Analyzing Ethereum ETF: Expected Monthly Inflow of $1 Billion, DeFi Ecosystem to Benefit from Continued Net Inflows
Grayscale's new mini ETH ETF may slow down the outflow of ETHE.Author: ASXN
Compiled by: Shenchao TechFlow
The Ethereum ETF will launch on July 23. The market has overlooked many dynamics related to the ETH ETF that do not exist in the BTC ETF. We will explore liquidity forecasts, the dissolution of ETHE, and the relative liquidity of ETH:
The fee structure of the ETF is similar to that of the BTC ETF. Most providers waive fees for a specified period to help accumulate assets under management (AUM). Similar to the BTC ETF, Grayscale maintains its ETHE fee at 2.5%, which is an order of magnitude higher than other providers. The key difference this time is the introduction of the Grayscale mini ETH ETF, which was not present in the previous BTC ETF.
The mini trust is a new ETF product launched by Grayscale, with an initially disclosed fee of 0.25%, similar to other ETF providers. Grayscale's strategy is to charge a 2.5% fee to inactive ETHE holders while directing more active and fee-sensitive ETHE holders to their new product, rather than shifting to low-fee products like Blackrock's ETHA ETF. After other providers cut Grayscale's 25 basis point fee, Grayscale reduced the mini trust fee to just 15 basis points, making it the most competitive product. Additionally, they will transfer 10% of ETHE AUM to the mini trust and gift it to ETHE holders of this new ETF. This transition is done on the same basis, so it is not a taxable event.
As a result, the outflow of ETHE will be more moderate than that of GBTC, as holders simply transition to the mini trust.
Now let's look at liquidity:
There are many estimates regarding ETF liquidity, and we have listed some below. After normalizing these estimates, the average comes out to about $1 billion per month. The highest estimate from Standard Chartered is $2 billion per month, while JPMorgan's lowest estimate is $500 million per month.
Fortunately, we can leverage data from Hong Kong and European ETPs, as well as the disappearance of the ETHE discount, to help estimate liquidity. If we look at the AUM distribution of Hong Kong ETPs, we draw two conclusions:
Relative to market capitalization, the AUM ratio of BTC and ETH ETPs is more skewed towards BTC. The market cap ratio is 75:25, while the AUM ratio is 85:15.
The BTC to ETH ratio among these ETPs remains relatively constant and is consistent with the ratio of BTC market cap to ETH market cap.
In Europe, we have a larger sample size—197 crypto ETPs with a total AUM of $12 billion. After data analysis, we find that the AUM distribution of European ETPs roughly aligns with the market capitalization of Bitcoin and Ethereum. However, Solana's allocation is disproportionately high relative to its market cap, sacrificing "other crypto ETPs" (any non-BTC, ETH, or SOL). Setting aside Solana, a trend begins to emerge—the global AUM distribution between BTC and ETH roughly reflects the market cap-weighted ratio.
Considering that the cause of GBTC outflows is the "sell the news" narrative, it is crucial to assess the potential outflows of ETHE. To simulate potential ETHE outflows and their impact on price, it is helpful to study the percentage of ETH supply in the ETHE vehicle.
After adjusting for Grayscale mini seed capital (10% of ETHE AUM), ETHE as a vehicle has a percentage of ETH supply relative to total supply that is similar to that at the launch of GBTC. While it is currently unclear how much of the GBTC outflow is turnover versus exit, if we assume the turnover to exit ratio is similar, then the impact of ETHE outflows on price would also be similar to that of GBTC outflows.
Another key piece of information that most people overlook is the premium/discount of ETHE relative to net asset value (NAV). Since May 24, ETHE has been trading within 2% of its NAV—whereas GBTC first traded within 2% of NAV on January 22, just 11 days after GBTC converted to an ETF. The approval of a spot BTC ETF and its impact on GBTC is gradually being priced in by the market, while the situation of ETHE trading at a discount to NAV has been more clearly communicated through GBTC. By the time the ETH ETF launches, ETHE holders will have two months to exit ETHE close to NAV. This is a key factor that helps curb the outflow of ETHE, especially the outflow of funds directly exiting the market.
At ASXN, our internal estimate of monthly inflows is between $800 million and $1.2 billion. This is derived by calculating the market cap-weighted average of monthly inflows for Bitcoin and adjusting it by Ethereum's market cap.
Our estimates are supported by global crypto ETP data, which indicates that market cap-weighted baskets are the primary strategy (we may see similar strategies for rotation flows in BTC ETFs). Additionally, due to ETHE trading at par before launch and the introduction of the mini trust, we are open to potential upside surprises.
Our ETF inflow estimates are proportional to their respective market caps, so the impact on price should be similar. However, it is also necessary to assess how much of the assets are liquid and ready to sell—assuming that the smaller the "float," the more sensitive the price is to inflows. There are two specific factors affecting the liquid supply of ETH, namely native staking and supply in smart contracts. Therefore, the liquid and sellable ETH is less than that of BTC, making it more sensitive to ETF liquidity. However, it is important to note that the liquidity gap between the two assets is not as large as some claim (the cumulative +-2% order book depth of ETH is 80% of BTC).
Our estimates of liquid supply are as follows:
As we approach the ETF launch, understanding the reflexivity of Ethereum is crucial. Its mechanism is similar to BTC, but Ethereum's burning mechanism and the DeFi ecosystem built on it make the feedback loop more powerful. The reflexive loop roughly goes as follows:
ETH inflow into ETH ETF → ETH price increases → Increased interest in ETH → Increased DeFi/chain usage → Improvement in DeFi fundamentals → Increased EIP-1559 burning → Decreased ETH supply → ETH price increases → More ETH inflow into ETH ETF → Increased interest in ETH → …
One important factor missing from the BTC ETF is the "wealth effect" of the ecosystem. In the emerging Bitcoin ecosystem, we have not seen much of the gains reinvested into foundational projects or protocols, despite some small interest in ordinals and inscriptions. Ethereum, as a "decentralized application store," has a complete ecosystem that will benefit from the continuous inflow of the underlying asset. We believe this wealth effect has not received enough attention, especially in the DeFi space. There are 20 million ETH ($63 billion) locked in Ethereum DeFi protocols, and as the ETH price rises, ETH DeFi becomes more attractive as the TVL and revenue in USD surge. ETH has a reflexivity that does not exist in the Bitcoin ecosystem.
Other factors to consider:
How will the rotation flow from BTC ETF to ETH ETF occur? Assuming some BTC ETF investors are unwilling to increase their net crypto exposure but wish to diversify, particularly traditional finance (TradFi) investors who tend to prefer market cap-weighted strategies.
How well does traditional finance understand ETH as an asset and Ethereum as a smart contract platform? The "digital gold" narrative of Bitcoin is both simple and widely known. How well can Ethereum's narratives (such as the settlement layer of the digital economy, the three-point asset theory, tokenization, etc.) be understood?
How will previous market conditions affect the liquidity and price trends of ETH?
Traditional finance decision-makers have chosen two crypto assets to connect to their world—Bitcoin and Ethereum. These assets have become mainstream. How will the introduction of spot ETFs change traditional finance capital allocators' views on ETH, considering they can now offer a product that can charge fees? The thirst for returns in traditional finance makes the native yield from staking Ethereum a very attractive proposition, and we believe that a staking ETH ETF is a matter of when, not if. Providers can offer zero-fee products, simply staking ETH in the background to earn yields an order of magnitude higher than a regular ETH ETF.
