A new era began in the US crypto landscape, with implications for the global market as well, when the US Securities and Exchange Commission (SEC) officially approved the trading of Ethereum ETFs on July 23rd, 2024. The full approval of ETH ETFs came on July 22nd after repeated deliberations and requests from fund issuers. Most market participants were enthusiastic about the launch since the Bitcoin ETFs had already proved their worth by attracting billions of dollars in investments since their approval in January.
How have the ETFs performed till now? Before delving deeper, let us quickly look into the funds launched.
For now, as we draft this article, as many as nine Eth ETFs have received approval from the SEC, including BlackRock’s iShares Ethereum Trust ETF, Invesco Galaxy Ethereum ETF, 21Shares Core Ethereum ETF, Fidelity Ethereum Fund, Franklin Ethereum ETF, VanEck Ethereum ETF, Bitwise Ethereum ETF and Grayscale Ethereum Trust and Mini Trust.
The approvals were received with much enthusiasm and gusto by industry stakeholders. Matt Hougan, chief investment officer of crypto fund sponsor Bitwise, had the following to say regarding the ETFs:
“Traditional asset management can no longer ignore crypto as an asset class. I think you’re going to see effectively everyone embrace this space.”
Cboe Global Markets, responsible for listing five of the nine Ether ETFs, described initial trading patterns as indicative of ‘good market quality.’ More specifically, Cboe said:
“All products opened for trading smoothly, with strong participation from our dedicated market makers who have been actively quoting and providing liquidity from the outset.”
Giving absolute trade volume numbers, Matt Hougan predicted that the ETFs could attract as much as US$15 billion over their first 18 months on the market.
They say morning shows the day! In the coming segments, we shall look into that proverbial morning to try and gauge whether the start could be termed promising.
The US$1 Billion First Day
The first day in the books of all ETH ETFs together saw more than a billion US dollars in volume, US$1.083 billion, to be precise. Grayscale led the charts with US$458 million, followed by Blackrock at US$248.7 million and Fidelity at US$137.3 million.
However, when it came to net inflow, the clear winners were BlackRock’s iShares Ethereum Trust (ETHA) and Bitwise’s Ethereum ETF (ETHW). These two registered net inflow numbers of US$266.5 million and US$204 million, respectively. Fidelity’s Ethereum Fund came in a distant third, securing US$71.3 million in new investments.
Ether, the main component underlying all these funds and the second most popular asset in the crypto space, experienced a slight decline during the launch.
While we will discuss the impact of the ETH ETFs on the base currency of Ethereum in greater detail, we must remember that the US SEC was not initially as welcoming of these ETFs as it was of the BTC ETFs. While speaking about the scenario in which ETH ETFs found themselves to be working, Ferdinando Ametrano, the CEO of CheckSig, said:
“Ether ETFs are launching despite initial resistance from the SEC, which, when approving Bitcoin ETFs last January, declared it would not authorize ETFs for other crypto assets. There is an ongoing power struggle in the United States: banks and asset managers want to offer financial services in the crypto space, while the regulator seeks to restrain them.”
Amidst this resistance, the performance of ETH ETFs has not been disappointing. The fund issuers, keen to make the launch a success, offered fee waivers.
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The Importance of Fee Waivers
Just like Bitcoin ETF issuers, the ETH ETF issuers, too, introduced fee waivers. These fee waivers covered the ground well, with options starting from no fees or very low fees for six months to a year or until the assets reached a certain amount, which could range anywhere from $500 million to $10 billion.
According to analysts at Kaiko, a leading data intelligence service provider in the crypto industry, these fee waivers indicated the competitiveness of the market, where issuers operate within tight margins. The importance of fee waivers in making an ETF launch successful could be seen during the Bitcoin ETF launch.
The Grayscale Bitcoin Trust launched its ETFs without a fee waiver when converting to an ETF from a closed-end fund. In other words, it had the highest fees among Bitcoin ETFs. As a result, it also saw the highest net outflows, totaling nearly US$19 billion since then. The other ten spot Bitcoin ETFs, which came with fee waivers—contrastingly—saw net inflows of close to US$36 billion.
Since going live on July 23rd, the ETH ETFs have attracted over US$106 million on their first day of trading. And since then, till the time of drafting this article, overall net flows were US$178M of outflows, with over US$3B in trading volume.
Similar to the time of Bitcoin, Grayscale’s converted Ethereum Trust (ETHE) saw over US$1.1B in outflows, while their new Ethereum mini-trust has captured around US$120M in inflows. This time, too, Grayscale’s significant outflows were driven by its fees, which were still the highest out of all the new ETH ETFs (2.5% versus 0 – 0.25% for the others). However, the fact that many investors have already been locked into the Grayscale Trust for many years also had a role to play in driving the outflow.
While the approval and issuance of ETFs are promising for the crypto trading market, their implications go beyond trades and impact the larger arena of assets, regulations, and much more. In the coming segments, we will look into the impact these ETFs might have on their underlying asset: ETH.
Impact of ETH ETFs on Ethereum
Robert Mitchnick is BlackRock’s head of Digital Assets. While explaining the demand for ETH, he said:
“The launch of ETHA follows the iShares Bitcoin Trust, whose historic ascent to more than $20 billion in assets under management in its first six months reflects the substantial demand from investors to be able to access this asset class within the convenience of an exchange-traded product.”
It is pertinent to mention here that ETHA is the iShares Ethereum Trust ETF. Several analysts believe that ETH ETFs—by virtue of attracting billions of dollars of inflows within months—could significantly drive the ETH’s spot price.
According to Tom Ngo, the CEO of Ethereum Layer 2 roll-up platform Metis, the launch of the ETH ETFs:
“Not only increases Ethereum’s accessibility to institutional investors but also validates its role as the backbone of the burgeoning decentralized finance (DeFi) economy and the real world asset tokenization (RWA) market.”
But is Ethereum ready for large-scale adoption, both at an institutional and retail level? Did market sentiments experience an uptick around ETH because its ETFs were running? The answer is not so simple. We do not yet have ample data and retrospective information to conclude.
Like Bitcoin, Ethereum is also witnessing a fantastic upsurge. For instance, over the past year, Ethereum’s market capitalization has grown significantly, from nearly US$1.2 trillion to US$2.4 trillion. However, there is no significant surge in market cap yet for the pre-ETF to post-ETF period. Between 23rd and 25th July, the price of ETH dropped by approximately 5%.
However, as mentioned earlier, this is going to be a game of the long run, and CK Zheng, the Chief Investment Officer at ZX Squared Capital, puts it succinctly into the context:
“The introduction of Ethereum ETFs will likely catalyze a new phase of institutional adoption. We anticipate this will not only drive price appreciation but also foster innovation and development within the Ethereum network, solidifying its position as a cornerstone of the digital asset space.”
Therefore, it is not only about ETH as a standalone asset. The industry expects this to improve the ecosystem overall.
While there is no doubt that the atmosphere around ETH ETFs is one that of enthusiasm and appreciation, they also had to strike compromises as regulators didn’t let the ETFs generate income for investors by staking their ETH.
The Question of Staking
To become available for the common investor safely and effectively, Exchange-Traded Funds had to let go of one of the most common and most utilized features of Ether: staking.
The SEC specifically asked the issuers to remove the feature, as staking could potentially violate federal securities laws by constituting unregistered securities offerings. However, the issuers were not displeased, as per reports. They were satisfied with the inflow of funds in the early days of trading.
The issuers and funds expect that with a new administration set to take over in January, things will change for the better, with staking getting approval as a feature.
Cynthia Lo Bessette, head of digital asset management at Fidelity, had the following to say in terms of articulating the industry’s future expectations:
“I certainly would hope that as an industry, we’re going to be able to help to educate and provide perspective on how it is that we can bring staking capabilities to investors in these products. Staking is a critical component of the Ethereum ecosystem as it is the activity that secures the ecosystem, and therefore, it’s an important part of the investment experience and being able to invest in your ether.”
The industry also expects that the approval of staking as part of the investment experience is not a matter of how but when. They are quite hopeful that a possible Trump administration in the days to come would expedite their cause. According to Nate Geraci, president of the ETF Store:
“Indications are that a Trump administration would be much more crypto-friendly, which could certainly accelerate the timeline of when staking might be allowed. Otherwise, ETF issuers could be left waiting on a comprehensive crypto regulatory framework to be put in place, which would likely take significantly longer.”
Incorporating staking into the Ether-based ETF landscape would not only increase regulatory clarity but also draw more investors. Currently, the absence of staking simplifies the market for newcomers, especially those less familiar with the crypto world, and reduces risk.
Christopher Jensen, the director of digital asset research for Franklin Templeton’s Digital Asset Investment Strategies Group, believes the unstaked version to be the easier path or the ‘path of least resistance.’The industry expects the space to become more feature-rich with education increasing around crypto assets.
Concluding Thoughts
Without a doubt, the recent launch of Ether ETFs in the U.S. is a promising development for the entire crypto industry. Following the success of Bitcoin ETFs, Ethereum ETFs now provide a regulated and systematic way to access a key platform that powers the decentralized sector.
The interest of industrial and retail investors, which will likely lead to an increased inflow of funds, will help the platform prosper, fostering more innovation and holistic growth within the ecosystem.