Author: Matt Hougan, Chief Investment Officer of Bitwise; Translated by: 0xxz@Golden Finance
An ETF could have a bigger impact on Ethereum than on Bitcoin.
Everyone wants to know what will happen to the price of ETH after the launch of the spot ETP (Golden Finance Note: Ethereum spot ETF). My prediction is that the inflow of ETP will drive the price of ETH to a new all-time high of over $5,000.
It won’t be immediate — in fact, I think there may be volatility in the first few weeks as funds may flow out of the $11 billion Grayscale Ethereum Trust (ETHE) after the conversion to an ETP. But by the end of the year, I believe new highs will be reached. If inflows are stronger than many market commentators expect, prices could go even higher.
Here are the reasons.
It’s all about supply and demand
The best way to model the potential impact of ETP issuance on commodity prices is to consider supply and demand. ETPs do not change the fundamentals of the underlying commodity such as ETH, but they do bring in new sources 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 were able to produce:
BTC purchased by ETP: 263,965 BTC
BTC produced by miners: 129,181 BTC
Not surprisingly, the price has risen. BTC has risen about 25% since the Bitcoin ETP launched on January 11, and more than 110% since the market began pricing in an October 2023 launch.
Bitcoin's returns since January 2023
Source: Bitwise Asset Management. Data from December 31, 2022 to July 11, 2024.
Will we see the same effect on ETH? Actually, I think the effect will probably be even greater.
As I’ve written before, I think the new Ethereum ETPs will attract billions of dollars. And I think the money flowing into these new ETPs will have a much bigger impact than Bitcoin for three reasons.
Reason 1: ETH’s short-term inflation rate is low
When the Bitcoin ETP was launched, the Bitcoin network had an inflation rate of 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 worth of Bitcoin per year to sustain it.
Ethereum, by contrast, has had exactly 0% inflation over the past year: there were 120 million ETH a year ago, and there are 120 million ETH today. That’s because, while a small amount of ETH is generated every day (just like Bitcoin), it’s also consumed by people using Ethereum-based applications (from stablecoins to tokenized funds). Over the past year, these two forces have balanced out.
Lots of new demand meeting 0% new supply? I like this math. If activity on Ethereum increases, so will consumption of ETH. This is another organic demand lever that works in favor of investors.
Reason 2: Unlike BTC miners, ETH stakers do not need to sell
The second major difference is that while Bitcoin miners typically have to sell the new Bitcoin they receive, ETH stakers don’t.
Bitcoin mining, the process of creating new bitcoins and settling bitcoin transactions, 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.
Instead of relying on mining, Ethereum uses a system called "proof of stake." In a proof-of-stake system, users stake (or "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 are not forced to sell the ETH they produce. 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 therefore cannot enter the market
Staking has another effect: when you stake ETH, you lock it up for a fixed period of time. During this time, you cannot withdraw the 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.
Adding it all together, about 40% of ETH is partially or completely unsaleable. That’s a lot of money!
what does that mean?
As I mentioned above, I expect the new Ethereum ETP to be successful, attracting $15 billion in new assets within the first 18 months of listing. ETH is currently trading around $3,400, just 29% below its all-time high. If the ETP is as successful as I expect it to be — given the dynamics described above — it’s hard to imagine ETH not challenging its old record.
