The possibility of another altcoin exchange-traded fund (ETF) being introduced in the United States might hinge on political shifts post the forthcoming 2024 U.S. presidential election. This is in spite of the U.S. Securities and Exchange Commission (SEC) granting approval for fund managers to list spot Ether (ETH) ETFs on May 23.
While SEC Chair Gary Gensler conceded that the launch of Ether ETFs will be a gradual process, speculation surrounding the next crypto ETF has already commenced, with Solana (SOL) emerging as a frontrunner. Despite the excitement for more crypto ETFs, Ophelia Snyder, co-founder and president of 21.co, expressed to Cointelegraph that expectations for new altcoin ETFs should be tempered.
Nonetheless, the success of spot Bitcoin (BTC) and Ether ETFs showcased that strong demand from institutional investors for altcoin ETFs could prompt ETF issuers to submit applications. A report by CoinShares in April revealed a significant increase in altcoin holdings by hedge funds and wealth managers, particularly in Solana.
Snyder highlighted the substantial interest in 21.co’s Solana exchange-traded product (ETP) on European exchanges, noting that it boasts nearly $990 million in assets under management. While the approval of spot Ether ETFs was a challenge for the SEC, the possibility of an altcoin ETF could be even more complex.
The SEC has not signaled readiness to embrace other cryptocurrencies for future ETFs, making the approval of altcoin ETFs an uphill battle. However, various factors could influence this decision. U.S. elections have the potential to sway altcoin ETF approvals.
Altcoin ETFs are already available globally for Bitcoin, Ether, and other altcoins, but U.S. regulators have been more cautious. Snyder pointed out that foreign altcoin ETFs do not hold much weight with the SEC, as they tend to rely more on domestic regulations.
Bloomberg ETF analyst Eric Balchunas explained that the SEC follows a specific timeline for ETF approvals, which could mean a lengthy wait for an altcoin ETF to secure regulatory approval in the U.S. One crucial aspect that aided the SEC in assessing market integrity was using data from the Chicago Mercantile Exchange (CME) to compare correlation with spot prices on exchanges like Coinbase and Kraken.
As the U.S. presidential election on Nov. 5, 2024 approaches, it could play a pivotal role in determining the fate of altcoin ETFs. The regulatory landscape for U.S. crypto could change depending on the election results. Donald Trump has positioned himself as a pro-crypto candidate in contrast to President Joe Biden’s more reserved stance on U.S. crypto regulation.
The outcome of the election could significantly impact the trajectory of altcoin ETFs. Balchunas suggested that if Trump were to win, he might adopt a more crypto-friendly approach, potentially appointing an SEC commissioner who is less stringent on regulatory processes. This could lead to a surge in applications for new crypto ETFs.
On the other hand, if Democrats retain power, the prospects for an altcoin ETF might dim, even if Biden replaces Gensler with another Democrat as SEC chair. The future of altcoin ETFs in the U.S. appears closely tied to the election results, with the possibility of an altcoin ETF in 2024 looking slim based on the assumption that the newly elected president would take office in January 2025.
Apart from the election dynamics, certain criteria need to be met to secure ETF approval, including liquidity, decentralization, resistance to price manipulation, and regulatory clarity. Are altcoins prepared to meet these standards?
Concerns about price manipulation in altcoin markets persist due to the smaller market cap of altcoins compared to Bitcoin and Ether. Balchunas highlighted the risk of price manipulation in smaller markets, which could pose challenges for ETFs. However, De Vos indicated that ETFs could manage some degree of price manipulation.
The issue of liquidity in altcoin markets also presents a hurdle, as they generally have lower trading volumes than Bitcoin or Ether. While some believe that an altcoin must have a significant market cap and daily trading volume to justify an ETF, Balchunas pointed out that certain ETFs can exist despite low liquidity, citing examples like junk bond ETFs.
Market makers could help mitigate the liquidity challenges in altcoin markets, facilitating the creation of ETFs. Even in markets with low liquidity, market makers could bridge the gap and enhance overall liquidity and market efficiency.
While a Solana ETF is seen as a strong contender for the next altcoin ETF due to its market capitalization, concerns about centralization and regulatory hurdles remain. Solana’s decentralized metrics, including the distribution of coins among the top holders, could impact its eligibility for an ETF.
The high concentration of wealth among a few wallets is not unique to Solana but is a common issue among altcoins. Regulatory concerns, such as Solana being labeled as a security by the SEC, could impede the approval of a spot Solana ETF unless regulatory clarity is established.
Solana’s market cap and trading volume make it a viable candidate for an ETF, but improvements in its decentralization and regulatory compliance might be necessary to meet U.S. regulatory requirements. The path to an altcoin ETF in the U.S. is fraught with challenges, but with the right adjustments, altcoins could eventually meet the criteria for ETF approval.