A New Era for Crypto: Ethereum Spot ETFs Debut with Impressive Market Impact

On July 23, nine Ethereum spot ETFs made their debut, issued by traditional asset management giants such as BlackRock, Fidelity, and emerging crypto funds like Grayscale and Bitwise. These ETFs track the spot price of Ethereum.

By listing on exchanges such as the Chicago Board Options Exchange (CBOE), the New York Stock Exchange (NYSE), and NASDAQ, investors can now hold this emerging top-tier crypto asset through U.S. stock brokers.

In a bid to capture more market share, issuing institutions are competing fiercely by being first to market, increasing speed, and lowering fees (including fee waivers). Currently, fund management fees range from the newly launched Grayscale Ethereum Mini Trust (ETH) at 0.15% to the Ethereum Trust (ETHE) at 2.50%. Some institutions have even chosen to waive fees temporarily to attract higher AUM, similar to the initial launch of Bitcoin spot ETFs six months ago.

On the first day of trading, Ethereum spot ETFs saw a cumulative trading volume exceeding $1 billion, mainly from Grayscale's ETHE, BlackRock's ETHA, and Fidelity's FETH. However, data from Farside Investors showed an overall outflow of funds on the first day, primarily due to ETHE’s net outflow of over $480 million.

As a crypto-native asset management company without a deep traditional financial background, Bitwise has taken a unique approach to quickly gain a larger scale by focusing on aspects such as issuance time, trading fees, and ecosystem support.

When Bitwise launched its Bitcoin spot ETF, BITB, it announced that 10% of BITB's profits would be donated to three non-profit organizations funding open-source Bitcoin development. These organizations play a key role in improving the security, scalability, and usability of the Bitcoin network. The donations will continue annually for at least the next 10 years to further support the health and development of the Bitcoin ecosystem. Similarly, with the issuance of ETHW, Bitwise announced that 10% of the fund’s profits would be donated to open-source Ethereum developers for at least 10 years, with annual donations. To ensure transparency, the Bitcoin address for BITB and the Ethereum address for ETHW have been made public.

Such community-friendly donation actions naturally gained the favor of crypto enthusiasts, who, in return, gave Bitwise a pleasant surprise on the first day of ETF trading.

Using the basic situation and recent development trends of Bitcoin as a benchmark, we can roughly analyze the potential demand for Ethereum spot ETFs.

Ethereum’s market cap is $420 billion, about one-third of Bitcoin's $1.3 trillion market cap. On average, Ethereum’s daily spot trading volume is half that of Bitcoin. In the futures market, Bitcoin’s open interest is approximately 2.6 times higher than Ethereum’s across all exchanges and about 9 times higher on the Chicago Mercantile Exchange (CME).

Moreover, before the respective ETFs were launched, the AUM of Grayscale’s Bitcoin Trust (GBTC) was approximately 2.8 times that of its Ethereum Trust (ETHE).

Based on the above indicators, we can roughly predict that the potential inflow of funds into Ethereum spot ETFs may reach 20%-30% of the simultaneous Bitcoin spot ETF inflows.

However, due to current regulatory requirements that prevent Ethereum spot ETFs from including staking rewards, this limitation might dampen investor demand in the short term.

Furthermore, one cannot ignore the significant impact of Grayscale’s Ethereum Trust (ETHE) when analyzing the capital inflow into Ethereum spot ETFs.

Grayscale’s Bitcoin Trust (GBTC) performance over the past six months can serve as a reference. Before converting to a Bitcoin spot ETF, GBTC held about 620,000 BTC (approximately 3.1% of Bitcoin’s supply) with a total AUM of about $30 billion. After converting to an ETF, it provided an exit or transition opportunity for investors who had previously purchased GBTC at a discount or for those who preferred a lower-fee ETF.

Thus, GBTC’s Bitcoin holdings decreased by about 55% to 270,000 BTC, objectively exerting downward pressure on Bitcoin’s price.

Grayscale’s Ethereum Trust (ETHE) had an AUM of approximately $10 billion, equivalent to about 3 million ETH (2.5% of Ethereum’s supply) before the launch. Although ETHE may experience similar outflows, two factors should be considered:

Firstly, following the ETF approval in May, ETHE's net asset value discount quickly narrowed, allowing investors enough time to exit at prices close to face value.

Secondly, the Ethereum Mini Trust (ETH) charges only a 0.15% fee, offering fee-sensitive investors an option to transition to this low-cost product. Additionally, 10% of ETHE has already been transferred to the new Mini Trust as seed capital.

Thus, these factors are expected to significantly reduce the likelihood of ETHE holders selling off, thereby lowering potential outflows from this ETF.

If Ethereum spot ETFs attract funds equivalent to 30% of the inflows seen by Bitcoin spot ETFs over the next six months, it could mean an inflow of $4 billion by year-end based on current prices. This would result in 1% of circulating ETH being held by Ethereum spot ETFs, which would likely boost Ethereum’s price performance in the second half of the year.

Historical experience shows that the inflow of billions of dollars through ETFs had a significant stimulating effect on Bitcoin prices in the first half of 2024. During this period of market volatility, crypto ETF investors managed to remain calm, and even during significant price adjustments, there was no panic among funds. This stability is a positive factor for new investors aiming for long-term investments through Ethereum spot ETFs.

Moreover, the involvement of traditional financial giants like BlackRock and the approval by the U.S. SEC bring substantial and crucial credit endorsement to the crypto industry once again.

I believes that while the initial market focus may be on the price performance of Ethereum spot ETFs, their true impact will gradually unfold over the coming months. The mass listing of Ethereum spot ETFs marks a new critical milestone in the expansion and maturation of the crypto asset market.