The Ethereum spot ETF starts trading today. How significant are the inflows and selling pressure?

Author: Nianqing, ChainCatcher

On Monday local time, according to regulatory documents and announcements from relevant companies, the U.S. SEC officially approved the listing applications for spot Ethereum ETFs from multiple companies. The Ethereum spot ETFs are officially effective, and the 424(b) forms are being released one after another. Now, we are just waiting for the relevant ETFs to be listed at 9:30 AM Eastern Time on Tuesday (July 23, 9:30 PM Beijing Time).

The first batch of Ethereum spot ETF applicants includes:

• BlackRock Spot Ethereum ETF with a fee of 0.25% (0.12% for the first $2.5 billion or the first 12 months), code ETHA;
• Fidelity Spot Ethereum ETF with a fee of 0.25% (no management fee for the entire year of 2024), code FETH;
• Bitwise Spot Ethereum ETF with a fee of 0.2% (0% for the first $500 million or the first 6 months), code ETHW;
• 21Shares Spot Ethereum ETF with a fee of 0.21% (0% for the first $500 million or the first 12 months), code GETH;
• VanEck Spot Ethereum ETF with a fee of 0.2% (0% for the first $1.5 billion or the first 12 months), code ETHV;
• Invesco Galaxy Spot Ethereum ETF with a fee of 0.25%, code QETH;
• Franklin Spot Ethereum ETF with a fee of 0.19% (0% before January 31, 2025, or for the first $10 billion), code EZET;
• Grayscale Spot Ethereum ETF with a fee of 2.5%, code ETHE;
• Grayscale Ethereum Mini Trust ETF with a fee of 0.15%, code ETH.

It is worth mentioning that, similar to Grayscale's GBTC, Grayscale will convert the existing Grayscale Ethereum Trust ETHE into an ETF, maintaining the previous fee rate of 2.5%. In October last year, Grayscale, in collaboration with NYSE Arca, applied to convert Grayscale's Ethereum Trust Fund into a spot Ethereum ETF.

According to data from Grayscale's official website, the ETHE trust was established in December 2017, listed in June 2019, and the date for ETF listing is July 23. Currently, ETHE holds 2.63 million ETH, and due to its early establishment, Grayscale's average cost of holding ETH is only a few hundred dollars. Additionally, since the fee rate remains at 2.5% after ETHE converts to an ETF, some opinions suggest that due to ETHE's previous status as a trust, which did not allow redemptions during its existence and had a 6-month lock-up period, combined with ETHE's high fee rate being ten times higher than competitors, this will lead to significant outflows.

Although Grayscale introduced the Grayscale Mini Trust ETF (with fees reduced from 0.25% to 0.15%, free for the first 6 months, currently the lowest fee ETF) to prevent capital outflow, it is still difficult to avoid selling pressure similar to what occurred after the listing of GTBC.

Viewpoint: The selling pressure on ETHE will not be as great as GBTC

The ETHE trust was listed in 2019 and, like GBTC, is one of the earliest funds linked to ETH in the U.S. market. Previously, ETHE was a closed-end fund, and due to its structure, there were certain arbitrage opportunities due to the fund price being at a premium or discount to net asset value. However, a series of bankruptcy events such as FTX and DCG led to GBTC and other trusts being criticized by the market as "the initiators of institutional bubbles and collapses".

Moreover, ETFs are generally more transparent than trust products, have stronger liquidity, lower thresholds, and redemption risks, making them more acceptable to mutual fund managers and pension funds, thus more popular in the market. Therefore, as other institutions apply for crypto asset spot ETFs, Grayscale's GBTC and ETHE trusts, in order not to be gradually marginalized, have ultimately converted into ETF products.

The selling pressure following GBTC's successful conversion to a Bitcoin spot ETF lasted for more than a month, leading to concerns about potential large-scale outflows after ETHE's listing.

According to Farside Investors data, as of July 22, GBTC has faced capital outflows, with a cumulative net outflow of $18.49 billion. Although Grayscale's holding of 2.63 million ETH (worth about $9.3 billion) is significantly smaller than its GBTC scale, it can be imagined that ETHE's high fee rate will still lead to some outflows.

However, @analyst Theclues believes that there are significant differences between ETHE and GBTC, and the selling pressure on ETHE after its listing will not be as intense as that on GBTC.

She believes that the BTC ETF did not encounter any setbacks prior to its approval, with expectations stable, having risen nearly 100% in the three months before January 10.

In contrast, the ETH ETF has been full of twists and turns, especially the huge reversal from "unable to pass in the short term" to "passed in July," with speculative expectations starting again from $2800, and currently up 21%. The motivation for selling news stems from the profit situation of speculative funds, and compared to BTC, the motives for selling ETH are not comparable.

Additionally, although ETHE also has arbitrage profit opportunities (buying at a 40% discount), there are significant differences between ETHE and GBTC. Before converting to an ETF, GBTC had a weekly trading volume of only over $100 million, while ETHE currently has a weekly trading volume of over $400 million, sustained for several weeks. Furthermore, ETHE's premium has long been reduced to within 6%, while GBTC's premium only gradually recovered in the two weeks before its conversion to an ETF. Therefore, the arbitrage space for ETHE is sufficient, and there is enough market depth to sell ETHE shares. She believes that many predictions of a crash are based on the subjective view that the "predicted subject" is static.

Even if there is selling pressure and a crash in the short term, ETHE will be absorbed by other Ethereum ETFs in the long term. We can see from the inflow and outflow trends of Bitcoin spot ETFs that despite the large outflows from GBTC, as of July 22, the net inflow of Bitcoin spot ETFs has exceeded $17 billion. Moreover, from the price performance, the selling pressure has not had much impact on Bitcoin prices.

Additionally, compared to GBTC, a key measure is that Grayscale has spun off the Mini Trust ETF from ETHE. According to its official website, as of July 18, 2024, 10% of the underlying ETH of the Grayscale Ethereum Trust (ETHE Trust) was split off while creating the Grayscale Ethereum Mini Trust (ETH Trust). Therefore, the net asset value of ETHE Trust shares will be 10% lower than the net asset value on July 18, 2024 (not considering any potential rise or fall in ETH prices). ETHE Trust shareholders do not need to take any action to receive the split benefits and will have the right to receive ETH Trust shares on a 1:1 basis. Thus, their overall exposure to ETH will remain unchanged.

Currently, Grayscale has both ETHE and ETH ETFs, with ETHE holding an initial 90% of ETH, with a management fee of 2.5%, more suitable for institutions and professional investors, while ETH holds 10% of the initial ETH, with a lower management fee to reduce user attrition and lower potential selling pressure.

Therefore, compared to GBTC, as holders transition to the Mini Trust ETF, the outflow from ETHE will be more moderate.

Grayscale's Mini Trust ETF can also help long-term holders reasonably avoid taxes, providing ETHE holders with a good middle ground between not reducing income and avoiding sales, especially for those affected by potential capital gains taxes.

Estimated Inflow Scale of ETH ETF

Currently, several institutions have estimated the inflow scale of the ETH ETF:

Grayscale's research team estimates that the demand for U.S. spot Ethereum ETFs will reach 25%-30% of the demand for spot Bitcoin ETFs. A significant portion of Ethereum supply (such as staked ETH) may not be used for the ETF.

ASXN digital asset research believes that when the ETH ETF goes live, ETHE holders will have two months to exit at a price range close to the face value. This is a key variable that will help prevent ETHE outflows, especially exit flows. ASXN's internal estimate is that $800 million to $1.2 billion will flow in monthly. This is calculated by taking the market cap-weighted average of monthly Bitcoin inflows and then multiplying it by the market cap of ETH.

Bloomberg ETF analyst Eric Balchunas predicts that the Ethereum spot ETF could gain 10% to 15% of the assets acquired by the Bitcoin spot ETF, reaching $5 billion to $8 billion.

Galaxy expects that the net inflow of the ETH ETF will reach 20-50% of the net inflow of the BTC ETF within the first five months, targeting 30%, which means a net inflow of $1 billion per month.

Shenfish predicts that the main capital inflow during the initial listing period from June to December may come from retail investors, accounting for 80% to 90% of total funds, with institutional users participating less. Considering that ETHE is similar to GBTC, the market may face some arbitrage and selling pressure, and whether it can withstand this selling pressure remains to be seen. After December, institutional investors may gradually enter the market.

However, the market generally believes that the inflow brought by the ETH ETF will be limited.

J.P. Morgan's Nikolaos Panigirtzoglou predicted at the end of May that the inflow of the Ethereum ETF might only be a small fraction of Bitcoin's.

Citibank expects the ETF inflow to account for 30%-35% of Bitcoin inflows. CoinDesk cited this report, stating that this figure will reach $4.7 billion to $5.4 billion within the next six months.

Both banks believe that Bitcoin has a first-mover advantage and emphasize that the functionalities provided by Ethereum cannot be realized through ETFs, thus limiting demand.

How will ETH prices be affected?

Currently, the prevailing view in the market is that due to the approval news of the Ethereum spot ETF appearing in May, there has been a "Sell the News" phenomenon, and the waiting time in the market for the SEC to approve the 19-b and S-1 application documents was long enough, leading to the likelihood that the impact of the ETF on the market has already been digested. Therefore, the ETH ETF is unlikely to bring significant fluctuations to ETH prices.

Additionally, there are some more optimistic views suggesting that after the launch of the first batch of ETFs, Ethereum's performance will surpass that of Bitcoin.

Research from analysis company Kaiko shows that the upcoming ETH ETF should enhance ETH's performance relative to BTC. Kaiko states that since the regulatory approval of the ETF in May, the ETH/BTC ratio (a metric used to compare the two major cryptocurrencies) has risen significantly, from 0.045 to 0.05, and has remained high. In other words, purchasing one ETH requires more Bitcoin, and when the ETF goes live, this trend will only deepen. Although ETH's price has fluctuated since May, this ratio indicates that ETH is poised for an increase.

Rachel Lin, CEO of SynFutures, stated in May that besides demand factors, supply changes will also bring upward space, tightening the price ratio between BTC and ETH. She believes that the market's attitude towards Ethereum is "not optimistic enough," and all indicators suggest that ETH will experience a large-scale bull market in the coming months.