Ethereum’s Slowdown Unrelated to Spot ETH ETF Approval

The U.S. Securities and Exchange Commission (SEC) granted approval for the long-awaited Ethereum spot exchange-traded fund (ETF) on May 23. Despite this highly anticipated announcement, the price of Ether (ETH) could not maintain its position above $3,800 by May 24, which was unexpected since ETH had traded at $3,943 just two days prior. The market’s uncertainty about the likelihood of approval added to the surprise, especially regarding the timing of the SEC’s decision.

Although the spot ETF approval was significant news, the SEC has yet to approve the individual S-1 statements for each issuer, a step that could take considerable time to complete. This delay, coupled with other factors like stagnation in the network’s growth, high transaction fees, and ongoing regulatory uncertainty within the U.S., has impacted Ether’s overall performance. The recent profit-taking, driven by expectations surrounding the spot ETF’s approval, led to a 23% spike on May 20. This instance is often described using the phrase “sell the news,” where traders purchased ETH in anticipation of the formal announcement.

Despite the excitement surrounding the ETF approval, Ether still lags 24% behind its all-time high of $4,868 achieved in November 2021. This suggests that the fervor was insufficient to push Ether’s market capitalization beyond its current $445 billion. Bitcoin (BTC) is trading just 7% below its all-time high from March 2024, highlighting that other elements are restraining Ether’s performance.

Evaluating the Ethereum network over the past month reveals no signs of improvement in usage metrics for decentralized applications (DApps) and deposits. The total value locked (TVL) in Ethereum dropped by 6% after peaking at 18.3 million ETH on May 16. This metric excludes DApps that don’t rely heavily on large deposit bases, such as non-fungible token (NFT) marketplaces, games, social networks, and collectibles. A deep dive into the network’s top applications shows significant volume concentration in Uniswap, the leading decentralized exchange (DEX). Seven of the top ten DApps on Ethereum witnessed a decrease in active addresses, with Uniswap’s activity dropping by 25%.

Further compounding Ethereum’s issues is the challenge posed by miner-extracted value (MEV). MEV occurs when validators organize transactions within a block to maximize profits, often causing network congestion and spiking gas fees. Ethereum co-founder Vitalik Buterin tackled this concern on May 17, suggesting protocol-level controls to limit the information available to MEV developers. His proposals included separating the validation process from block contents or restricting block producers’ ability to prioritize certain transactions. A viable solution is not expected in the immediate future.

While the spot ETF approval marks a favorable regulatory development and classifies Ether as a digital commodity under some interpretations, regulatory actions still loom large. Ongoing legal actions against Consensys and the Ethereum Foundation contribute to the uncertainty. Some experts argue that until the SEC finalizes the S-1 registration statements, Ether’s classification as a non-security remains a question mark.

In April, Consensys received a Wells notice from the SEC, which highlighted issues concerning MetaMask’s trading and staking services. An investigation reported by Fortune magazine in March revealed that the SEC was scrutinizing firms linked to the Ethereum Foundation regarding staking activities. These ongoing regulatory concerns perpetuate the atmosphere of uncertainty, further dampening Ether’s market performance.

The SEC’s approval of the Ethereum spot ETF represented a significant regulatory milestone but did not lead to a substantial increase in ETH prices as many had hoped. The delay in approving individual S-1 statements, coupled with other operational and regulatory challenges, continues to weigh down Ether’s market performance. The overall sentiment surrounding Ethereum remains cautious as it continues to navigate these complex issues.