Bitcoin pullback, alts market revitalized

Recently, the cryptocurrency market has shown an interesting trend. Although Bitcoin has pulled back from its peak, Ethereum has defied expectations, breaking the $3600 barrier. Meanwhile, multiple sectors such as Defi and Layer2 have also experienced a broad rally, and the altcoin market seems to be rejuvenating. However, just a short while ago, the market conditions were vastly different. At that time, Bitcoin was nearing $100,000, while the altcoin market was bleak, with most tokens experiencing a cliff-like decline.

In this market environment, traditional financial institutions have shown interest in alts. With unprecedented regulatory support, they have begun to pay attention to altcoin ETFs, injecting a glimmer of vitality into the long-dormant alt market.

Looking back at the situation from a week ago, Bitcoin continued to rise and reached $99,000, becoming a hot topic in major media outlets. However, the usually active crypto community has rarely remained silent. In this round of bull market led by institutions, most market participants have not benefited from it. On the contrary, the alts they hold are continuously being "sucked dry" by Bitcoin, showing a persistent downward trend. This stands in stark contrast to the vigorous bull market promotions, leaving many investors feeling frustrated.

Ethereum is a typical example. As a recognized mainstream coin, the relative increase of ETH is far less than that of Bitcoin. The exchange rate between ETH and BTC has continued to decline throughout the year, dropping from 0.053 all the way down to a low of 0.032, and only recently began to rebound. If even Ethereum is like this, one can imagine the performance of other coins.

However, the altcoin market seems to be starting to recover recently. Coins such as SOL, XRP, LTC, and Link initiated the movement over the weekend. Solana's decentralized exchange saw an average daily trading volume surpassing $6 billion, and XRP once surged to $1.63. This morning, Ethereum strongly rose above $3,600, driving the entire altcoin sector to increase, with the Defi sector seeing a 24-hour increase of up to 8.47%.

Analyzing the reasons for the rise of alts, in addition to the positive sentiment brought by the bull market, the participation of traditional financial institutions is indispensable, and ETFs are the most direct manifestation.

Looking back at the beginning of this bull market, the launch of 11 Bitcoin spot ETFs ignited a market frenzy. The entry of traditional financial giants has propelled the mainstreaming of Bitcoin and significantly lowered the barriers to market participation. After the approval of Bitcoin and Ethereum spot ETFs, the market began to speculate on which token would attract Wall Street's attention next. Considering market capitalization and capital factors, Solana was once the most talked about coin.

At the end of June, several asset management companies began to submit applications for Solana ETFs. However, the regulators' tough stance quickly cooled down the altcoin ETFs. But now, the market environment has undergone significant changes. In late November, a certain exchange proposed to list and trade four types of Solana-related ETFs. These ETFs are initiated by different asset management companies and are classified as "commodity-based trust fund shares." If formally accepted, the final approval deadline is expected to be in early August 2025.

Not only Solana, but more alts ETFs are also in preparation. In the past month, several investment firms have submitted spot ETF applications for cryptocurrencies such as XRP, Litecoin, HBAR, and others to regulators. According to industry insiders, at least one issuer is currently attempting to apply for an ETF for ADA (Cardano) or AVAX (Avalanche).

The massive emergence of altcoin ETFs has sparked widespread discussion, and the influx of funds from afar has further heated up the market. Is the wild west era of crypto ETFs really about to arrive?

From an objective perspective, referring to the approval process of Bitcoin and Ethereum, cryptocurrency approval for a spot ETF basically needs to meet two implicit requirements: first, it must not be explicitly classified as a security by regulatory agencies; second, there needs to be leading indicators proving market stability and non-manipulability, with a typical characteristic being that the token can be traded on the commodity futures exchanges in the United States. From this perspective, there currently seem to be no other tokens in the crypto market that meet these standards. For more centralized tokens, the approval difficulty is even greater, especially for SOL, which not only has a high degree of centralization but has also been clearly classified as a security by regulatory agencies.

Nevertheless, the market remains optimistic about the ETF approvals for tokens like SOL and XRP. Some ETF analysts believe that the approval timeline for these ETFs may be extended to the end of 2025, but Solana-related ETFs are expected to be approved within two years. A more optimistic view suggests that the Solana ETF could receive approval before the end of next year.

Behind this optimistic sentiment are some supporting factors, the most core of which is the newly incoming government. The new government has a noticeably friendlier attitude towards cryptocurrency, and the changes in the internal and external regulatory environment have given the cryptocurrency industry stronger confidence.

From the perspective of internal industry regulation, major regulatory agencies will undergo leadership changes. The current chairman has announced that he will step down in January 2025, which puts a pause on the strict regulations seen in recent years. Although the selection of a new chairman has not yet been determined, there are reports that the new government may expand the powers of the Commodity Futures Trading Commission to strengthen its regulatory authority over the digital asset space. If this measure is implemented, the likelihood of crypto assets being classified as securities may decrease.

From a broader external perspective, the new government is not lacking in cryptocurrency supporters. Several cabinet members have a positive attitude towards cryptocurrencies, with some even directly holding cryptocurrencies. This composition is significantly different from before and suggests that future regulation of cryptocurrencies may be more lenient. If a complete regulatory framework for crypto assets can be established during this government's term, it will provide direction for the future development of the industry.

In addition to regulatory aspects, companies under the new government are also actively laying out plans in the crypto field. There are reports that a certain media technology company is negotiating to acquire a cryptocurrency exchange. Furthermore, the company has submitted an application for cryptocurrency payment services, planning to venture into the crypto payment sector. These corporate movements indirectly reflect the government's positive attitude towards cryptocurrency.

It is precisely based on these factors that the market has rekindled hope for altcoin ETFs. With the changes in the leadership of regulatory agencies, the securities disputes surrounding altcoins are expected to ease, laying a preliminary foundation for the realization of ETFs.

On the other hand, even though the prospects for altcoin ETFs are still unclear, traditional financial institutions are not willing to give up this massive market worth over $30 trillion. They are building new investment products and derivatives around crypto assets so that investors can incorporate crypto assets into their portfolios.

The head of a certain cryptocurrency index provider stated that mainstream investors would establish direct exposure through a spot Bitcoin ETF, while also customizing their exposure to the asset class through additional products. The most popular products include commodity futures linked to cryptocurrencies that earn returns, as well as products that provide downside protection through options. Currently, the company is planning to launch Bitcoin index options.

The Chief Investment Officer of a certain investment advisory firm also mentioned that they are considering increasing Bitcoin exposure in the ETF model portfolio.

Overall, although achieving altcoin ETFs is still challenging under the current regulatory environment, in the long term, with regulatory easing and increased investor interest, it will be an inevitable trend for financial institutions to deeply research crypto assets for the sake of traffic acquisition and market competition. On the product side, institutions will no longer be limited to Bitcoin and Ethereum; the productization and standardization of crypto assets will be further strengthened, and the derivatives market may experience explosive growth, aimed at clearing obstacles for investors to enter the market. It is foreseeable that in the future, investors will have more ways to participate in investments related to cryptocurrency products.

In the absence of new products, existing ETFs will also benefit from this trend. Taking the Ethereum spot ETF as an example, its inflows have long been weaker than those of Bitcoin. As of November 27, the net inflow of the Ethereum spot ETF was approximately $240 million, while the net inflow of the Bitcoin spot ETF reached a staggering $30.384 billion, highlighting a significant gap between the two.

There are multiple reasons for this disparity. First, Ethereum differs from Bitcoin in terms of value stability and positioning. Second, the core staking functionality of Ethereum is limited, which also diminishes investor enthusiasm. From a cost perspective, directly holding ETH can yield about 3.5% in staking rewards, while holding institutional ETFs not only fails to provide this risk-free income but also incurs management fees ranging from 0.15% to 2.5%.

However, with the shift in regulatory attitudes, Ethereum spot ETFs may include staking features in the future. After all, the regulatory agencies that previously firmly opposed staking have changed their stance, and there are already precedents in the European market for launching ETF products with staking features.

Of course, although the prospects for ETFs are promising, actual capital inflows remain to be seen. Even Ethereum's appeal to traditional capital is relatively limited, as the total assets of the Solana Trust under a well-known investment firm amount to only $70 million, indicating that the purchasing power for altcoin investments may not be as optimistic as imagined. As a result, some large asset management companies have stated that they are not very interested in crypto products outside of Bitcoin and Ethereum.

Regardless of how the approval progresses in the future, the buzz around altcoin ETFs has already begun. For the long-dormant altcoin market, this is undoubtedly a timely shot in the arm.