Estimated inflow of ETH spot ETF: Will it replicate the trend of BTC spot ETF?
The Ethereum spot ETF will launch on July 23. The ETH ETF has many aspects that are not visible in the BTC ETF and are easily overlooked by the market.Author: ASXN Digital Asset Research Company
Translation: xiaozou, Coin World
The Ethereum spot ETF will launch on July 23. There are many aspects of the ETH ETF that are not visible in the BTC ETF and are easily overlooked by the market.
ETHE Outflow Prediction
The fee structure of the ETF ETF is similar to that of the BTC ETF. Most ETF providers do not charge any fees for a specific period to better accumulate assets under management. Like the BTC ETF, Grayscale has maintained its ETHE fee rate at 2.5%, which is an order of magnitude higher than other providers. The key difference here is the introduction of the Grayscale mini ETH ETF, which had previously applied for a BTC ETF but was not approved.
This mini trust product is a new ETF product launched by Grayscale, with an initially disclosed fee rate of 0.25%, similar to other ETF providers. Grayscale's idea is to charge a 2.5% fee from less active ETHE holders while attracting more active and fee-sensitive ETHE holders to their new product, preventing funds from flowing to lower-fee products like Blackrock's ETHA ETF. After other providers reduced fees by 25bps compared to Grayscale, Grayscale lowered the mini trust fee to 15bps to regain competitiveness, making it the most competitive product. Importantly, they transferred 10% of ETHE AUM (Assets Under Management) to the mini trust and presented this new ETF to ETHE holders. The completion of this transition is based on the same basis, meaning it is not a taxable event.
The corresponding impact is that, compared to GBTC, the outflow of ETHE will be more moderate as holders transition to the mini trust.
ETH ETF Inflow Prediction
There are many valuations regarding ETF inflows, and we highlight some of them below. Standardizing these valuations yields an average estimate of $1 billion/month. Standard Chartered Bank provides the highest estimate at $2 billion/month, while JP Morgan's estimate is lower at $500 million/month.
Fortunately, we have the help of Hong Kong and European ETPs (Exchange-Traded Products) and the ETHE discount close to help us estimate the flow. If we look at the assets under management of Hong Kong ETPs, we can draw two conclusions:
(1) The relative assets under management of BTC and ETH ETPs are higher than BTC vs. ETH, with a relative market value of 75:25, while the assets under management are 85:15.
(2) Among these ETPs, the ratio of BTC to ETH is quite constant and consistent with the ratio of BTC market value to ETH market value.
In Europe, we have a larger sample size to study—197 cryptocurrency ETPs with a cumulative assets under management of $12 billion. After conducting data analysis, we found that the breakdown of assets under management of European ETPs roughly aligns with the market values of Bitcoin and Ethereum. Relative to their market values, Solana is over-allocated, at the expense of "other crypto ETPs" (anything other than BTC, ETH, or SOL). Setting Solana aside, a pattern is beginning to emerge—the breakdown of assets under management between BTC and ETH globally generally reflects a market-cap-weighted basket.
Considering that the outflow of GBTC is the origin of the "sell the news" narrative, it is important to consider the possibility of ETHE outflows. To simulate potential ETHE outflows and their impact on price, it is necessary to look at the proportion of ETH supply in ETHE.
Once adjusted based on Grayscale's mini seed capital (10% of ETHE AUM), the ETH supply ratio as a function of the existing total supply in ETHE is similar to that of GBTC at the time of release. It is currently unclear what the rotation vs. exit ratio of GBTC outflows is, but if we assume that the rotation flow is similar to the exit flow, then the impact of ETHE outflows on price will be similar to that of GBTC outflows.
Another key piece of information that is often overlooked is the NAV (Net Asset Value) premium/discount of ETHE. Since May 24, ETHE has been trading within a 2% range of its face value, while GBTC first traded within a 2% range of its net asset value on January 22 (just 11 days after GBTC converted to an ETF). The approval of the spot Bitcoin ETF and its impact on GBTC is slowly being reflected in the market, while the ETHE discount trading against NAV is more reflected in the existing narrative of GBTC.
When the ETH ETF launches, ETHE holders will have a two-month window to exit at a price range close to face value. This is a key variable that will help prevent ETHE outflows, especially exit flows.
ASXN's internal estimate is $800 million to $1.2 billion per month. This is calculated by taking the market-cap-weighted average of monthly Bitcoin inflows and then multiplying it by the market value of ETH.
Our estimate is supported by global cryptocurrency ETP data, indicating that a market-cap-weighted basket is the dominant strategy (we may see rotation flows from the BTC ETF adopting a similar strategy). Additionally, given the unique dynamics of ETHE trading at face value before the launch and the mini trust, we are open to upside surprises in ETH prices.
Our estimates of ETF inflows are proportional to their respective market values, so the impact on price should be similar. However, it is also important to measure how much of the assets are liquid and can be sold—assuming that the smaller the "circulation rate," the greater the price response to inflows.
There are two special factors affecting the liquid supply of ETH, namely native staking and supply in smart contracts. Therefore, the percentage of liquid and sellable ETH is lower than that of BTC, making it more sensitive to ETF inflows. However, it is worth noting that the liquidity difference between these two assets is not as large as some might think (the cumulative +-2% order depth of ETH is 80% of BTC).
Our approximate calculation of liquid supply:
Ethereum Reflexivity
When studying ETFs, it is crucial to understand the reflexivity of Ethereum. This mechanism is similar to BTC, but Ethereum's burn mechanism and the DeFi ecosystem built on it make the feedback loop even stronger.
The reflexive loop looks like this:
ETH inflow into ETH ETF → ETH price rises → Interest in ETH increases → DeFi/Chain usage rises → DeFi fundamentals improve → EIP-1559 burn increases → ETH supply decreases → ETH price rises → More ETH inflow into ETH ETF → Interest in ETH increases → …
One thing that the BTC ETF lacks is the absence of a "wealth effect" in the ecosystem. In the emerging Bitcoin ecosystem, we have not seen much of the gains being reinvested into foundational projects or protocols. Ethereum, as a "decentralized application store," has a complete ecosystem that will benefit from the continuous inflow of the underlying asset.
We believe that this wealth effect has not been given enough attention, especially in terms of DeFi. There are 20 million ETH ($63 billion) in TVL in Ethereum DeFi protocols, and as ETH transactions rise, the investment attractiveness of ETH DeFi increases with the surge in TVL and revenue measured in dollars.
ETH has a reflexivity that does not exist in the Bitcoin ecosystem.
Other Factors to Consider
How much of the rotation inflow will there be from BTC ETF to ETH ETF? Assuming some BTC ETF allocators are unwilling to increase their net cryptocurrency exposure but wish to diversify. Especially, TradFi investors prefer market-cap-weighted strategies.
How well does TradFi understand ETH assets and the Ethereum smart contract layer? The "digital gold" narrative of Bitcoin is both easy to understand and widely known. How much of Ethereum's narrative (settlement layer of the digital economy, three-point asset theory, tokenization, etc.) will be understood?
How will previous market conditions affect ETH's flow and price trends?
Elites in the ivory tower have designated two crypto assets as bridges to their world—Bitcoin and Ethereum. These assets have crossed the well-known zeitgeist. Considering that they can now offer products that can charge fees, how will the launch of spot ETFs change TradFi capital allocators' views on ETH? The thirst for returns in TradFi makes the native yield obtained through staking Ethereum very attractive for providers, and we believe that a staking ETH ETF is a matter of "if" rather than "when." Providers can offer zero-fee products and earn income an order of magnitude higher than normal ETH ETF fees simply by staking ETH on the backend.
