January of this year was very interesting; the weeks and months leading up to it were fueled by speculation about BTC spot ETFs that would be provided by some of the largest asset managers in the world, on US stock exchanges, then, the ETFs happened and BTC rallied. Fast forward to now (June) and everyone is focused on ETH.
It’s worth noting that markets moved up before the approval, took a pause, then sold off on the announcement, and then only later rallied when the massive flow of capital drove prices inexorably higher.
The question I find myself asking is: will we see a similar dynamic? There’s a few things to look at.
A major controversy, which did not plague BTC, is whether Ether should be seen as a security. Filing for securities ETFs are structured a certain way and the ETF applications by Fidely, VanEck, Blackrock seem to not be formatted this way, and so assume that it’s not. Whether it is or not, though, ultimately doesn’t hinder providers from offering the product as you have plenty of securities-linked ETFs anyway, but the SEC’s stance could dampen the mood.
For now, ETF applications were approved and so, provided everything goes smoothly, spot ETH ETFs should be tradeable soon. It’s worth noting that they’re technically already tradeable, for example in Hong Kong; the size of trading and AUM for those spot ETH products are about 15% of the spot BTC products and so might provide an expectation of what’s to come. While many newcomers in the crypto space might find BTC a tad boring, the size of the market is much bigger than ETH and so our expectation of volumes and capital flowing into the ETH ETFs should be in line (and so in this case multiple times lower than what we’ve seen for BTC).
On the flip side, though, a dynamic that will be fascinating to watch is the impact of capital inflow and the actual Ether issuance. BTC is inflationary meaning that, while we know how many bitcoins there ever will be and at what rate, new bitcoins are still issued every ten minutes and so can absorb some of the demand. ETH’s issuance rate can rise but can also go negative (when more Ether is burned based on activity and ensuing transaction fees, compared to how much is being issued). This could give rise to a MASSIVE discrepancy, between how much ETH is bought at time when very little or negative supply of ETH is flowing. The push-pull could give rise to an explosive scenario.
Less bullish is one key component also unique to ETH and proof-of-stake blockchains: there should be a yield for participants willing to stake their coins. The ETF applications specifically mention not offering that yield and not staking coins that would be acquired -no doubt to avoid any regulatory issue that could come of it. That means ETF holders will face an opportunity cost on top of the management fee charged by providers.
Lastly, it’s worth keeping in mind that crypto Twitter is already full of speculation about future spot ETFs (say, Solana, or Avalanche, etc.) and so it’s very likely that many crypto native players will put a trade on for ETH and then, as soon as it’s played out, move on to the next narrative, looking to front-run slower and more traditional players.
With all this in mind, while markets seem to be pulling back now, it’s not unlikely that the actual issuance and trading of spot ETH ETFs will create a new rail for traditional players, professional or retail, to get access to an asset they otherwise might not feel comfortable trading. This results in net inflows for Ethereum and so a new demand that should inevitably push prices higher -similar to what we saw with BTC but maybe a smaller impact due to the relatively smaller market cap and trading volume, and also due to the fact that BTC has already rallied well and pulled ETH along with it for the ride.