This article is compiled and organized by BlockWeeks
From its launch on January 11, 2024, to June 15, Bitcoin spot ETFs have accumulated net inflows of $15.1 billion. Now, nine issuers are racing to launch 10 spot Ethereum ETFs in the United States. After approving all 19b-4 filings on May 23, the SEC is expected to allow these products to officially list and trade in July 2024. In its latest research report, Galaxy Research, referencing the performance of Bitcoin spot ETFs, has estimated the scale of demand that spot Ethereum ETFs may attract after listing.
Bitcoin ETF Performance: Demand Far Exceeded Expectations
Bitcoin spot ETFs have been listed for less than 6 months, which can serve as a reference basis for judging the market reaction to spot Ethereum ETFs. The main observations are as follows:
- Capital inflows continue to exceed expectations. As of June 15, U.S. spot Bitcoin ETFs have accumulated net inflows of more than $15 billion since launch, with an average daily net inflow of about $136 million. These ETFs collectively hold about 870,000 BTC, accounting for 4.4% of the current BTC supply. At about $66,000 per BTC, the assets under management of all U.S. spot ETFs are about $58 billion (note: before the ETF launch, GBTC held about 619,000 BTC).
- ETF inflows are part of the driver of BTC's rise. A regression analysis of weekly BTC price changes against weekly ETF net inflows gives an r-sq of 0.55, indicating a high correlation between the two. Interestingly, price changes appear to be more of a leading indicator of fund flows, rather than the opposite.
- GBTC selling pressure is a drag on overall ETF inflows. Since the trust converted to an ETF, GBTC experienced significant outflows in the first few months, with daily outflows peaking at $642 million on March 18. Outflows have since slowed, and GBTC even began to see a few net inflow days starting in May (before the first net inflow on May 3, there had been 78 consecutive days of net outflows). As of June 15, the BTC held by GBTC had fallen from 619,000 to 278,000 (-55%).
- Demand is mainly driven by retail investors, while institutional demand is rising. 13F filings show that as of March 31, 2024, more than 900 U.S. investment institutions held Bitcoin ETFs, with holdings worth about $11 billion, accounting for about 20% of total Bitcoin ETF holdings, indicating that most demand comes from retail investors. This highlights the growing intersection between ETFs and crypto trading strategies among a broad range of market participants. A previous report predicted first-year inflows of $14 billion for Bitcoin ETFs based on the entry of wealth management platforms, but Bitcoin ETFs recorded significant inflows before these platforms truly arrived. Therefore, caution should be exercised when predicting that Ethereum ETF demand may disappoint.
Ethereum ETF Inflow Forecast: 30% of Bitcoin's, About $5 Billion
As with Bitcoin ETFs, we believe the main net new addressable market is independent investment advisers, as well as advisers affiliated with banks or broker-dealers. We expect that in the first 5 months after listing, net inflows into ETH ETFs will reach 20%-50% of net inflows into BTC ETFs, with a target ratio of 30%, implying about $1 billion in net inflows per month, or about $5 billion in total over 5 months.
Overall, we believe ETHUSD is more price-sensitive to ETF inflows than BTC, because a considerable portion of ETH's total supply is locked in staking, cross-chain bridges, and smart contracts, while the amount of ETH remaining on centralized exchanges is relatively small.
Structural Differences: Lack of Staking Yield and ETHE Outflows
The structural and market differences between Bitcoin and Ethereum ETFs will affect fund flows, with two being particularly critical.
First, the lack of staking yield may limit demand for spot Ethereum ETFs. Unstaked ETH has opportunity costs, including: inflation rewards paid to validators (which are also a negative dilution effect), priority fees paid to validators, and MEV revenue paid to validators through relayers. Using data from after the Merge (after September 15, 2022) to June 15, 2024, the annualized opportunity cost for spot ETH holders of forgoing staking rewards is about 5.6 percentage points (or 4.4 percentage points using year-to-date data), which is not a small difference. This will make spot ETH ETFs less attractive to potential buyers. It is worth noting that ETPs offered outside the United States (such as in Canada) can provide holders with additional returns through staking.
Second, Grayscale's ETHE is likely to drag on Ethereum ETF inflows. Just as the GBTC trust experienced significant outflows after converting to an ETF, ETHE's conversion to an ETF will likewise lead to capital outflows. Assuming ETHE's outflow pace matches GBTC's first 150 days (i.e., 54.2% of trust shares are redeemed), we estimate ETHE outflows of about 319,000 ETH per month, equivalent to about $1.1 billion at the then price of about $3,400, with average daily outflows of about $36 million. It should be noted that the shares held by these trusts account for 3.2% of BTC supply and 2.4% of ETH supply, respectively, meaning that the drag on ETH prices from the ETHE conversion will be relatively smaller than from the GBTC conversion. In addition, unlike GBTC, ETHE will not face forced sellers due to bankruptcies (such as 3AC, Genesis, etc.).
Value Flow: Unstaked Holders vs Staking Validators
Overall, changes in ETH supply come from new issuance (paid to validators) and burned base fees. Since the Shanghai upgrade (i.e., the "Merge") launched in September 2022, the burn amount has exceeded the inflationary impact of new issuance, reducing ETH's net supply by 0.20%. If issuers are prohibited from staking ETH in ETFs, then such ETFs will reflect a considerable opportunity cost in terms of lost validator income and dilution. From the perspective of value flow:
- The base fee in user transaction fees is burned, reducing supply, and both unstaked and staked ETH holders benefit equally.
- The priority fee in user transaction fees is collected by validators and has no impact on unstaked ETH holders.
- MEV payments are paid by searchers to block builders and then redistributed to validators through MEV Boost. Similar to priority fees, they provide income to staking validators and have no impact on unstaked ETH holders.
- The new issuance of block rewards has a dilutive effect on all ETH holders; but for staking validators, new issuance constitutes another source of income, and its returns are sufficient to cover the dilution caused by new issuance.
Conclusion: Overall Positive for Ethereum Adoption
We believe that the potential launch of spot Ethereum ETFs will have an overall positive impact on the adoption of Ethereum and the broader crypto market, mainly for two reasons: first, expanding accessibility across wealth tiers, and second, gaining broader acceptance through formal recognition by regulators and trusted financial services brands. ETFs can expand reach to retail and institutions, broaden distribution through more investment channels, and support the use of Ethereum in more investment strategies within portfolios. In addition, a deeper understanding of Ethereum by financial professionals will ideally accelerate investment in and adoption of the technology.
The report also raises several unresolved questions: Will ETF subscriptions need to be in cash or in kind? Will there be products limited to BTC only, ETH only, and a mix of both? When (if possible) can staking be added? Will the lack of staking rewards affect the adoption of spot Ethereum ETFs? Given the lack of alternative investment products, will investment demand for exposure to DeFi, tokenization, NFTs, and other crypto-related applications cause Ethereum ETF adoption to exceed Bitcoin's? What is the potential impact on other altcoins? After Ethereum, is it more likely that other altcoin ETFs will be approved?
