The Ethereum spot ETF is expected to begin trading in mid-to-late July, with Galaxy estimating that it will attract $5 billion in capital inflows within the first five months of its launch. This article predicts the performance of the Ethereum spot ETF after its listing by comparing it to the Bitcoin spot ETF.
Key Points:
Background
Experience of Bitcoin ETF
Retail demand drives ETF demand, institutional demand is recovering
Wealth management platforms have not yet begun purchasing Bitcoin ETFs
Estimating potential inflows for Ethereum ETF
Factors affecting sensitivity of ETH and BTC prices
Future outlook
The Bitcoin spot ETF, launched on January 11, 2024, accumulated a net inflow of $15.1 billion as of June 15, 2024.
Nine issuers are working to launch 10 Ethereum spot ETFs in the United States. The U.S. Securities and Exchange Commission (SEC) approved all 19b-4 filings on May 23, and these ETFs are expected to begin trading in July 2024.
Similar to the Bitcoin ETF, we believe that the main source of net inflows will come from independent investment advisors or investment advisors associated with banks or broker/dealers.
We expect the net inflows for the first five months of the Ethereum ETF to account for 20-50% of the net inflows for the same period for the Bitcoin ETF. Our target estimate is 30%, which means a monthly net inflow of $1 billion.
Overall, we believe that ETHUSD is more price-sensitive to ETF inflows than BTC, as a significant portion of ETH’s total supply is locked in staking, cross-chain bridges, and smart contracts, while centralized exchanges hold a smaller amount.
For the past few months, observers and analysts have consistently underestimated the possibility of the U.S. Securities and Exchange Commission (SEC) approving spot Ethereum exchange-traded products (ETPs). Pessimism stemmed from the SEC’s unwillingness to explicitly recognize ETH as a commodity, a lack of contact between the SEC and potential issuers in the market, and the SEC’s ongoing investigations and enforcement actions related to the Ethereum ecosystem.
However, all applications for spot Ethereum ETPs have been approved by the SEC. We expect these instruments to be launched after the effectiveness of the S-1 filing (which we expect to happen in the summer of 2024).
This report will reference the performance of the Bitcoin spot ETP to predict the demand for the Ethereum spot ETP. We estimate that the Ethereum spot ETP will achieve approximately $5 billion in net inflows during the first five months of trading (about 30% of the net inflows for the Bitcoin ETP).
Currently, there are nine issuers competing to launch 10 spot ETH exchange-traded products (ETPs). In recent weeks, some issuers have already withdrawn their applications. ARK chose not to collaborate with 21Shares to launch an Ethereum ETP, while Valkyrie, Hashdex, and WisdomTree have withdrawn their applications.
The following chart shows the current status of applicants sorted by the 19b-4 application date:
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Grayscale is seeking to convert the Grayscale Ethereum Trust (ETHE) into an ETP, just as the company did with its Grayscale Bitcoin Investment Trust (GBTC), but Grayscale has also applied for a “mini” version of the Ethereum ETP.
On May 23, the SEC approved all 19b-4 filings, allowing the final listing of ETH spot ETPs on stock exchanges. However, each issuer now needs to have repeated discussions with regulatory agencies about their registration statements.
The product itself can only start trading once the SEC allows these S-1 filings (or the S-3 filing for ETHE) to become effective. Based on our research and reports from Bloomberg, we believe the Ethereum spot ETP could start trading as early as the week of July 11, 2024.
The launch of the Bitcoin ETF has been nearly six months, providing a benchmark for predicting the potential popularity of the Ethereum spot ETF.
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Source: Bloomberg
Here are some observations from the first few months of trading for the Bitcoin spot ETP:
So far, the inflows have been on an upward trend. As of June 15, the U.S. Bitcoin spot ETF has accumulated net inflows of over $15 billion since its launch, with an average daily net inflow of $136 million. These ETFs hold approximately 870,000 BTC, accounting for 4.4% of the current BTC supply. The BTC trading price is around $66,000, and the total AUM of all U.S. spot ETFs is approximately $58 billion (note: before the launch of ETFs, GBTC held approximately 619,000 BTC).
ETF inflows have contributed to the rise in BTC prices. By regressing the one-week change in BTC price against ETF net inflows, we calculated an r-squared of 0.55, indicating a high correlation between these two variables. Interestingly, we also found that price changes were leading indicators for inflows, rather than the other way around.
GBTC has been a major concern for the overall ETF liquidity. Since the conversion of the trust into an ETF, GBTC experienced significant outflows in the first few months. Daily outflows for GBTC peaked in mid-March, with an outflow of $642 million on March 18, 2024. Afterward, the outflows eased, and GBTC even had several days of positive net inflows starting in May. As of June 15, the BTC balance held by GBTC has decreased from 619,000 BTC to 278,000 BTC since the ETF launch.
13F filings show that as of March 31, 2024, over 900 U.S. investment firms held Bitcoin ETFs with a total value of approximately $11 billion, accounting for about 20% of the total BTC holdings in ETFs. This indicates that most of the demand is driven by retail investors. Institutional buyers include major banks (such as JPMorgan Chase, Morgan Stanley, and Wells Fargo), hedge funds (such as Millennium, Point72, and Citadel), and even pension funds (such as the Wisconsin Investment Board).
The largest wealth management platforms have not yet allowed their brokers to recommend Bitcoin ETFs. However, it has been reported that Morgan Stanley is exploring allowing its brokers to solicit clients for purchases. In our report “Market Size of Bitcoin ETFs,” we wrote that it may take several more years for wealth management platforms (including broker-dealers, banks, and RIAs) to assist clients in purchasing Bitcoin ETFs. So far, there have been minimal inflows from wealth management platforms, but we believe it will become a significant catalyst for Bitcoin adoption in the near to medium term.
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GBTC daily flows (USD) after ETF approval
By referring to the situation of the Bitcoin ETP, we can approximate the potential demand for the Ethereum ETP.
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Relative market size of BTC and ETH ETPs
To estimate the potential inflows for the Ethereum ETF, we apply the BTC/ETH multiple to the net inflows of the U.S. Bitcoin spot ETF, based on the relative asset sizes of BTC and ETH across various markets for trading. As of May 31:
BTC’s market capitalization is 2.9 times that of ETH.
In terms of futures markets on all exchanges, based on open interest levels and trading volumes, the BTC futures market is approximately twice the size of the ETH futures market. Specifically, for CME, BTC’s open interest is 8.4 times that of ETH, and BTC’s daily trading volume is 4.2 times that of ETH.
Existing AUMs of various funds (divided into Grayscale Trusts, futures, spot, and selected global markets) indicate that the size of BTC funds is 2.6 to 5.3 times that of ETH funds.
Based on the above, we believe that the net inflows for the Ethereum spot ETF will be approximately 1/3 of the net inflows for the Bitcoin spot ETF (estimated range: 20%-50%).
Applying this data to the $15 billion net inflows for the Bitcoin spot ETF before June 15, it means that the monthly inflow for the first five months after the launch of the Ethereum ETF will be approximately $1 billion (estimated range: $600 million to $1.5 billion).
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Estimated net inflows for U.S. spot Ethereum ETF
Due to several factors, we see some estimates lower than our prediction. However, our previous report predicted a first-year net inflow of $14 billion for the Bitcoin ETF, assuming the entry of wealth management platforms, but there were already significant inflows into the Bitcoin ETF before these platforms entered. Therefore, we recommend caution in predicting low demand for the Ethereum ETF.
Several structural/market differences between BTC and ETH will impact ETF liquidity:
The demand for the Ethereum spot ETF may be affected due to the lack of staking incentives. Non-staked ETH may loseOpportunity Costs as Follows:
(i) Inflation rewards paid to validators,
(ii) Priority fees paid to validators,
and MEV income paid to validators via relayers.
Based on data from September 15, 2022, to June 15, 2024, we estimate the annualized opportunity cost of forfeiting staking rewards for holders of spot ETH to be 5.6% (4.4% using year-to-date data), a significant difference.
This could reduce the appeal of spot Ethereum ETFs to potential buyers. Note that ETPs offered outside the US (e.g., in Canada) provide additional income to holders through staking.
Sources of income for non-staking and staking ETH holders.
Additionally, Grayscale’s ETHE could potentially hamper flows into Ethereum ETFs. Similar to the GBTC Grayscale Trust experiencing substantial outflows during ETF conversions, converting ETHE Grayscale Trust to an ETF could also lead to outflows.
Assuming ETHE’s outflow rate matches GBTC’s during its initial 150 days (i.e., 54.2% of trust supply withdrawn), we estimate monthly outflows for ETHE to be approximately 319,000 ETH, amounting to $11 billion monthly or $36 million daily at current prices.
Note that tokens held by these trusts represent a percentage of their total supply: BTC 3.2%, ETH 2.4%. This suggests less downward pressure on ETH prices from ETHE ETF conversions compared to BTC. Moreover, unlike GBTC, ETHE is not subject to forced liquidation due to bankruptcy cases (e.g., 3AC or Genesis), further supporting the view that selling pressure related to Ethereum-related Grayscale trusts may be relatively lower than that for BTC.
Net flows of GBTC and ETHE (predicted).
Basis trading may drive demand from hedge funds for Bitcoin ETFs. Hedge funds engaging in basis trading seek arbitrage opportunities between Bitcoin spot and futures prices.
As mentioned earlier, 13F filings show that as of March 31, 2024, over 900 US investment firms hold Bitcoin ETFs, including notable hedge funds like Millennium and Schonfeld.
Throughout 2024, ETH’s average financing rates on exchanges are higher than BTC’s, indicating (i) relatively greater demand for ETH long positions, and (ii) potential for more hedge fund demand utilizing basis trading from spot Ethereum ETFs.
BTC and ETH financing rates.
Given our estimated inflows into Ethereum ETFs as a proportion of market capitalization roughly equals that of Bitcoin’s flows to market cap, we anticipate similar price impacts under otherwise identical conditions. However, several critical differences in supply and demand dynamics between these assets may make Ethereum’s price more sensitive to ETF flows:
BTC and ETH market supply differences.
Exchange-held supply: Currently, the proportion of BTC held by exchanges exceeds that of ETH (11.7% versus 10.3%), suggesting ETH supply may be tighter. Assuming flows correlate with market cap, ETH’s price sensitivity could be higher (note: this metric heavily depends on exchange address attribution and varies significantly across data providers).
Inflation and burn: Following BTC’s latest halving on April 20, 2024, its annual inflation rate is approximately 0.8%. Post-merge, ETH has seen net negative issuance (annualized -0.19%) due to newly issued rewards to stakers (+0.63%) offset by burned base fees (-0.83%). In the past month, lower base fees (annualized -0.34%) failed to offset new issuance (annualized +0.76%), resulting in a net positive annualized inflation rate of +0.42%.
ETF-held supply: Since launch, net BTC flows into US spot ETFs (excluding initial GBTC balance) total 251,000 BTC, representing 1.3% of current supply. Annually, ETFs are expected to absorb 583,000 BTC, 3.0% of current supply, far exceeding dilution from miner rewards (0.81% inflation rate).
However, actual market liquidity available for purchase is much lower than reported current supply. We believe better representations of available market supply for each asset would adjust for factors such as staking supply, dormant/lost holdings, and supply held in cross-chain bridges and smart contracts:
Adjusted supply calculations for BTC and ETH.
Staking supply (discount: 30%): Staking reduces the amount of tokens available for ETF purchase. Currently, Bitcoin lacks staking functionality, whereas Ethereum requires ETH staking to secure the network, but stakers can unstake ETH for other uses. Present staked ETH amounts to approximately 27% of current supply, with a 30% discount applied to estimate available market supply, resulting in an 8.2% supply discount.
Dormant/lost supply (discount: 50%): Some BTC and ETH are considered irrecoverable (e.g., lost keys, shipwrecks), reducing available supply. We use BTC addresses dormant for over 10 years and ETH addresses dormant for over 7 years to calculate dormant/lost supply, accounting for 16.6% and 6.7% of current BTC and ETH supply, respectively. We apply a 50% discount to this balance, as some supply held in dormant addresses may potentially return to circulation at any time.
Supply in cross-chain bridges and smart contracts (discount: 25%): This represents locked supply used for production in cross-chain bridges and contracts. BitGo custody holds approximately 153,000 BTC for packaged BTC (wBTC), with a similar amount estimated locked in other cross-chain bridges, totaling about 1.6% of BTC supply. Locked ETH in smart contracts accounts for 11.4% of current supply. We apply a lower discount of 25% to this balance compared to staking supply, assuming this supply is more liquid than staked supply (i.e., possibly less constrained by the same locking requirements and withdrawal queues).
Applying discount weightings for each factor to calculate adjusted supply for BTC and ETH, we estimate available supply for BTC and ETH is 8.7% and 14.4% less than reported current supply, respectively.
Overall, ETH’s sensitivity to price, weighted by relative market cap inflows, should be higher than BTC’s, due to (i) lower available market supply based on adjusted supply factors, (ii) lower exchange-held supply percentage, and (iii) lower inflation rates. Each of these factors should multiply rather than add to price sensitivity, with prices tending to be more sensitive to larger variations in market supply and liquidity.
Looking ahead, several questions remain regarding adoption and second-order effects:
– How should allocators view BTC and ETH? Will existing holders shift from Bitcoin ETFs to ETH?
– For allocators, some rebalancing is expected. Will spot Ethereum ETFs attract new buyers who haven’t purchased BTC yet? What will potential buyers’ portfolios look like? Will they hold only BTC, only ETH, or both?
– When might staking functionality be added? Does the lack of staking rewards affect the adoption of spot Ethereum ETFs? Will investment demand in DeFi, tokenization, NFTs, and other crypto-related applications further increase the adoption of Ethereum ETFs?
– What potential impact will this have on other altcoins? After Ethereum, are we more likely to see approvals for ETFs of other altcoins?
Overall, we believe the launch of spot Ethereum ETFs will have a significant positive impact on the adoption of Ethereum and the broader cryptocurrency market, primarily for two reasons:
(i) Expanding the reach of cryptocurrency
(ii) Securing greater recognition for cryptocurrencies through regulatory agencies and reputable financial service brands.
ETFs can broaden coverage among retail and institutional investors, provide wider distribution through more investment channels, and support Ethereum’s use in more investment strategies. Additionally, increased understanding of Ethereum among financial professionals will accelerate investment and adoption.
Related Reports
Bloomberg: Ethereum spot ETF listing delayed to July 8; SEC requires issuer to amend S-1 document
Bloomberg: Standard Chartered Bank is setting up a “cryptocurrency exchange” stationed in London for trading Bitcoin and Ethereum spot
Reuters also optimistic: Ethereum spot ETF could be listed as early as 7/4, how much new capital can it bring in?