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Yesterday, on July 23rd, nine Ethereum spot ETFs commenced trading in the United States, following the SEC's unexpected change in stance in May. In this blog, we weigh up the impact of the ETH ETFs, examining day one inflows and our expectations going forward.
Yesterday, on July 23rd, nine Ethereum spot ETFs commenced trading in the United States, following the SEC's unexpected change in stance in May.
This launch represents a significant milestone for Ethereum and the wider digital asset industry - not only signifying the ongoing favourable regulatory clarity but also underscoring the growing maturity of digital assets as a viable alternative asset class for institutional investors.
Nine spot Ethereum ETF products have been approved in the first round of applications, with all applicants having previously launched spot Bitcoin ETFs in the US earlier this year. Coinbase has been chosen as the custodian for eight of the nine ETF providers.
Of these spot ETH ETFs, five will be trading on the CBOE, three on the New York Stock Exchange (NYSE), and the BlackRock iShares Trust will be trading on the Nasdaq.
Following Grayscale, the Franklin Ethereum ETF, VanEck Ethereum ETF, and Bitwise Ethereum ETF have set their fees at 0.19% and 0.20%, respectively. Meanwhile, BlackRock and Fidelity, issuers of the top two Bitcoin ETFs by AUM, have set their fees at 0.25% each.
The Grayscale Ethereum Mini Trust, which aims to offer a fraction of the underlying asset at a lower price, has the most competitive ETF with post-waiver fees at 0.15%. This competitive fee structure is expected to reduce outflows from Grayscale’s Ethereum Trust to other competitors.
Six of the ETF providers have waived all fees for at least six months, while BlackRock’s iShares Ethereum Trust has opted to cut their fees by half for the first 12 months. The Invesco Galaxy Ethereum ETF and Grayscale Ethereum Trust have chosen not to offer any initial fee waivers.
Compared to the spot Bitcoin ETFs, all providers except Grayscale have maintained the same post-waiver fees for their spot Ethereum ETFs. Grayscale Ethereum Trust has the highest fees among all applicants at 2.50%, which is 1% higher than its Bitcoin counterpart. However, the introduction of the Grayscale Ethereum Mini Trust is expected to mitigate the negative impact of these higher fees.
Prior to the launch of the Ethereum ETFs, many market participants had been making predictions about the estimated inflows these ETFs would receive, using the Spot Bitcoin ETFs that launched earlier this year as a point of reference and comparison.
As of the first 6 months of Spot Bitcoin ETFs trading, they have accumulated $15.5bn in net flows; driving the price from $46667 to $57348, a 6-month increase of 22.89%, whilst reaching a peak of $73118, up 57% on 13th March, just 2 months after launch.
In a previous research piece, we analysed the distribution of AUMs for BTC versus ETH investment products globally. We found that, on average, Ethereum investment products received about 23% of the AUM compared to Bitcoin from 2022 to 2023. We used this distribution as a benchmark to estimate the potential inflows for Ethereum spot ETFs, assuming the distribution remains the same going forward.
Based on this assumption, taking the 6-month cumulative flows into account, we expect to see roughly $3.56bn in inflows. Assuming these flows, our linear regression model estimates the direct impact on returns to be around 43% based solely on the inflows. This would put the ETH price at around $4,900.
Analysing the collective dataset, our prediction sits below the median 29% prediction and below the mean 25% prediction when comparing BTC’s first 6-month flows to ETH. Although we take a conservative approach, it is drawn directly from the current structure of BTC/ETH AUM distribution and is directly data-driven.
This estimate is especially conservative if the proxy for distribution is taken from market cap rather than investment product AUMs, which shows a current ETH/BTC ratio of 0.316, or 31.6%, which exceeds all proportioned flow predictions except for Standard Chartered.
There are a variety of factors at play when drawing a comparison between BTC and ETH spot ETF flows for the first 6 months. Bitcoin benefitted from first-mover advantage and launched at a more strategic point in the market, where the total market cap was approximately $1.806T. In contrast, at the time of ETH’s launch, the total market cap was roughly 37% higher, at $2.473T. This large increase in total market cap identifies the larger opportunity that was available at a lower market cap during the first launch of BTC.
In addition, the lack of a staking element within the Ethereum Spot ETF could reduce interest, with most investors looking to take advantage of the native yield on offer by holding and staking the underlying asset, which is an opportunity cost which does not exist with BTC’s ETF, since Bitcoin is proof-of-work and as such, does not provide native staking yield.
On the other hand, we also expect to see fewer outflows from Grayscale’s ETHE product compared to what was seen in the case of GBTC’s conversion, which has so far experienced cumulative net outflows of approximately $18.694bn.
Ethereum is likely to have a higher price sensitivity to flows, which we outlined in our previous blog. In summary, the key factors which affect Ethereum’s price sensitivity are:
Examining order book market depth at the 5% level, and comparing ETH to BTC, we see BTC commands a ratio of approximately 1.41 in terms of aggregate liquidity across exchanges. This means ETH is more sensitive in shifting price based on the orders currently sitting in the order book across exchanges.
With the introduction of EIP-1559, Ethereum has the potential to burn more ETH than is minted in a single block, provided there is sufficient network activity. If the launch of an ETH ETF successfully drives demand back to the Ethereum blockchain, we expect to see increased deflationary activity, which could further impact price sensitivity by reducing the circulating supply.
Currently, around 28% of the ETH supply is staked. This significantly impacts the amount of supply available for sale and highlights the long-term incentives for ETH holders to stake. This high percentage of staked ETH may also negatively affect the success of spot ETH ETFs unless a staking component is included, as the opportunity cost of holding ETH without staking is quite substantial, as covered previously.
On the first day of trading for the spot Ethereum ETFs, the nine products saw a combined volume of $1.12bn and recorded total net inflows of $106.8mn. Leading the group in terms of capital inflows were BlackRock’s iShares Ethereum Trust ETF and Bitwise Ethereum Trust, which attracted $266.5mn and $204.0mn , respectively.
Grayscale Ethereum Trust experienced outflows of $484.1mn, representing nearly 5% of its assets under management (AUM). The Grayscale Ethereum Mini Trust managed to attract $15.1mn on the first day.
As anticipated, the nine Ethereum ETFs saw lower net inflows on Day 1 compared to spot Bitcoin ETFs, which recorded $655mn in inflows. Trading activity was also lower, with Ethereum ETFs trading a Day 1 volume of $1.12bn, compared to $4.5bn for spot Bitcoin ETFs. The Day 1 inflows for Ethereum ETFs were nearly 17% of those for Bitcoin ETFs. Given the larger-than-expected outflows from the Grayscale Ethereum Trust, these inflows align with the consensus expectation of around 20% of the spot Bitcoin ETFs' AUM.
2024 has been a historic year for the digital asset sector, marked by the launch of the first spot crypto ETFs in the US, and the larger acceptance of the asset class from a political and regulatory standpoint. Major traditional financial institutions, such as BlackRock and Fidelity, have begun offering these innovative products to investors. with both the Bitcoin and Ether products seeing significant demand on launch, collectively capturing $761mn in net inflows and volumes of $5.62bn. This shift underscores the industry's transformation from being viewed as a speculative venture to becoming a significant topic in the US Presidential elections, evidenced by candidate participation in the upcoming Bitcoin conference later this week.
The launch of the Ethereum ETFs is another significant milestone and a testament to the increasing adoption of digital assets. These ETFs are particularly noteworthy as they could potentially open the doors for ETFs for other digital assets. This can be seen already, with VanEck and 21Shares having filed for spot Solana ETFs in the US, with a decision expected next year. The performance of spot Ethereum ETFs could demonstrate investor interest in digital assets beyond Bitcoin and could encourage ETF issuers to explore new digital asset ETF products. It also remains to be seen if the Ether ETFs will allow for staking in the near future, with many analysts claiming this missing component could lessen investor interest.
Overall, the launch of spot Ethereum ETFs is likely to act as a catalyst for market movements, potentially triggering breakout price action similar to previous cycles in digital assets. While we anticipate short-term volatility due to outflows from the Grayscale Ethereum Trust and the Mt. Gox sale, we remain optimistic for the future - supported by additional institutional inflows, increased regulatory clarity, improved macroeconomic conditions, and favourable policies as we approach the US Presidential elections.
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