US elections are a ‘big variable’ for Solana ETF approval.
Another altcoin exchange-traded fund (ETF) in the United States may depend on political changes in the upcoming 2024 US presidential election.
Although the US Securities and Exchange Commission (SEC) gave the green light to fund managers to list Ether (ETH) ETFs on May 23rd.
Although SEC Chairman Gary Gensler admitted that “it will take time” for ether ETFs to launch, speculation about the next crypto ETF has already begun, with Solana (SOL) emerging as a top contender.
Oh guest @cnbc says $SOL is the next ETF.
Hmm, where have I heard that before… pic.twitter.com/aYAedMhcM0
— ◢ Joe McCann (@joemccann) May 22, 2024
Despite the enthusiasm for more crypto ETFs, Ophelia Snyder, founder and president of 21.co – the sponsor and subsidiary of the ARK investment site Ether ETF – told Cointelegraph that expectations for the new altcoin ETFs should not be too high.
“It is unlikely that the approval of ETH will trigger a large wave of validation.”
However, as the space's Bitcoin (BTC) and Ether ETFs have shown, strong demand for altcoin ETFs from institutional investors is forcing ETF issuers to submit applications.
In an April report, CoinShares – an alternative asset manager specializing in digital assets – hedge funds and wealth managers have significantly increased their holdings of altcoins, especially Solana.
Snyder highlighted the strong interest in 21.co's Solana Exchange Traded-Product (ETP) on European exchanges, which has approximately $990 million in assets under management.
The SEC has shown no signs of accepting other cryptocurrencies in future ETFs. Approving the Spot Ether ETF was already a tough pill for the Commission to swallow.
An altcoin ETF may be more difficult to accept SEC; However, several different factors can change that.
US elections could be a sign of altcoin ETF approvals.
Spot Bitcoin, Ether and altcoin ETFs exist worldwide. However, US regulators are more restrictive. “Foreign altcoin ETFs do not matter to the SEC because US regulators tend not to trust foreign regulators,” Snyder said.
Bloomberg ETF analyst Eric Balchunas explained to Cointelegraph that the SEC follows a specific timeline for approving ETFs, and if followed again, it could take years for another altcoin ETF to get the green light from the agency.
One key factor that allowed the SEC to examine market accuracy was the use of data from the Chicago Mercantile Exchange (CME) to compare correlations with prices on spot exchanges such as Coinbase and Kraken. “The analysis used a 32-month sample, which is the critical period of the asset on the CME,” Joshua de Vos, head of research at the crypto data company CCData, explained to Cointelegraph.
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With current US regulators, Balchunas explained, they “probably follow the same process” where a crypto asset can have active trading on the CME to monitor price behavior.
No future altcoin ETFs are listed in the US yet, which suggests a long wait before the US market can see an altcoin ETF. But Balchunas said, “There's a big variable here, which is the American election.”
In the year The November 5, 2024 US election could be crucial for the future of altcoin ETFs, with US crypto regulation becoming a political topic. Donald Trump has promoted himself as a pro-crypto candidate in light of President Joe Biden's somewhat anti-crypto stance on US crypto regulation.
The results could significantly change the course for altcoin ETFs. Balchunas said:
“If Trump wins, in my opinion, we may see other coins as ETFs.”
Balchunas added that if Trump wins, he promises to go really liberal on crypto and support him in everything. If that's the case, Balchunas said, Trump could put in place a “new SEC commissioner who doesn't care” about the process followed by the SEC over the past few years, making access to future information a critical part of the spot ETF approval process.
Balchunas also believes that Trump's victory could prompt ETF issuers to apply en masse for new crypto ETFs: “If Trump wins, I think people will test the waters and try all kinds of things.” [ETFs]He said.
On the other hand, Balchunas believes that “if the Democrats stay in power, there will be no altcoin ETF,” even if Biden ousts Gensler and appoints another Democrat as SEC chairman.
Altcoin ETF prospects in the US appear to be highly correlated with the outcome of the upcoming presidential election, and since the president-elect will take office in January 2025, the prospects for an altcoin ETF in 2024 are slim.
In addition to the upcoming US election, some specific requirements for ETF approval are generally expected to be met: healthy liquidity, decentralization, resistance to price manipulation and, if possible, must provide accurate classification from regulatory agencies. Are altcoins ready to meet these conditions?
Price manipulation in altcoin markets
The market capitalization of Bitcoin and Ether is significantly higher than that of other altcoins. As Balchunas notes, “This is a concern for ETFs as the lower the market, the greater the risk of price manipulation.”
As it stands now, “the altcoin market is still very nascent, so the altcoin market is vulnerable to market manipulation,” said CCD's De Vos.
However, price gouging may not be as strong a deterrent as some think.
De Vos points out that Bitcoin ETFs have been rejected several times in the past before the SEC finally “disapproved” of concerns surrounding market manipulation. Balchunas says ETFs can handle some price manipulation.
“Just because there's a little bit of price manipulation or because the price moves and fluctuates a lot doesn't mean you can't have an ETF.”
For example, two active ETFs claim to have GameStop as a major holding, and even though there has certainly been a manipulation of GameStop's stock price, the ETFs are still active.
Can ETFs back low-liquidity crypto assets?
Another issue is that altcoin markets are less liquid than Bitcoin or Ether.
Sebastian Hein, chief risk and compliance officer at institutional staking partner Northstack, told Cointelegraph that he believes an altcoin needs a large market cap and high daily trading volume to justify an ETF.
However, Balchunas explained how an ETF can exist without much liquidity. He pointed out that there are junk bond ETFs that “even the big ones don't trade on a daily basis.” So, if there are junk bond ETFs, why not an altcoin ETF?
Although there are ETFs with less liquidity, this situation can represent a problem.
Balchunas explained that the main issue in a market with low liquidity is the aspect of premiums and discounts. This is not useful for an ETF as it may provide a different value than the actual asset. At this point, market makers help eliminate these arbitrage gaps.
Alexis Sirkia, founder and former CEO of market maker GSR, told Cointelegraph that market makers should have no problem ensuring liquidity in more mature altcoin markets like Solana.
In addition, the form of ETFs “attracts market makers from other markets, leading to overall liquidity and improvement in the market.”
Low liquidity parameters of altcoins with smaller markets may not be sufficient for a specific ETF. Therefore, a basket of altcoins can be an option.
Justin D'Annett, head of business development at market maker Keyrock, believes that multiple altcoins need to be bundled together to have one sustainable ETF. He believes there could be an “Ethereum Layer-2 ETF or maybe a memecoins ETF” in the future.
However, investors do not seem to favor altcoin baskets. Snyder said 21.co has seen more interest in individual asset trackers than the baskets of altcoins offered. Additionally, she explained that an ETF with a basket of altcoins is unlikely because ETF wrappers in the US require “more regulatory involvement.”
Could Solana be an ETF?
Snyder said Solana is a frontrunner for the next altcoin ETF because it has the highest market capitalization compared to other altcoins. However, Solana has a problem with centralization.
De Vos explained that the performance metrics used for the crypto ESG Benchmark index evaluate decentralized metrics, including the percentage of coins in the top 10 Solana wallets, the Nakamoto coefficient, and the type of governance system.
Solana doesn't crack the top 10 in CCCData's decentralization ranking.
De Vos said the top 10 Solana holders hold 7.29% of the supply and play a critical role in price action.
The high concentration of wealth among small wallets is not Solana's only issue; It's a common problem for altcoins. According to data from CCData, the top 10 wallets have 5.58% of XRP (XRP), 4.88% of Stellar Lumens (XLM), and 3.90% of Chainlink (LINK).
Basel Ismail, CEO of the investment analytics firm, told Cointelegraph that Solana's enterprise validators receive the most support from a small group, which if united could dominate the network.
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Ismail Solana said that the blockchain has previously experienced multiple outages, with no indication of when it will come back online. He said this issue must be resolved before any EFF is considered.
If the current regulators don't change after the upcoming election, the Place Solana ETF faces significant hurdles. The SEC has directly designated Solana as a security, “which makes it highly unlikely that a spot ETF will be approved unless there is clarity on their treatment,” De Vos said.
Solana has the market size and scale to justify an ETF, but – like other altcoins – it may need to improve its fundamentals to overcome current US regulatory requirements and become a viable ETF alternative.
