Trading on the first day of listing exceeded expectations. Will Ethereum ETF be the new hot item in the US stock market?

Highlights

① 9 Ethereum spot ETFs were launched on July 23. With reference to the nearly 50% return performance of Bitcoin spot ETFs in the past six months, Ethereum spot ETFs are worth looking forward to.

② On the first day of listing, the cumulative trading volume of Ethereum spot ETFs exceeded US$1 billion. Its potential capital inflow is expected to reach 20%-30% of the Bitcoin spot ETF in the same period, which will help boost Ethereum's price performance in the second half of the year.

③ The participation of traditional financial giants in the issuance and the regulatory approval of the US SEC have once again brought solid and important credit endorsements to the crypto industry, and the institutionalization of the crypto market is becoming more and more perfect. Institutions such as pension funds, hedge funds and investment banks will continue to enter the market, and we are still optimistic about the long-term performance of crypto ETFs.

In January this year, the launch of the Bitcoin spot ETF marked the end of a decade of waiting. With the help of ETFs, a simple, compliant, and highly user-accepted traditional U.S. stock investment product, U.S. stock investors can invest more widely in the largest crypto asset.

A few months ago, the 13-F filing showed that the Bitcoin spot ETF has been widely accepted by U.S. state government investment funds, major banks, top hedge funds, well-known asset management companies, investment consulting companies, and other commercial companies.

Then, the market's attention turned to another top crypto asset: Ethereum. Ethereum's current market value is $420 billion. It was clear several months ago that its ETF approval was only a matter of time, not a "yes or no" question. On July 23, 9 Ethereum spot ETFs were finally approved and officially began trading.

In this article, the RockFlow investment research team will explore in depth the issuers, supply and demand dynamics, and future impact of Ethereum spot ETFs to help US stock investors interested in crypto investments better understand their investment value.

 1. Brilliant performance on the first day of listing

The nine Ethereum spot ETFs that debuted on July 23 were issued by traditional asset management giants such as BlackRock and Fidelity, as well as emerging crypto funds such as Grayscale and Bitwise, and will track the spot price of Ethereum.

By listing on exchanges such as the Chicago Board Options Exchange (CBOE), the New York Stock Exchange (NYSE), and Nasdaq, investors can now hold this emerging head crypto asset through US stock brokers.

In order to compete for more market share, issuers have chosen to compete in first launch, roll speed, and fee reduction (fee exemption). Currently, the management fees of various funds range from 0.15% of the newly launched Grayscale Ethereum Mini Trust (ETH) to 2.50% of Ethereum Trust (ETHE). Some institutions even choose to temporarily waive fees to attract higher AUM, just like the initial listing of Bitcoin spot ETF half a year ago.

On the first day of listing, the cumulative trading volume of Ethereum spot ETF exceeded US$1 billion, mainly from Grayscale ETHE, BlackRock ETHA and Fidelity FETH. However, according to Farside Investors data, the overall funds were outflowing on the day of listing, mainly due to the net outflow of more than US$480 million from ETHE.

What is more surprising is that Bitwise's ETHW has become the main "money-making" force with a net inflow of over $200 million, far exceeding Fidelity FETH's $71.3 million and Franklin EZET's $13.2 million.

As a crypto-native asset management company without a deep traditional financial background, in order to quickly acquire a larger scale, Bitwise is unique and chooses to make a fuss around issuance time, transaction fees, and ecological support.

As early as the launch of its Bitcoin spot ETF, BITB, Bitwise announced that it would donate 10% of BITB's profits to three non-profit organizations that fund Bitcoin open source development, which play a key role in improving the security, scalability and availability of the Bitcoin network. And the donation will be made at least once a year for the next 10 years to further support the health and development of the Bitcoin ecosystem; similarly, this time it issued ETHW and announced that it would donate 10% of the fund's profits to Ethereum open source developers for at least 10 years, every year. And in order to ensure transparency, BITB's Bitcoin address and ETHW's Ethereum address have been made public.

Such a donation behavior close to the crypto community naturally aroused the favor of crypto enthusiasts, and crypto enthusiasts "reciprocated" and gave Bitwise a surprise on the first day of ETF trading.

2. Analysis of Potential Demand for Ethereum Spot ETF

Based on the basic situation of Bitcoin and its development trend in the past six months, we can roughly conduct a forward-looking analysis of the potential demand for Ethereum spot ETF.

The market value of Ethereum is $420 billion, which is about one-third of Bitcoin's market value of $1.3 trillion. On average, Ethereum's daily spot trading volume is half that of Bitcoin, while in the futures market, Bitcoin's open interest is about 2.6 times higher than Ethereum in all exchanges and about 9 times higher in the Chicago Mercantile Exchange.

In addition, before the launch of their respective ETFs, the asset management scale of Grayscale Bitcoin Trust (GBTC) was approximately 2.8 times that of its Ethereum Trust (ETHE).

Based on the above indicators, we can roughly assume that the potential fund inflows of Ethereum spot ETFs are expected to reach 20%-30% of the Bitcoin spot ETFs in the same period.

Of course, given that the current regulatory requirements for Ethereum spot ETFs prevent them from incorporating staking returns, this limitation may weaken investor demand in the short term.

In addition, when analyzing the fund inflows of Ethereum spot ETFs, an important factor that cannot be ignored is the important impact of Grayscale Fund's Ethereum Trust (ETHE).

The performance of Grayscale's Bitcoin Trust (GBTC) over the past six months can be used as a reference. Before its conversion to a Bitcoin spot ETF, GBTC held approximately 620,000 Bitcoins (approximately 3.1% of Bitcoin's supply) and managed total assets of approximately $30 billion. The subsequent conversion to an ETF created an opportunity for investors who had previously purchased GBTC at a discount to exit or transfer to an ETF with lower management fees.

As a result, GBTC's Bitcoin holdings decreased by approximately 55% to 270,000 Bitcoins, which objectively put downward pressure on Bitcoin's price.

The Grayscale Ethereum Trust (ETHE) held approximately $10 billion in assets under management before its launch, equivalent to approximately 3 million Ethereum (2.5% of Ethereum's supply). Although ETHE may experience similar outflows, two aspects are taken into consideration:

First, with the approval of the ETF in May, the discount on ETHE's net asset value has narrowed rapidly, and investors have enough time to exit at a price close to par value;

Second, the Ethereum Mini Trust (ETH) charges only 0.15% in fees, providing fee-sensitive investors with the option to transition to this low-cost product, and 10% of ETHE has been transferred to the new mini trust product as seed funds.

Therefore, these factors are expected to largely alleviate the willingness of ETHE holders to sell, thereby reducing the possibility of outflows from the ETF.

 3. How will the Ethereum spot ETF affect the crypto market?

If the inflow of funds into the Ethereum spot ETF reaches 30% of the Bitcoin spot ETF in the next six months, then at the current price, the inflow of $4 billion means that by the end of this year, 1% of the ETH in circulation will be held by the Ethereum spot ETF. This is obviously conducive to boosting the price performance of Ethereum in the second half of the year.

Historical experience shows that the tens of billions of dollars flowing into Bitcoin through ETFs have an important stimulating effect on the rise in Bitcoin prices in the first half of 2024. Moreover, the market volatility during this period has allowed crypto ETF investors to deal with it calmly. Even during the period of large price adjustments, funds did not panic, which is also a stabilizing factor for new investors who are committed to long-term investment and intend to choose Ethereum spot ETFs.

Not to mention, the participation of traditional financial giant BlackRock in the issuance and the regulatory approval of the US SEC have once again brought solid and important credit endorsements to the crypto industry.

 4.  Conclusion

The RockFlow investment research team believes that while the market's initial focus may be on the price performance of Ethereum spot ETFs, their true impact will gradually emerge in the coming months. The batch listing of Ethereum spot ETFs this time marks a new key milestone in the expansion and maturity of the crypto asset market.

From Bitcoin spot ETF to Ethereum spot ETF, we can see that the institutionalization of the crypto market is becoming more perfect. By making cryptocurrencies more suitable for institutional capital such as pension funds, hedge funds and investment banks, the crypto market's position in the financial mainstream is further established. And now may just be the beginning: some analysts say the next one may be the listing of Solana ETF or a fund representing multiple tokens.