Bloomberg analyst Eric Balchunas had estimated that there was a 25% chance that an Ethereum ETF would be approved in May. However, by May 20, he suddenly raised that probability to 75%, and Ethereum prices surged 20% that day. Later that week, all 19b-4 (Exchange Rule Change) applications for spot Ethereum ETFs were approved by the SEC. Currently, nine issuers are planning to launch 10 Ethereum spot ETFs. They submitted their S-1 documents to the SEC on Monday, and the market expects them to be listed and traded by July 18 at the latest. We look forward to these ETFs actually being listed and traded after the S-1 application becomes effective, and predict that these ETFs will achieve at least $5 billion in net inflows within half a year of trading. For comparison, Bitcoin ETFs achieved $15.14 billion in net inflows in half a year, and $5 billion is about 30% of the net inflows of Bitcoin ETFs. Similar to Bitcoin ETFs, the initial net inflows are expected to come mainly from retail investors in the United States, but no more than a quarter, and institutional investors such as hedge funds, investment advisors (RIAs), banks and pensions will also join and become the dominant force.
Lessons learned from BTC ETF:
As of July 10, spot Bitcoin ETFs have accumulated a net inflow of $15.14 billion since their launch, with an average daily inflow of $123 million. The total amount of Bitcoin held by these ETFs is about 880,000, accounting for 4.5% of the current supply. In the absence of improvement in external liquidity, ETF inflows are the main reason for the rise in Bitcoin prices this year. Through regression analysis of the 7-day change in Bitcoin prices and ETF net inflows, the correlation coefficient R² is 0.65, indicating that the two variables are highly correlated. It is worth noting that due to the lag of ETF inflow data, prices tend to be reflected in advance.
In addition, GBTC redemptions have always been a major hidden danger to the overall inflow of ETFs. Since the conversion of the trust to an ETF, GBTC has experienced a large amount of capital outflows in the first few months. In mid-March, GBTC outflows peaked, reaching US$642 million on March 18. Since then, capital outflows have eased, with occasional net inflows since May. The situation of GBTC is mainly caused by the following three reasons: 1. Premium arbitrage liquidation in the early stage of listing; 2. Redemption transfer caused by high management fees in the industry; 3. Forced sale of GBTC shares when bankrupt companies such as FTX and Genesis liquidate assets. Although the number of bitcoins held by GBTC has dropped from 619,000 to 274,000 (a decrease of 55%), the unfavorable factors have basically improved, and GBTC is still in the upper-middle level among all Bitcoin ETFs.
The 13F filing shows that as of March 31, 2024, thousands of institutions hold Bitcoin ETFs with a total value of approximately $11 billion, accounting for 20% of the total share of Bitcoin ETFs. This shows that most of the demand is driven by retail investors, but institutional buyers are still pouring in, including major banks (such as Morgan Stanley, JPMorgan Chase, Wells Fargo), hedge funds, and pension funds. Institutions are not only continuous buyers of ETFs, but also long-term holders. As asset management platforms gradually expand the buying and selling rights of Bitcoin ETFs, we expect to see a further increase in the proportion of institutional ownership in the next quarter's 13F, which is an important support for Bitcoin prices.
Estimated inflows into the Ethereum ETF:
Taking the performance of BTC ETF in half a year as a benchmark, we expect Ethereum ETF to achieve about 30% of BTC in half a year of trading, achieving at least $5 billion in net inflows, equivalent to $830 million per month and $38 million per trading day. Considering the market value ratio of the two (34%), the open interest of CME futures and the open interest of futures in the entire market (12% and 48% respectively), and the AUM of Grayscale Trust Fund and all cryptocurrency funds on the market before the ETF is approved (39% and 21% respectively), based on the above situation, we believe that the inflow of Ethereum spot ETF will be about 30.8% of BTC, ranging roughly between 30% and 50%.
Assessing the prospects for an Ethereum ETF:
Currently, exchanges hold a larger proportion of Bitcoin's supply than Ethereum (11.7% and 10.3%, respectively). Bitcoin's annual inflation rate is about 0.8% after the halving, while Ethereum has a negative inflation rate so far this year (-0.19% annualized) due to the implementation of the EIP-1559 destruction mechanism. The PoS staking mechanism reduces the liquidity available for ETFs to absorb, and currently staked Ethereum accounts for about 27% of the supply. Smart contracts and cross-chain bridges also limit a portion of Ethereum's available supply, which accounts for about 11%. These factors suggest that Ethereum's supply may be tighter. Similar to Bitcoin, ETF inflows will have a positive impact on Ethereum prices, but Ethereum may be more sensitive to ETF flows.
First, since ETHE is a trust product that cannot be redeemed before being converted to an ETF, the market price is much lower than the net asset value. In 2023, the discount of ETHE was about -20%. After the news of the ETF's approval was confirmed in May this year, the price difference quickly narrowed to less than -5%. Arbitrage institutions will buy ETHE at a discount, and when the ETF is approved, the discount will be eliminated and redeemed to earn the difference.
Secondly, high management fees will also cause early ETHE investors to move their positions to competitor products with more favorable rates, such as BlackRock's ETHA. Grayscale's fees are expected to remain around 0.2% higher than the industry level, but ETHE's mini product, ETH, will also be launched at the same time, with lower management fees. Investors can choose to transfer their shares to the mini product at zero cost. Grayscale hopes to retain its asset share and avoid large-scale panic redemptions. Finally, unlike GBTC, ETHE will not face forced sales due to bankruptcy (such as FTX or Genesis), which further supports the view that the selling pressure associated with the Grayscale Trust is relatively less than that of BTC.
Overall, the launch of a spot Ethereum ETF will have a very large boost to Ethereum's price and demand, with potential even higher than Bitcoin. Although the SEC has been reluctant to explicitly state that Ethereum is a commodity, if issuers can negotiate to resolve the issue of ETFs being unable to be pledged, potential demand will be even stronger. The recent sell-offs in Mt. Gox and the German government have led to low market sentiment, while the Bitcoin ETF has not had a continuous large inflow since March. The arrival of the Ethereum ETF will bring a new narrative to the market, which is expected to reverse the pessimistic market sentiment.
