Ethereum ETF exceeded expectations on first day of listing. Will it be the new hit in US stocks?

Key Points

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

② On the first day of listing, the cumulative trading volume of Ethereum spot ETF 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 the price performance of Ethereum 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.

The launch of the Bitcoin spot ETF in January this year 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 extensively in the largest crypto asset.

The 13-F filing from several months ago showed that the Bitcoin spot ETF has been widely accepted by US state government investment funds, major banks, leading hedge funds, well-known asset management companies, investment consulting companies, and other commercial companies.

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

In this article, the RockFlow investment research team will delve into the issuers, supply and demand dynamics, and future impact of the Ethereum spot ETF to help U.S. stock investors interested in crypto investments better understand its 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.

With listings 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 U.S. stock brokers.

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

On the first day of the Ethereum spot ETF's listing, the cumulative trading volume exceeded US$1 billion, mainly from Grayscale ETHE, BlackRock ETHA and Fidelity FETH. However, according to Farside Investors data, the overall funds showed an outflow 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 ETHW under Bitwise has become the main "money-making" force with a net inflow of over US$200 million, far exceeding Fidelity FETH's US$71.3 million and Franklin EZET's US$13.2 million.

As a crypto-native asset management company without a deep traditional financial background, in order to quickly achieve a larger scale, Bitwise is unique in choosing to focus on multiple aspects such as 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 that is so close to the crypto community naturally attracted the favor of crypto enthusiasts, and crypto enthusiasts "reciprocated" and gave Bitwise a surprise on the first day of ETF trading.

2. Potential demand analysis of Ethereum spot ETF

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

Ethereum’s market cap is $420 billion, about a third of Bitcoin’s $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’s across all exchanges and about 9 times higher on the Chicago Mercantile Exchange.

Additionally, prior to the launch of their respective ETFs, Grayscale’s Bitcoin Trust (GBTC) had approximately 2.8 times the AUM of its Ethereum Trust (ETHE).

Based on the above indicators, we can roughly assume that the potential capital inflow of Ethereum spot ETF is expected to reach 20%-30% of Bitcoin spot ETF in the same period.

Of course, given that 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 capital 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 converting 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 about 55% to 270,000 Bitcoins, which objectively put downward pressure on the price of Bitcoin.

Grayscale’s Ethereum Trust (ETHE) held approximately $10 billion in AUM before its launch, equivalent to approximately 3 million ETH (2.5% of the Ethereum supply). Although ETHE may experience similar outflows, there are two considerations:

First, with the approval of the ETF in May, the discount to ETHE’s NAV narrowed rapidly, giving investors ample time to exit at a price close to par value;

Secondly, 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 into the new mini trust product as seed capital.

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

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

If the capital inflow of Ethereum spot ETF reaches 30% of that of Bitcoin spot ETF in the next six months, then based on the current price, the $4 billion inflow means that by the end of this year, 1% of the ETH in circulation will be held by Ethereum spot ETF. This will obviously help boost 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 will 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 respond calmly. Even during larger price adjustments, funds have not generated panic, which is also a stabilizing factor for new investors who are committed to long-term investment and intend to choose Ethereum spot ETFs.

Needless to say, 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 endorsement 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 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 complete. 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 the current situation may be just the beginning: some analysts say that the next one may be the listing of Solana ETF or a fund representing multiple tokens.