Ethereum ETFs are live and expectations are high
By Alexander Bechtel and Kasper Luyckx
Crypto ETFs in the US are entering their second round: Nine Ethereum ETFs recently started trading. The expectations are high.
August 29, 2023 marked a historic milestone for the crypto industry. The District of Columbia Court of Appeals ruled that the US Securities and Exchange Commission (SEC) had wrongly rejected Grayscale Investments’ application for approval of a Bitcoin spot ETF. This landmark decision paved the way for the launch of ten Bitcoin ETFs on January 10, 2024. With combined holdings now exceeding USD 60 billion, the Bitcoin ETF has become the most successful ETF launch of all time.
On July 22, 2024, the USA added another chapter to its crypto-ETF success story. Ether (ETH), the second-largest cryptocurrency with a market capitalization of around USD 400 billion, was approved as an underlying asset for ETFs. One day later, nine Ethereum ETFs began trading. A development that few experts could have predicted a year ago.
The introduction of Ethereum and Bitcoin ETFs has many similarities: The issuers, management fees and custodians are mostly identical. In addition, similar to the case of their Bitcoin ETF, Grayscale decided to convert an existing closed-end fund called Grayscale Ethereum Trust into an ETF. Investors took advantage of the opportunity to exit the fund for the first time and withdrew more than USD 1.1 billion. However, with a fee of 2.5 percent, the Grayscale Ethereum Trust is also significantly more expensive than its competitors. The remaining eight funds, including another Grayscale fund called Ethereum Mini Trust, recorded inflows of almost USD 1 billion.
| Ticker | Name | Volume (mn) | Flows (mn) | Assets (mn) | Fee | Custodian |
|---|---|---|---|---|---|---|
| ETHE | Grayscale Ethereum Trust | $ 1,479 | – $ 1,157 | $ 7,122 | 2.5 % | Coinbase |
| ETHA | iShares Ethereum Trust | $ 741 | $ 355 | $ 336 | 0.25 % | Coinbase |
| FETH | Fidelity Ethereum Fund | $ 332 | $ 180 | $ 171 | 0.25 % | Fidelity |
| ETHW | Bitwise Ethereum ETF | $ 175 | $ 250 | $ 229 | 0.20 % | Coinbase |
| ETH | Grayscale Ethereum Mini Trust | $ 261 | $ 119 | $ 1,027 | 0.15 % | Coinbase |
| ETHV | VanEck Ethereum ETF | $ 78 | $ 36 | $ 10 | 0.20 % | Gemini |
| EZET | Franklin Ethereum ETF | $ 28 | $ 17 | $ 18 | 0.19 % | Coinbase |
| QETH | Invesco Galaxy Ethereum ETF | $ 35 | $ 15 | $ 15 | 0.25 % | Coinbase |
| CETH | 21Shares Core Ethereum ETF | $ 14 | $ 9 | $ 9 | 0.21 % | Coinbase |
| Total Total ex-ETHE | $ 3,143 $ 1,664 | – $ 178 $ 908 | $ 8,936 $ 1,814 |
Despite the similarities between the launch of Ethereum and Bitcoin ETFs, there are key differences between the two cryptocurrencies themselves: Ethereum, developed in 2013, extended the original vision of Bitcoin by facilitating the development of applications based on the blockchain. Ethereum thus enabled the rise of decentralized finance (DeFi), non-fungible tokens (NFTs) and innovative platforms in social media and gaming.
Ethereum is also used in the traditional financial market: The European Investment Bank, for example, used the platform to issue its first digital bond. Against this backdrop, investors in Ethereum ETFs are presumably guided by the conviction that the network will further expand the benefits of blockchain technology beyond pure currency applications.
Another significant difference to Bitcoin: Ethereum offers returns to investors who actively participate in the validation of the network by staking their ETH. The ability to generate cash flows allows the value of ETH to be determined using traditional valuation methods. However, the first Ethereum ETFs do not allow staking and thus exclude an additional income stream. This decision has sparked discussions about the potential impact on investor interest.
According to analysts at Galaxy Digital, Ethereum ETFs are likely to attract around 30 percent of the total net inflows that Bitcoin ETFs recorded in the first five months. This would equate to almost USD 1 billion per month and make Ethereum ETFs one of the most successful ETF launches in history. In addition, Galaxy’s experts expect the ETH price to be more sensitive to ETF inflows than the Bitcoin price, as significant portions of the ETH supply are tied up in staking and DeFi applications and are therefore not available for sale on exchanges.
European investors cannot invest in the Ethereum ETFs as they do not comply with European transparency standards and the UCITS Directive, which requires diversification beyond a single asset. In Europe, however, physically backed Ethereum ETCs and ETNs, which are structurally similar to ETFs but issued as debt securities, have been in existence for several years. The market capitalization of all physically backed Ethereum ETCs or ETNs in Europe currently amounts to around USD 1.2 billion, which is almost USD 8 billion less than in the US. As soon as the strong outflows from the Grayscale Ethereum Trust subside, this gap is likely to widen even further.
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This article was originally published in Frankfurter Allgemeine Zeitung (FAZ) in German. For the original version, click here.
Disclaimer: The contents of the article reflect private opinions of the authors and not directly those of DWS and Crypto Finance.