New research conducted by Coinbase suggests that the decision regarding a spot Ethereum (ETH) exchange-traded fund (ETF) could catch investors off guard.

Coinbase Institutional has released a new note stating that it is not a matter of if, but rather when, an ETH ETF will be approved, drawing a parallel between the U.S. Securities and Exchange Commission’s (SEC) approach to Bitcoin (BTC) ETFs earlier this year.

The note highlights the SEC’s examination of the strong correlation between the price of spot BTC on the Chicago Mercantile Exchange (CME), which is also applicable to Ethereum.

“While there is uncertainty surrounding the timing of the approval due to the SEC’s lack of communication with issuers, we believe that the introduction of a US spot ETH ETF is inevitable. In fact, the same reasoning used to approve spot BTC ETFs can be applied to spot ETH ETFs. This is based on the sufficiently high correlation between the CME futures product and the spot exchange rates, which allows CME’s surveillance to reasonably detect any misconduct in the spot market.”

The correlation study mentioned in the spot BTC approval notice began in March 2021, one month after the launch of CME ETH futures. This deliberate choice of evaluation period suggests that a similar reasoning could be used for Ethereum markets. Furthermore, correlation analysis previously presented by Coinbase and Grayscale indicates that the spot and futures correlation in ETH markets is comparable to that of BTC.

Despite the low probability of an Ethereum ETF receiving approval in May, Coinbase suggests that the SEC might surprise the market with a positive decision.

“We believe there is potential for an unexpected outcome in this decision. Polymarket currently estimates a 16% chance of approval by May 31, 2024, while the Grayscale Ethereum Trust (ETHE) is trading at a 24% discount to its net asset value (NAV). We believe the likelihood of approval is closer to 30-40%.

As cryptocurrencies become a topic of interest in elections, it is less certain that the SEC would be willing to risk the political capital required to deny an Ethereum ETF. Even if the initial deadline on May 23, 2024 results in rejection, there is a high probability that litigation could reverse the decision. It is also important to note that not all applications for spot ETH ETFs need to be approved simultaneously. In fact, Commissioner Uyeda’s approval statement regarding the spot BTC ETF criticized the hidden “motivation for expediting the approval of these applications, which is to prevent a first-mover advantage.”

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