Should You Buy Optimism and Arbitrum Before an Ethereum ETF Is Approved?

The recent approval of an Ethereum spot ETF by the U.S. Securities and Exchange Commission (SEC) has caused great excitement in the cryptocurrency market. This decision, similar to the earlier approval of a Bitcoin spot ETF, paved the way for a significant increase in the price of Bitcoin. Investors are now speculating whether Ethereum will experience a similar surge as institutional money flows into the newly approved ETF. This anticipation is not limited to Ethereum, but also includes the wider ecosystem such as Arbitrum and Optimism.

The impact of the launch of the Ethereum ETF on Arbitrum and Optimism

The approval of an Ethereum ETF could increase network activity on the Ethereum blockchain. This increase in activity could lead to increased transaction volume and potential congestion, making second-layer scaling solutions such as Arbitrum and Optimism more attractive. As more users and developers seek cost-effective and efficient ways to transact, the adoption of these platforms could increase significantly. This increased usage could have a positive impact on the value of their native tokens.

ARB and OP price action over the past 7 days. Source: CoinStats

Given their performance over the past seven days, ARB and OP do need some bullish cues. ARB’s price has fallen by 11% since May 27 and reached a daily low of nearly $1.1 on May 30, while OP’s price has fallen by 10% from a high of $2.7 on May 24. Their respective teams designed Arbitrum and Optimism to enhance Ethereum’s scalability by providing faster and cheaper transactions. As institutional investors pour money into Ethereum through ETFs, demand for scalability solutions is likely to increase. This could lead to more projects and applications being listed on these platforms, driving their utility and market value. Positive sentiment towards Ethereum’s increased legitimacy could extend to these second-layer solutions, increasing investor confidence and interest.

Bullish technical patterns for Arbitrum and Optimism prices

Both L2 tokens have formed bullish technical patterns. The hype of the Ethereum ETF may spread to ARB and OP, helping these tokens break out and confirm the pattern.

The price of ARB has formed a technical pattern known as a "falling wedge". The falling wedge pattern consists of a pair of trend lines connecting lower highs and lower lows, forming a shape that gradually narrows and slopes downward. The pattern suggests that in a downtrend, the price of an asset loses bearish momentum during the consolidation phase and is ready for a potential reversal. Usually, the breakout occurs upward, in line with the overall trend. To estimate the price target, traders measure from the widest part of the wedge above the breakout point and project this distance upward. Higher volume at the time of the breakout confirms the reliability of the reversal, indicating stronger market confidence and a higher probability of success. According to the rules of technical analysis, the price of ARB may rise 42% from the current level to $1.6 near the expected target of the pattern.

Optimism and Arbitrum prices formed a bullish technical pattern. Source: Tradingview.com

Meanwhile, Optimism’s OP token has formed a bullish pattern known as an “ascending triangle.” Historically, a horizontal trendline connecting swing highs and an ascending trendline connecting swing lows form an ascending triangle pattern. Additionally, volume helps determine the strength of a breakout. In ideal conditions, buyers enter the market when the trendlines narrow. As a result, prices will push above heavy horizontal resistance accompanied by high volume. According to the rules of technical analysis, the price target of the breakout is equal to the height of the triangle at its widest point. If this bullish pattern materializes, OP’s price could theoretically target close to $3.74, an increase of nearly 50% from current levels.

Potential challenges and risks

While the outlook is generally positive, there are potential challenges. The attention and scrutiny on Ethereum and its ecosystem could put regulatory pressure on layer-2 solutions. Additionally, if the Ethereum mainnet achieves significant scalability improvements through future upgrades such as Ethereum 2.0, demand for layer-2 solutions may not grow as expected. This could weaken the bullish case for Arbitrum and Optimism.

The latest open interest and funding rate data for Optimism (OP) and Arbitrum (ARB) provide additional insights into market sentiment.

Optimism futures open interest. Source: Coinglass

For Optimism, open interest is relatively stable, with fluctuations but no clear long-term trend. The price shows volatility, reaching a high in mid-March, then falling in late April and stabilizing in May. In addition, the funding rate fluctuates around zero, with brief periods of positive and negative funding rates, indicating mixed sentiment among traders. The combination of stable open interest and fluctuating funding rates indicates that the attitude towards OP is neutral to slightly bearish.

Arbitrum futures open interest. Source: Coinglass

For Arbitrum, open interest has dropped significantly since early March but stabilized in May. The price of ARB also reflects this downward trend, but also shows signs of stabilization. Similar to OP, the funding rate fluctuates between negative and positive values, highlighting the complexity of investor sentiment.

Given the current trajectory and the need for immediate scalability solutions, the approval of an Ethereum ETF would benefit Arbitrum and Optimism tremendously. Investors looking for high-potential opportunities in the cryptocurrency market should consider these second-layer solutions as viable options to capture the growth that will come with Ethereum’s mainstream adoption.