The implications of the Ethereum ETF and beyond

After launching our own Ethereum exchange-traded funds in Hong Kong, we’ve experienced firsthand the unlock that comes with greater visibility among investors. We saw an immediate shift in the enthusiasm, tone, and tenor of our conversations with investors, both institutional and retail, who saw this moment as a shift in legitimacy for the asset class. 

So, as Ethereum (ETH) ETFs start trading in one of the world’s largest markets this week, we see this as another milestone on the path to full integration of digital assets into traditional finance. This move paves the way for more diverse financial products, including cryptocurrency basket ETFs, ETFs with staking options, tokenized securities, and other financial innovations.

So, what will the real impact of expanded access to ETH as an investment class really be? Will we see ATHs in the coming months? How can we overcome Ethereum’s complexity as infrastructure compared to Bitcoin’s reputation as digital gold? Let’s explore these questions and how they may result in a more gradual adoption curve among investors.

The BTC effect

When spot Bitcoin (BTC) ETFs debuted, they saw over $25 billion traded in the first month. It’s unlikely that Ethereum ETFs will match this volume initially, considering Ethereum’s average 24-hour trading volume is currently at a 70% discount compared to Bitcoin. We expect spot Ethereum ETFs to trade between $15 billion and $20 billion in the first month.

Of course, it’s possible that the inflows will be larger than we expect. This would indicate a bullish sentiment that could drive momentum and give Ethereum a positive psychological push as an accepted asset class for investors of all kinds. 

However, many investors will be comparing ETH directly to BTC—and that’s a major messaging challenge. If BTC is digital gold, then what is ETH? How do investors place it into their diversified portfolios? The success of the ETH ETF hinges on its marketing, which must focus on ETH as the utility layer for the crypto industry. 

Potential for a price rally

By the end of this year, we forecast a price for Ethereum somewhere between $6,000 and $10,000. This price represents 1.6x to 2.5x its 52-week high. Our relatively bullish outlook on Ethereum is driven by rising demand from ETF introductions, increased interest in Ethereum-linked calls, and the growing adoption of ERC-20 tokens and the broader Ethereum ecosystem.

While initial ETF launches might push Ethereum higher, there could be short-term outflows from Grayscale’s Ethereum Trust, similar to what was observed with Bitcoin ETFs. Investors might shift funds to options with lower fees, impacting market sentiment temporarily. 

The launch of an Ethereum ETF could trigger a modest price rally for ETH, driven by increased demand. This uptick might also positively affect other cryptocurrencies through a spillover effect. However, the macroeconomic environment will significantly influence the long-term trajectory of digital assets. Should bearish headwinds diminish and optimism grow with the advent of new funds, Ethereum could see greater price swings.

The sustainability of these gains will depend on external factors such as equity prices, interest rates, emerging sectors, and institutional adoption rates. There’s also the election year in the US, which injects a modicum of uncertainty into the medium-term appetite for risk assets like crypto. 

Staking rewards: Retail vs institutional 

One potential limitation of Ethereum ETFs is the absence of staking rewards, a significant incentive for holding Ethereum directly. Staking allows investors to earn rewards, making it attractive for those comfortable with self-custody. That could limit the appeal for crypto natives, who may not consider adding ETH to their brokerage accounts. 

In contrast to retail investors, ETFs provide a regulated and convenient way for institutional investors to gain exposure to Ethereum without dealing with direct ownership. The strong institutional interest in ETH suggests a growing acceptance of ETFs as exposure instruments, even without staking yields. There is ongoing work with regulators to potentially introduce an ETH ETF with staking in the future, which could enhance market competitiveness.

Even so, staking is not a deal breaker. And income is not the main reason why many investors would want to add ETH ETFs to their portfolio. Rather, they’re looking for price appreciation and exposure to the digital asset vertical. 

Institutional adoption 

Institutional interest in Ethereum could differ from Bitcoin ETFs due to Ethereum’s potential as an infrastructure layer for decentralized applications across various sectors, including finance, supply chain, and technology. These sectors offer significant opportunities, making Ethereum attractive beyond just being a store of value like Bitcoin. And, as regulatory frameworks evolve and provide more clarity and certainty, institutions might find Ethereum a valuable addition for portfolio diversification.

Staking is a major attraction for institutional investors considering Ethereum ETFs. Institutional staking within crypto ETFs represents a sophisticated tool for yield generation, leveraging the inherent value of staked assets. 

This could potentially outperform traditional fixed-income instruments by providing a consistent yield that buffers against market volatility. Incorporating staking into crypto ETFs potentially allows institutions to maximize asset utilization, capturing price appreciation and generating additional returns through staking rewards. This dual-purpose approach can optimize overall investment strategies and could stabilize fund performance in bearish markets.

Moreover, institutional participation in staking could enhance governance within the ecosystem, encouraging more robust regulatory guidelines from relevant authorities and creating a safer, more transparent environment that benefits everyone. This is most evident when it comes to liquidity, as institutions tend to provide more reliable support over time as they become more comfortable with an asset class prone to instability and volatility. 

An upside catalyst

The approval of Ethereum ETFs promises to be a catalyst for market growth, attracting substantial capital inflows from investors preferring the regulated environment of traditional financial markets. As each new jurisdiction approves crypto-related financial products, it attracts new investors who were previously hesitant due to regulatory uncertainties, thus expanding the market.

More importantly, this exposure will add legitimacy to Ethereum in the eyes of the public, benefiting the broader digital asset ecosystem. We will see more people consider investments not only across other digital assets but also in the companies innovating in the broader blockchain ecosystem. 

We see the potential for a rotation into utility, with investors considering projects that address real-world solutions and have the potential to disrupt industries on a global scale. We also could see a boost for defi, as financial products that bridge the gap between traditional finance and decentralized finance become more appealing as investors gain comfort with digital assets. 

And, while initial trading volumes may not match Bitcoin ETFs, the long-term impact on Ethereum and the broader crypto ecosystem promises to be substantial, paving the way for greater awareness and innovation that enables the future of finance.