the post-halving period would be bullish, that the Bitcoin ETFs were (indefinitely) buying ten times the mining supply, and that Bitcoin prices could only go up, things are turning out differently – precisely as we expected. It’s tough to be bearish, but occasionally, this is the right call to make, and we do not shy away from these tough calls.

👇2-11) Until the Bitcoin halving on April 20, we had seen approximately $42bn of (liquidity) inflows into crypto markets this year (see chart below). Since the halving, we have seen nearly zero growth in stablecoin inflows, and Bitcoin futures leverage has been dramatically reduced. Contrary to the bullish tweets about a post-halving rally, crypto users have voted with their money by withdrawing or pausing inflows.

There are three catalysts around the corner. Today, we discuss one.

Crypto Flow Analysis: Bitcoin (LHS) vs. Flows (RHS, $bn) since early Jan

👇3-11) Although we are not surprised, it is remarkable how crypto market volumes have tracked Bitcoin’s funding rate—both signal a lack of interest from traders. Worryingly, there is no attempt to drive volumes higher as upside catalysts are minimal. We still expect Bitcoin to decline into the 52,000/55,000 area.

👇4-11) While crypto appears random to many, there is a clear advantage in correctly anticipating catalyst events and their implications. Since the Ethereum Dencun upgrade on March 13, 2024 (three years too late), ETH Gas fees have declined from 50 Gwei to just 3 Gwei while ETH prices dropped from 4,037 to 2,931 (or -27%). ETH prices will drop, at least, to 2,500 during the summer.

👇5-11) Since Ethereum PoW and PoS merged on September 6, 2022, the ETH/BTC ratio has declined by -43%. TVL on Ethereum is only half $52bn vs. a peak of $109bn in November 2021, while revenues are a fraction of their 2021 glory days. Since Q2 2021, Ethereum active addresses have been stagnant, and while it might be too aggressive to call Ethereum a dying blockchain, it’s a blockchain with very little value for the ETH holders. (See our report ‘Ethereum: The Bearish Case’ from April 2, 2024, when ETH traded at 3,500).

Ethereum / Bitcoin Ratio and the last two upgrades

👇6-11) Grayscale was under intense pressure a year ago. Not only was their Bitcoin product trading at one point -50% below its NAV but holders were locked in and could not redeem the product while being forced to pay a 2% management fee. This was a nice cash flow that kept the DCG mother company afloat. However, everything changed with the August 29, 2023, Court of Appeals decision and the October 13, 2023, news that the SEC would not appeal Grayscale’s application to launch an ETF.

👇7-11) Grayscale’s legal win against the SEC is overshadowed by its 1.5% annual management fee despite everybody else charging near zero. The result is $17bn in outflows from its GBTC BTC ETF. That is $340m in fees and 0.5% less in its remaining $19bn, another $100m or $440m in total fees per annum that Grayscale is missing out due to the SEC’s decision to allow Bitcoin Spot ETFs. Even if BTC is up +100% due to the ETF launch, Grayscale is losing - at least - $220m annually due to the ETF approval.

👇8-11) The probability is very low that the SEC will approve an ETH ETF on May 23; considering that the other ETF issuers with sizeable financial resources have other traditional market products, they certainly want to maintain their relationship with the SEC. Hence, nobody might sue even if the SEC denies an ETH ETF, and an ETF would look unlikely in 2024.

👇9-11) Blackrock themselves have said their clients are very little interested in ETH ETFs, and the Hong Kong ETF launch example has ETH ETFs at around 10% of the inflows compared to BTC. Due to their fee structure, Blackrock might make only $35m on the Bitcoin ETF (per annum). Would Blackrock sue the SEC and risk being considered ‘difficult’ for maybe $3.5m in management fees? Doubtful. Only Grayscale could sue and bring this ball rolling.

👇10-11) However, considering how they lost out on Bitcoin ETF fees, Grayscale will undoubtedly be happy with the status quo: $9bn in AUM for their Ethereum ETF at a 2.5% annual management fee—or $225m per annum. Hence, it will be implausible for Grayscale to sue the SEC (if an ETF is denied). The industry can no longer say that Grayscale has been milking investors for the management fee despite fees 7x higher than Blackrock's.

👇11-11) But we still expect a Bitcoin rally later in the year (which we will explain in another report), which could also benefit Ether prices. First, we expect Ethereum to continue selling off into the summer as it lacks fundamental support. Our bearish Ethereum view from 3,500 looks solid at 2,900 (May 13), and we expect another move lower to at least 2,500. Tough calls are challenging but necessary to produce and protect PnL.