ETH ETF will not bring full profits to investors
ETFs bring awareness but are less effective than private funds as an ETH investment vehicle.
With the recent approval, launch, and success of spot bitcoin ETFs, all eyes are on the possibility of regulatory approval of a spot ETH ETF, an outcome we believe is unlikely. could happen under the current administration. Additionally, at least initially, the ETH ETF will lack a staking reward component, an important aspect of ETH total return.
We see the main value of crypto ETFs as normalizing crypto investing for traditional financial allocators. Major ETF providers enter the licensing space for their legitimacy, allowing allocators to invest in cryptocurrencies without career risk. However, for all the industry benefits of spot ETH ETFs, the return characteristics are not as attractive as total return options.
At the time of writing, the reward from eth staking is over 3% per year, according to CESR, the benchmark aggregate ether staking rate. In other words, if an investor invests in an ETH ETF, they may be at a disadvantage compared to someone who invests in a staking investment. CESR has been as high as 8% over the past 12 months.
ETH ETF – Liquidity mismatch due to staking
Mechanically, staking reduces liquidity due to validator entry and exit queues. In the summer of 2023, the joining queue increased to 45 days due to a spike in activity. As a cyber security activity, staking is not designed to ensure the liquidity required for securitization. Due to the huge liquidity needs of ETFs, issuers will have difficulty providing ETH liquidity and total returns, including staking rewards.
Inefficient structure
Passively holding unstaking ETH is the same as holding unsolicited fiat currency for long periods of time in a zero-interest demand deposit account. In other words, holding ETH Not passively staked creates structural inefficiencies and, if compared to a total return benchmark, persistent negative tracking error. From every angle, it is an unacceptable position for an investor.
Private fund solutions
For accredited investors, private funds provide an effective solution to gain total return exposure to ETH. Purchasing and staking ETH through a private fund structure is not subject to legal challenges. Managers can also combine fund liquidity with staking and dumping of ETH on behalf of investors. With a thoughtful operational setup, there are few trade-offs; A private foundation can be audited, benchmarked, and hold qualifying assets.
Disclosure: Methodic partners with CoinDesk's index affiliate, CoinDesk Indices, on a private fund using the CoinDesk Ether Total Return Index, a combination of the CoinDesk Ether Price Index (ETX) and Ratio Synthetic Ether staking (CESR), calculated by CoinDesk Indices and managed by digital asset manager CoinFund.
