Original author: Matt Hougan, Chief Investment Officer, Bitwise
Original translation: Luffy, Foresight News
Everyone wants to know what will happen to the price of Ethereum after the launch of the spot ETP (note: ETF is a type of ETP). My prediction is that the inflow of funds into the Ethereum ETP will drive the price to a new all-time high of over $5,000.
Of course, this won’t happen immediately, and I think the first few weeks of ETH may be volatile as funds from the $11 billion Grayscale Ethereum Trust (ETHE) flow out after the conversion to ETP. But I believe that ETH will hit new highs by the end of the year. If the fund flow exceeds expectations, the price of ETH may be higher.
Supply and demand is everything
The best way to estimate the potential impact of ETP issuance on Ethereum price is to analyze supply and demand. ETP will not change the fundamentals of Ethereum, but it does bring a new source of demand.
Consider what happened to the price of Bitcoin after the launch of the Spot Bitcoin ETP in January. Since that day, Bitcoin ETPs have purchased more than twice as much Bitcoin as miners have produced:
Bitcoin purchased with ETP: 263, 965
Bitcoins produced by miners: 129, 181
So, the price of Bitcoin is up. Since the launch of the Bitcoin ETP on January 11, Bitcoin has risen about 25%. If you count from October 2023, when the market starts pricing in Bitcoin ETPs in advance, Bitcoin has risen more than 110%.
Bitcoin returns since January 2023. Source: Bitwise Asset Management
Will we see the same impact on Ethereum? Yes, I think the impact will likely be even greater.
As I’ve written before, I think the new Ethereum ETPs will attract billions of dollars, and that the money flowing into these new ETPs will have a much bigger impact than Bitcoin for three reasons.
Reason 1: ETH has a low short-term inflation rate
When the Bitcoin ETP was launched, the inflation rate of the Bitcoin network was 1.7%. In other words, the Bitcoin network produced approximately 328,500 BTC per year, which was approximately $16 billion at the price at the time. This means that we need to buy $16 billion of Bitcoin every year to maintain its price.
In contrast, Ethereum’s inflation rate over the past year has been exactly 0%: there were 120 million ETH a year ago, and there are still 120 million ETH today. This is because, while a small amount of ETH is generated every day, users consume ETH using applications on Ethereum (from stablecoins to tokenized funds). Over the past year, these two forces have reached a balance.
Lots of new demand meeting 0% new supply? Going a step further, if activity on Ethereum increases, ETH consumption will also increase, which is another organic demand lever that works in favor of investors.
Reason 2: Unlike Bitcoin miners, Ethereum stakers do not need to sell
The second major difference is that Bitcoin miners typically have to sell the Bitcoin they produce, while Ethereum stakers do not.
Bitcoin mining is expensive, requiring high-end computer chips and large amounts of energy, so miners typically sell most of the bitcoins they mine to cover operating costs.
Ethereum does not rely on mining, but instead uses a system called "proof of stake." In the proof-of-stake system, users stake ETH as collateral to ensure that they process transactions accurately and truthfully. In return for processing transactions correctly, stakers are rewarded with new ETH.
A key difference between Bitcoin mining and Ethereum staking is that there are no significant direct costs to staking. Therefore, Ethereum stakers will not be forced to sell the ETH they receive. Even if Ethereum’s inflation rate rises above 0%, I don’t think stakers will face significant selling pressure.
In the short term, Ethereum’s daily forced selling volume is significantly less than Bitcoin’s.
Reason 3: 28% of ETH is staked and cannot enter the market
Staking has another effect: when you stake ETH, you lock it up for a period of time. During this period, you cannot withdraw ETH and sell it. Currently, 28% of all ETH is staked, which means it is effectively off the market.
In addition, another 13% of ETH is locked in decentralized financial smart contracts, such as as collateral in lending markets. This leads to a further reduction in the amount of ETH on the market.
All things considered, about 40% of ETH is partially or fully off the market.
what does that mean?
As I mentioned above, I expect the new Ethereum ETP to be successful, attracting $15 billion in new capital within the first 18 months of listing. Ethereum is currently trading around $3,400, just 29% below its all-time high. If the ETP is as successful as I expect, new highs for Ethereum are almost certain.
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