Spot Ethereum ETFs: Expectations moving forward

The unexpected approval of spot Ether ETFs took the market by surprise, but it might just be the very catalyst that rekindles Ethereum’s momentum. Although there is no set date for when the ETFs will begin trading, their potential to increase adoption and further legitimise cryptocurrencies as an asset class has certainly brought the leading smart contract platform back into the spotlight.

When looking at Ethereum’s performance over the last year and a half, it has lagged behind Bitcoin. This was at first surprising given the successful upgrades like Shanghai (staking withdrawals) and DenCun (Layer 2 scalability enhancements), the fast-growing staking and restaking sectors, and various other ecosystem trends.

A logical explanation could be that for most investors, Bitcoin is the obvious on-ramp into the crypto market, with far greater popularity, liquidity and a stronger presence in the options and futures markets. Much of this year’s early momentum also rotated into other tokens like Solana, while many retail investors are still out of the market, given that Ether’s retail trading volume is only a third of what is was during the last comparable rally in 2021.

However, momentum finally shifted after the SEC’s approval of the spot Ether ETF products, leading to a significant spike in Ether’s price and overall traded volumes, with Ether nearly breaking its yearly high of USD 4098. The excitement is understandable, given the involvement of reputable issuers like BlackRock and Fidelity, who have strongly endorsed cryptocurrencies like Bitcoin (and now Ether). Their activity in the space has brought much higher levels of trust and confidence among many sceptical or sidelined investors – especially after spot Bitcoin ETFs became the most successful ETF launch of all time.

Now, many are looking to Ethereum, the second largest cryptocurrency by market cap. Some expect substantial inflows and significant upside potential, while others are more conservative and predict a far slower start compared to Bitcoin. Either way, we think that the upcoming spot Ether ETFs matter for Ethereum and the broader crypto market. Here’s a few reasons why:

  • Legitimisation of Ethereum: The regulatory approval as a commodity ETF reduces the regulatory risk around Ether, while the issuance of spot Ether ETFs by reputable institutions like BlackRock and Fidelity could lend significant legitimacy to cryptocurrencies for retail and institutional investors alike. This can increase trust and the likelihood of Ether becoming an acceptable part of traditional portfolios, while providing a secure and regulated entry point without the reputational issues that often get in the way, particularly for institutions.
  • Lowers barrier to entry: Without the friction of having to understand how to use a wallet or how to account for crypto in a tax return, spot Ether ETFs would dramatically lower the barrier to entry into Ether. This could attract a new wave of investors, particularly those familiar with traditional stock market trading but new to the crypto space.

The introduction of spot Ether ETFs could also have an impact on the demand dynamics of Ether itself, even though these products are managed outside Ethereum’s native ecosystem.

  • Limited liquid supply: Ether’s liquid supply is already limited, wih about a third of Ether staked and another third locked in protocols or held by long-term holders. Exchange balances are down to just 10.6 percent of the total liquid supply, so if demand increases after ETFs start trading, this could lead to potential demand shocks.
  • Demand for spot Ether: The spot Ether ETFs do not offer staking yields, which might lead to higher demand for actual Ether. This could result in investors moving funds from ETF products like Grayscale’s Trust into spot Ether. Over time, as demand grows and the available liquid supply remains low, this could positively impact Ethereum’s price potential.

Source: The Block (aggregate open interest on exchanges)

After a period of consolidation, the excitement around spot Ether ETFs spiked following Bloomberg ETF analyst Eric Balchunas’s tweet on May 20. He increased the approval odds from 25 percent to 75 percent, driving futures open interest up 25 percent in a single day. Ether’s CME open interest also saw a similar surge, showing a clear rise in institutional demand in anticipation of an eventual launch.

Expectations post Ether spot ETF launch

When considering the potential inflows for spot Ether ETFs, it is important to mention the circumstances around their approval are quite different from Bitcoin’s earlier this year.

Firstly, the SEC’s approval for Ethereum came unexpected and with little notice, unlike Bitcoin’s where issuers had months to prepare and expecting an approval on the January set date. This last-minute green light has left issuers rushing to market these new Ethereum products, which could slow initial inflows. Secondly, Ethereum isn’t as popular as Bitcoin. While Bitcoin is often seen as “digital gold” and a safe haven (even publicly endorsed by BlackRock’s Larry Fink), Ethereum’s features like smart contracts, staking yields and scalability solutions are less familiar to the broader, less crypto-savvy investor base. Thirdly, with Ethereum’s market cap less than a third of Bitcoin’s, it might be reasonable to expect proportionately smaller inflows for spot Ether ETFs.

That being said, although the trends for spot Ether ETFs are generally positive, many view the asset more conservatively given the reasons stated above. Predictions vary greatly; Standard Chartered expects inflows between USD 15 – 45 billion in the first year, JPMorgan expects USD 3 billion, with this figure doubling if staking is permitted down the line, while others think the market’s initial reaction to the launch will be a slow burn, similar to the launch of futures Ether ETFs back in October 2023. We also have to consider the selling pressure that followed Grayscale’s spot Bitcoin ETF launch, and their Ethereum ETF may follow a similar route. This could impact market sentiment and downward pressure on Ether prices due to the optics of net flows.

There is also a chance we might see a “sell the news” event once these ETFs start trading, similar to the 20 percent drop Bitcoin saw after its spot ETF launch. Such a correction may already be underway, but this could arguably increase the appeal for those looking to gain better entry prices.

Concluding remarks

As we await the launch of US spot Ether ETFs, there are several drivers that may contribute to a strong performance in H2, but there are also risks to keep in mind.

The exact launch dates are still up in the air, and this uncertainty only fuels speculation until a firm date is established. While the idea of an Ether ETF might resonate well with traditional investors, it is unclear whether Ether will find the same footing in portfolio allocations as Bitcoin, which often competes with gold as a store of value.

More importantly, Ether has an attractive feature – staking yields – that isn’t part of the ETF package, and this might limit its appeal compared to holding Ether directly. However, Ether as an asset is arguably more relatable for traditional investors due to its value being based on revenues, cashflows and demand from various use cases.

The potential is there, but it remains to be seen whether spot Ether ETFs will end Ethereum’s long period of underperformance.

ENDS

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