Author: Tanay Ved & Matías Andrade Source: Coin Metrics Translation: Shan Ouba, Golden Finance
Key Takeaways:
Nine Ethereum spot ETFs are set to debut on July 23, with fees ranging from 0.15% for Grayscale’s Ethereum Mini Trust to 2.5% for Grayscale’s ETHE.
Ethereum’s market cap is $420 billion, about a third of Bitcoin’s $1.3 trillion market cap, and ETH’s daily spot trading volume on trusted exchanges from Coin Metrics is about half of BTC’s.
33.2M ETH (28% of supply) is staked on the Ethereum consensus layer, of which 13.5M ETH (11% of supply) is locked in smart contracts, and 12.5M ETH (10% of supply) is currently on exchanges. ETFs can further stimulate prices by locking funds in an already fully utilized asset.
The launch of a Bitcoin spot ETF in January marked the end of a decade-long wait, giving people broader exposure to the largest crypto asset through a familiar, regulated investment vehicle. Recent 13-F filings revealed the companies behind $16 billion (and counting) of inflows into these products. With this development, market attention has naturally turned to the next frontier: Ethereum (ETH). With a market cap of $420 billion today, ETH is the logical successor, and its ETF approval is a matter of when, not if. The SEC’s surprise approval of a spot ETH ETF in May made ETH’s status as a commodity clear, further strengthening the asset class’s value proposition. Now, just six months later, a spot ETH ETF is set to launch.
In this edition of the Coin Metrics State of the Network report, we take a deep dive into the launch of a spot Ethereum ETF, the supply and demand dynamics, and its impact on Ethereum and the broader digital asset ecosystem.
Issuers in the ETH ETF Race
Nine Ethereum ETFs will debut on July 23, expanding the range of financial products based on cryptocurrencies. Sponsored by traditional asset managers such as BlackRock and Fidelity as well as crypto-native companies such as Bitwise and Grayscale, the products will track the spot price of Ether (ETH). By listing on public exchanges such as the Chicago Board Options Exchange (CBOE), the New York Stock Exchange (NYSE) and Nasdaq, investors will now have another way to gain exposure to ETH through major brokerage platforms, complementing existing options such as user-owned wallets.
As the launch date approaches, a fee war ensues. Issuers have filed final S-1 registration statements disclosing that management fees for their respective funds range from 0.15% for the newly launched Grayscale Ethereum Mini Trust (ETH) to 2.50% for Grayscale’s Ethereum Trust (ETHE), which will convert from its current trust structure to an ETF at launch. Some issuers are also temporarily waiving fees, a strategic move to attract AUM, as has been the case with the Bitcoin ETF.
Background analysis of demand and short-term pressures
Using the metric as a barometer of demand for ETH relative to BTC, we can get an idea of the potential demand for an Ethereum ETF.
Ethereum (ETH) has a market cap of $420 billion, roughly one-third of Bitcoin’s (BTC) market cap of $1.3 trillion. On average, daily spot volume (across trusted exchanges) is half that of BTC, reflecting relative market activity and liquidity. In futures markets, BTC’s open interest is roughly 2.6x higher than ETH across all exchanges and roughly 9x higher on CME. Prior to the launch of their respective ETFs, Grayscale’s Bitcoin Trust (GBTC) had roughly 2.8x the assets under management (AUM) of its Ethereum Trust (ETHE). Overall, these metrics suggest that inflows into the ETH ETF may be roughly in line with the established size difference between the two assets.
An important consideration is that the current ETF structure does not include staking, which creates an opportunity cost for potential investors who forgo additional staking returns. This limitation may affect demand for Ethereum ETFs in the short term and may spark discussions about developing more comprehensive ETH investment products that include staking returns. However, the inclusion of staking also involves considerations of ETH's staking ratio and rewards, overall network security, and regulatory clarity around the Proof of Stake (PoS) consensus mechanism.
Grayscale Fund Focus
As Grayscale’s Ethereum Trust (ETHE) transitions from a trust structure to an exchange-traded fund (ETF) at launch, it is important to consider the potential outflows that the product could generate.
The dynamics of Grayscale's Bitcoin Trust (GBTC) can serve as a precedent. Prior to the launch of the spot Bitcoin ETF, GBTC held approximately 620,000 BTC (approximately 3.1% of the BTC supply) and had total assets under management of approximately $30 billion. GBTC's conversion from a trust to an ETF created an opportunity for investors who previously purchased GBTC at a discount to exit capital or roll into an ETF with lower management fees. As a result, GBTC's Bitcoin holdings decreased by approximately 55% to 270,000 BTC, creating downward pressure on BTC's price.
On the other hand, Grayscale’s Ethereum Trust (ETHE) held approximately $10 billion in AUM, including 3 million ETH (2.5% of ETH supply) prior to launch. While ETHE may experience similar outflows, the events leading up to the launch of the ETH ETF and the launch of Grayscale’s Ethereum Mini Trust (ETH) may mitigate the extent of these outflows.
On the one hand, with the approval of the ETF in May, ETHE's NAV discount has narrowed rapidly, giving investors ample time to exit at close to par value. In addition, the mini-trust charges a fee of 0.15%, providing fee-sensitive investors with the option to transition to this low-cost product. 10% of ETHE has been transferred into the new mini-trust product as seed money, resulting in a reduction in AUM of $1 billion or 300,000 ETH holdings.
ETH supply dynamics
ETH’s multifaceted utility gives it a relatively high velocity (turnover rate) and has a significant impact on its supply dynamics into ETFs.
Ether (ETH) plays a vital role as the native asset in the Ethereum ecosystem. It is the backbone of the Proof of Stake (PoS) consensus mechanism, a means of paying network fees, and is used as collateral or a source of liquidity for decentralized finance (DeFi) platforms such as lending applications and decentralized exchanges (DEX). In addition, as the Ethereum Layer 2 ecosystem develops, more and more ETH is bridged to access infrastructure and services built on top of the Ethereum base layer.
As of July 22, of the 120 million ETH supply in circulation, 33.2 million ETH (about 28% of the supply) is staked on the Ethereum consensus layer, 13.5 million ETH (about 11% of the supply) is locked in various smart contracts, and 12.5 million ETH (about 10% of the supply) is on exchanges. In total, this equates to 39% of the ETH supply not being easily accessible on the market, not counting inactive supply.
The launch of an Ethereum ETF could further absorb ETH, potentially limiting the available market supply. However, the extent of this effect will depend on the adoption rate of these newly launched ETFs.
Other Ethereum data worth watching
Despite recent inflationary trends, driven in part by growth in Layer 2 activity and lower fees on Dencun, ETH supply has remained largely deflationary (-0.24%) since the “merge.” The interaction between ETH’s constrained supply and potential ETF inflows could kickstart a flywheel of network activity and benefit ETH’s overall economics and on-chain metrics.
Increased activity on Ethereum, whether through increased stablecoin supply, L2 blob adoption, or DEX trading, could impact base fees on the Ethereum mainnet, and thus the ETH burn rate. This would ultimately further constrain supply, making prices potentially more susceptible to changes in demand.
ETH Performance and Volatility
As shown by the ETH/BTC ratio, ETH's performance relative to BTC has been in a consolidation phase since 2021. The ratio is currently 0.052, trending down from 0.084 when it consolidated. Since the launch of the spot Bitcoin ETF in January, ETH has returned 35%, lagging the performance of Coin Metrics' Total Market Index (CMBITM) and BTC, which have returned 41% and 46%, respectively, driven by the surge in BTC demand.
It remains to be seen to what extent ETH’s trajectory will change, however, the launch of a spot Ethereum ETF represents an important catalyst for greater awareness and adoption of ETH as an asset, the Ethereum ecosystem, and the digital asset industry as a whole.
in conclusion
While initial attention may be focused on the immediate performance of Ethereum ETFs, their true impact will be apparent in the coming months. This period will provide insight into the demand for ETH ETFs relative to Bitcoin, the characteristics of these investment groups, and the broader implications for the Ethereum ecosystem, including network adoption, scaling infrastructure, and applications. Nonetheless, this launch marks a key milestone in the expansion and maturation of the crypto asset market. By expanding the accessibility of ETH and its ecosystem, the launch of the ETH ETF represents not only a new investment vehicle, but also an important catalyst for Ethereum's expanding role in the global financial landscape.
