Written by Andrew Kang
Compiled by: J1N, Techub News
The passage of the Bitcoin spot ETF has opened the door to the cryptocurrency market for many new buyers to allocate Bitcoin in their portfolios. But the passage of the Ethereum spot ETF has a less obvious impact. When the BlackRock Bitcoin spot ETF application was submitted, I was strongly bullish on the price of Bitcoin. At that time, the price of Bitcoin was $25,000. As of now, Bitcoin has returned 2.6 times and Ethereum has returned 2.1 times. Since the bottom of the cycle, Bitcoin has returned 4 times and Ethereum has also returned 4 times. So how much upside can the Ethereum ETF provide? I don’t think there will be much upside unless Ethereum develops a new model to improve its economic conditions. I said on June 19, 2023 that the approval rate of BlackRock’s application for a Bitcoin spot ETF was as high as 99.8%, which is the most positive news we have heard recently and may open the floodgates for tens of billions of dollars in capital flows. However, the price of Bitcoin has only risen by 6%, and the price performance has not met expectations.
Overall, while Bitcoin spot ETFs have amassed $50 billion in AUM. However, when breaking down net inflows since launch by excluding pre-existing GBTC AUM and swaps (selling futures, buying spot ETFs), you get $14.5 billion in net inflows. However, these are not true inflows as there are a lot of delta neutral flows to account for, namely basis trades (selling futures, buying spot ETFs) and selling spot, buying spot ETFs. By looking at CME data and analyzing ETF holders, I estimate that about $4.5 billion of net flows can be attributed to basis trades. ETF experts say that large holders such as BlockOne have also converted a large amount of spot Bitcoin into spot ETFs, roughly estimated at $5 billion. Netting out these flows, we get true net purchases of Bitcoin spot ETFs to be $5 billion
In this way we can simply infer what the flow of funds for Ethereum will be. Bloomberg ETF analyst @EricBalchunas estimates that Ethereum flow may be 10% of Bitcoin. This makes the real net purchase flow of $500 million and the reported net flow of $1.5 billion in 6 months. Although @EricBalchunas's prediction is not very accurate, I believe he represents the attitude of a number of traditional financial institutions. Personally, I think Ethereum flow may be 15% of Bitcoin. Starting with Bitcoin's $5 billion in real net purchases (mentioned above), by adjusting Ethereum's market value (33% of Bitcoin) and a 0.5 ⎡access coefficient⎦, we can get $840 million in real net purchases and $2.52 billion in reported net purchases. There are some reasonable arguments that ETHE (Grayscale Ethereum Futures ETF) has less premium than GBTC, so I think the optimistic case is $1.5 billion in real net purchases and $4.5 billion in reported net purchases. This is about 30% of Bitcoin's flow. In either case, the estimated $1.5 billion in real net purchases for the Ethereum spot ETF is far lower than the current $2.8 billion in Ethereum derivatives inflows, not including front-running of spot. This means that the inflows before the Ethereum spot ETF was launched exceeded the estimated inflows for the Ethereum spot ETF, so the price of the Ethereum spot ETF has been largely priced in by the market. ⎡Access Coefficient⎦: Adjusted for the liquidity achieved by the ETF, Bitcoin clearly benefits more than Ethereum given the different holder bases. For example, Bitcoin is a macro asset and is more attractive to institutions with access issues (macro funds, pensions, endowments, sovereign wealth funds). Ethereum is more of a technology asset and is more attractive to institutions that are not as restrictive in terms of crypto access, such as VCs, crypto funds, technical experts, retail investors, etc. 50% is derived by comparing the CME OI (Open Interest, derivatives open interest) to market capitalization ratio of Ethereum and Bitcoin. Looking at CME data, before the launch of the Ethereum spot ETF, Ethereum's OI was significantly lower than Bitcoin.OI is ~0.3% of supply, while Bitcoin is 0.6%. At first, I thought this was a sign of early days, but one could also argue that this masks a lack of interest in Ethereum ETFs from traditional financial money. Wall Street traders tend to trade Bitcoin spot ETFs, and they tend to have front-line information, so if they are not using the same trading methods on Ethereum, there must be a good reason, and it may mean that there is insufficient information about Ethereum liquidity.
The most clear and direct answer is that $5 billion alone cannot do it. Because there are many other buyers in the spot market. Bitcoin is an asset that is truly recognized as a key portfolio asset worldwide and has many large institutions holding it for a long time, such as Saylor, Tether, family offices, high net worth individual investors, etc. Although Ethereum is also held by large institutions, I think its magnitude is lower than Bitcoin. Remember, before the emergence of the Bitcoin spot ETF, Bitcoin's highest price had reached $69,000, with a market value of more than $1.2 trillion. Market participants and institutions own a lot of spot cryptocurrencies. Coinbase custody $193 billion, of which $100 billion comes from other institutions. In 2021, Bitgo reported an AUC of $60 billion and Binance custody of more than $100 billion. Six months later, the Bitcoin spot ETF custodyed 4% of the total supply of Bitcoin. I tweeted on February 12th about the size of the cryptocurrency market, ⎡ I estimated that long-term demand for Bitcoin is $40-130+ billion this year. One of the most common pet peeves of cryptocurrency investors is underestimating the wealth in the world, how much people earn, how liquid money is, and how it affects cryptocurrencies. We hear statistics about the market cap of gold, stocks, real estate so often that cryptocurrencies can be overlooked by many. Many crypto practitioners are stuck in their own limited thinking, but the more you travel and meet other business owners, high net worth individuals, etc., the more you realize how unimaginable the amount of dollars in the world is, and how much of that can go into Bitcoin or other cryptocurrencies. Let me explain this with a rough demand sizing exercise. The average US household income is $105k. There are 124 million US households in the US, which means the total annual income of US individuals is $13 trillion. The US accounts for 25% of GDP, so the total global income is about $52 trillion. The average global cryptocurrency ownership is 10%. In the US, it is about 15%, and in the UAE it is as high as 25-30%. Assuming that cryptocurrency owners only allocate 1% of their income each year, it would cost $52 billion per year to buy BTC, or $1.$500 million ⎦. MSTR (Microstrategy) and Tether bought billions of dollars of Bitcoin when the Bitcoin spot ETF was launched, and investors who entered the market at that time also had low holding costs. At that time, it was generally believed that the passage of the Bitcoin spot ETF was a signal for shipment. Therefore, billions of dollars of short-term, medium-term and long-term positions have been sold and need to be bought back. On top of that, once the Bitcoin spot ETF flow forms a significant upward trend, the shorts need to buy back. Before the launch of the Bitcoin spot ETF, the open interest actually declined, which is crazy.
Ethereum spot ETF is positioned very differently. Ethereum price is now 4x from pre-spot ETF low, while Bitcoin is 2.75x. Crypto native CEX OI increased by $2.1 billion, bringing OI close to ATH levels. Markets are efficient. Of course, many crypto natives saw the success of Bitcoin spot ETF and they also expected the same for Ethereum and positioned accordingly.
Personally, I think the expectations of crypto native users are exaggerated and out of touch with the real preferences of traditional financial markets. This leads to relatively high mind share and purchases of Ethereum by those deeply involved in the crypto space. In reality, for many large non-crypto native capital groups, Ethereum purchases as a key portfolio allocation are much lower. One of the most common pitches from traditional finance is that Ethereum is a ⎡tech asset⎦. The global computer, the Web3 app store, the decentralized financial settlement layer, etc. This is a nice pitch, and I bought it in the last cycle, but it is hard to accept when you look at the actual returns. In the last cycle, you could point to the growth rate of fees and point out that DeFi and NFTs will generate more fees, cash flow, etc. and make a compelling case for it as a technology investment through a similar lens to tech stocks. But in this cycle, the quantification of fees is counterproductive. Most charts will show flat or negative growth. Ethereum is a cash machine, with $1.5 billion in revenue in just 30 days based on its annualized rate, a P/E ratio of 300 times, and a negative P/E after deducting inflation, how will analysts justify this price to their family office or macro fund bosses?
I would even expect the first few weeks of fugazi (usually referring to large trade volumes that appear to be not caused by actual inflows) flows to be lower for two reasons. First, the approval of an Ethereum spot ETF came as a surprise, leaving issuers with little time to convince large holders to convert their Ethereum into spot ETF form. Second, it’s less attractive for holders to switch because they need to give up their stake or earnings on Ethereum in DeFi. But please note that the current Ethereum staking rate is only 25%. Does this mean Ethereum will go to zero? Of course not, at a certain price it will be considered good value for money, and when Bitcoin rises in the future, Ethereum will not necessarily follow suit. Before the spot ETF launch, I expected Ethereum to trade between $3,000 and $3,800. When the spot ETF launches, my expectation is $2,400 to $3,000. However, if Bitcoin rises to $100,000 in Q4 of 2024 or Q1 of 2025, then this could push the price of Ethereum above ATH, but Ethereum and Bitcoin will then move lower. There are some developments to look forward to in the long term, and you have to believe that BlackRock and Fink are doing a lot of work building some financial infrastructure on the blockchain and tokenizing more assets. How much value this will bring to Ethereum, and when exactly, is uncertain. I expect Ethereum to Bitcoin to continue its downward trend, with a ratio between 0.035 and 0.06 over the next year. Although our sample size is small, we do see Ethereum and Bitcoin making lower highs every cycle, so this should come as no surprise.
