Underrated "Ethereum Spot ETF"

Author: Zhou Zhou, Foresight News

Ethereum spot ETF is underestimated.

Initially, people did not anticipate that the Bitcoin spot ETF could create such a huge miracle. Now, the Ethereum spot ETF is also being underestimated. Traditional institutions have shown strong purchasing demand for the Ethereum ETF in the first seven trading days.

On July 23, 2024, the U.S. Ethereum spot ETF officially began trading, just six months after the U.S. Bitcoin spot ETF started trading. During these six months (up to July 2024), the net inflow of assets into the Bitcoin spot ETF reached $17 billion. This is equivalent to an average daily net inflow of over $100 million into Bitcoin since the Bitcoin ETF was launched. The market reacted quickly; after the Bitcoin ETF was approved, Bitcoin rose by 50% within two months.

The impact of the Bitcoin spot ETF on this cycle's Bitcoin price is unparalleled. Binance co-founder He Yi mentioned in an interview with Foresight News: "From 2021 to 2024, this so-called bull market is not driven by innovation; it is actually driven by independent events like the ETF." This is not an exaggeration; according to Caixin Weekly, the average daily trading volume of the Bitcoin spot ETF is about $4 billion to $5 billion, accounting for 15% to 20% of the total trading volume of global cryptocurrency exchanges, bringing massive liquidity to the Bitcoin market.

Moreover, the U.S. Bitcoin ETF has also created miracles in the U.S. ETF market. Launched only six months ago, two Bitcoin spot ETFs (IBIT and FBTC) have entered the top 10 in terms of asset inflow among nearly 2,000 ETFs launched in the past five years. BlackRock's IBIT became the fastest ETF in the U.S. to reach $20 billion, taking only 137 days (the previous record holder was JPMorgan's actively managed fund JEPI, which took 985 days to reach $20 billion). As of July 31, 2024, BlackRock's IBIT had a net inflow of $20.023 billion, while Fidelity's FBTC had a net inflow of $9.952 billion.

As possibly the currently largest "single variable" affecting the Bitcoin and cryptocurrency market, the data performance of the Bitcoin spot ETF provides a rare and valuable template and reference for subsequent other cryptocurrency ETFs like Ethereum. People can intuitively see and compare the daily net inflow, trading volume, and other data of Bitcoin and Ethereum spot ETFs.

So, will Ethereum replicate the success of the "Bitcoin spot ETF"? At what scale of trading volume and net inflow can the Ethereum spot ETF be considered to outperform the Bitcoin spot ETF? Will the impact of the Ethereum ETF on Ethereum's liquidity and price be as significant as the Bitcoin ETF's impact on Bitcoin's price and liquidity?

The Underestimated "Ethereum Spot ETF"

Traditional institutions have shown strong purchasing demand for the Ethereum ETF in the first seven trading days. Based on market capitalization (30%), the net inflow of funds for the Ethereum spot ETF even exceeded that of the Bitcoin spot ETF.

As of August 1, Ethereum's market capitalization was 30% of Bitcoin's. Based on this ratio, the first-day and first-week data performance of the Ethereum ETF exceeded that of the "Bitcoin spot ETF."

In the first day of trading, the net inflow of eight Ethereum ETFs, excluding Grayscale, reached $591 million, while the net inflow of nine Bitcoin ETFs, excluding Grayscale, was $750 million, with the Ethereum ETF accounting for 78%. Considering that Ethereum's market capitalization is 30% of Bitcoin's, the first-day data performance of Ethereum was quite impressive, surpassing that of the Bitcoin spot ETF.

Data of Ethereum spot ETF in the first 7 trading days (Source: Coinglass)

If we extend the time to a week, we still find that the performance of the Ethereum spot ETF is comparable to that of the Bitcoin spot ETF.

In the first seven trading days, the net inflow of the eight Ethereum ETFs, excluding Grayscale, was $1.494 billion. In comparison, the net inflow of the nine Bitcoin ETFs, excluding Grayscale, in the first few trading days was $4.536 billion, with the former accounting for 32% of the latter. Considering that Ethereum's market capitalization is 30% of Bitcoin's, the data of the first seven days for the Ethereum ETF is not inferior to and may even be slightly better than that of the Bitcoin ETF.

Data of Bitcoin spot ETF in the first 11 trading days (Source: BitMEX Research)

From the above two charts, it can be seen that in the first 11 trading days, both the Bitcoin spot ETF (10 funds) and the Ethereum spot ETF (9 funds) had only Grayscale selling, while others were buying. Moreover, the selling volume from Grayscale was far higher than the total buying volume from the other eight companies.

This is due to Grayscale's early layout, having acquired Bitcoin and Ethereum at a low cost, and the high fees after the ETF listing, which meant that both Bitcoin and Ethereum faced significant selling pressure from Grayscale in the first few weeks. Therefore, the prices of Bitcoin and Ethereum did not directly rise as a result.

According to Coinglass data, as of July 30, 2024, the total assets under management of the U.S. Ethereum ETF were $9.009 billion, while Grayscale's ETHE had assets under management of $6.896 billion, accounting for 76% of the overall U.S. Ethereum spot ETF market. Grayscale's selling pressure on Ethereum will continue for some time.

Grayscale ETFE's assets under management are $6.896 billion, accounting for 76% of the market (Image Source: The Block)

In the first seven trading days, the nine Ethereum spot ETFs had a total outflow of $484 million. Among them, Grayscale's ETHE had an outflow of $1.977 billion. While the other eight ETFs were all buying, Grayscale alone caused the net outflow of the Ethereum spot ETF.

So, how long will Grayscale's Ethereum spot ETF continue to exert selling pressure on the market? When will the funds for the Ethereum ETF begin to accelerate, bringing a continuous net inflow of funds and liquidity to the Ethereum market? Will it even start to directly affect Ethereum's price?

Will the Ethereum ETF Surpass the "Bitcoin ETF" in the Future?

How to judge the performance of the "Ethereum spot ETF"?

U.S. ETF analysts believe that the data performance of BlackRock's ETF will be an important reference point.

Whether it is the Bitcoin spot ETF or the Ethereum spot ETF, BlackRock is the largest buyer of ETFs, and over time, it is expected to absorb all of Grayscale's selling.

As the world's largest asset management company controlling $10 trillion, BlackRock's purchases of Bitcoin ETFs exceed the total of the other nine Bitcoin ETFs combined. From January 11, 2024, to July 31, 2024, BlackRock attracted a net inflow of $20.023 billion into Bitcoin, while the total net inflow of the other eight Bitcoin spot ETFs, excluding Grayscale, was $16.6 billion, and Grayscale's selling amounted to $19 billion. BlackRock has completely "absorbed" Grayscale's selling of Bitcoin.

According to the data of the Bitcoin ETF, on the 12th working day after the Bitcoin ETF was issued (January 29), BlackRock's Bitcoin spot ETF first surpassed Grayscale's Bitcoin Trust (GBTC) in trading volume. Some U.S. professional ETF analysts believe this indicates that the selling pressure from Grayscale's held Bitcoin is being significantly weakened, marking one of the signals of Bitcoin hitting a bottom.

Data of Bitcoin spot ETF in the first 23 trading days (Source: BitMEX Research)

In fact, since that day (the 12th working day after issuance), the Bitcoin ETF has experienced continuous net inflows of funds.

As shown in the above chart, after the 12th trading day, Grayscale's selling pressure was difficult to maintain at previous levels, while the buying from BlackRock and Fidelity continued at previous levels. Bitcoin's price also began to rise from January 26 and reached a peak on March 14. During these two months, the Bitcoin ETF injected nearly $10 billion into the Bitcoin market.

The second indicator worth noting is whether the net inflow of assets after the issuance of the Ethereum ETF can reach 30% of that of the Bitcoin ETF.

Eugene, head of institutional business at Bybit, told Foresight News: For traditional financial institutions, understanding ETH may take slightly longer than understanding BTC. We expect the net inflow of the Ethereum ETF to be about 25% to 30% of that of the Bitcoin ETF, based on the market capitalization ratio of Ethereum to Bitcoin.

Image Source: CoinShares Research Director James Butterfill

Net inflow of assets represents the actual net inflow of funds into the Ethereum market from the Ethereum ETF, i.e., the incremental funds.

As shown in the above chart, referencing the first month after the official issuance of the Bitcoin spot ETF (February 14), the total net inflow reached $4 billion. This brought substantial incremental funds to the Bitcoin market.

Quantifying the second indicator further:

1) In the first month, around August 23, 2024, will the net inflow of the Ethereum ETF reach $1 billion?

2) Two months later, around September 23, will the net inflow reach $2.7 billion, and will the total assets under management reach $16.5 billion (as of July 31, the total assets under management of the Ethereum ETF were $9.119 billion)?

3) Six months later, around January 23, 2025, will the net inflow reach $4.6 billion (after six months, the net inflow of the Bitcoin spot ETF reached $15.2 billion)?

When all Ethereum spot ETFs first generate net inflows of assets, it will be another key signal.

As shown in the chart below, as of July 31, the net outflow of the Ethereum ETF was $484 million. This indicates that Grayscale's selling pressure was greater than the buying from the other eight Ethereum spot ETFs.

Data Source: Coinglass

However, Grayscale ETFE currently has assets under management of $6.896 billion. Based on the current average daily selling speed of $282 million, after 12 trading days, Grayscale ETFE's assets under management will be halved. This is clearly unsustainable and illogical. According to the selling data of Grayscale's Bitcoin ETF, although Grayscale has been selling Bitcoin almost daily for six months, it has only sold more than half of the Bitcoin it holds after six months.

From Grayscale's holdings and selling speed of the Ethereum ETF, it is difficult for Grayscale to continue selling Ethereum at the intensity of the first seven weeks, while institutions like BlackRock are expected to maintain their previous purchasing power. If this is the case, the net inflow of the Ethereum ETF will encounter a turning point in the coming weeks.

ETF, the Biggest Variable Affecting Ethereum's Price in the Short Term?

The Bitcoin ETF is the "biggest variable" affecting Bitcoin's price in this cycle. After the emergence of the Ethereum ETF, will it become the "biggest variable" affecting Ethereum's price in the current cycle?

As Eugene, head of institutional business at Bybit, told Foresight News, it depends on whether traditional institutions can quickly understand what Ethereum is, just as they did with Bitcoin, and be willing to invest.

"Many people believe that Bitcoin's main attraction lies in its scarcity, but many also believe that Ethereum's appeal lies in its utility; you can think of Ethereum as a global platform for running applications without a centralized intermediary," Bloomberg ETF analyst Eric Balchunas introduced Ethereum.

"Ethereum is a global application platform that can operate without a central authority, making it a truly decentralized platform in history." Others in the industry have described it this way. Regardless, in the next six months, Ethereum will be under observation from traditional institutions, which will use funds to prove whether they are willing to invest in Ethereum's technology, builders, business narrative, and future prospects.

The good news is that based on the 30% market capitalization ratio, in the data from the first seven trading days, excluding Grayscale's influence, traditional institutions have shown strong demand for the Ethereum ETF. The Ethereum ETF accounted for 32% of the net inflow of the Bitcoin ETF, indicating that the current performance of the Ethereum spot ETF slightly exceeds that of the Bitcoin spot ETF.