Main points

  • The approval of ETH spot ETFs is expected to significantly increase demand and drive up the price of ethereum, following a similar trend seen with Bitcoin ETFs.

  • With tighter ETH supply on exchanges due to staking and smart contracts, ETH prices could be more sensitive to ETF inflows compared to BTC, which could lead to steeper price movements.

  • The SEC's restriction on ETH staking in ETFs could lead crypto-savvy investors to prefer direct staking, which could suppress some demand for ETFs while catering to different investor audiences.

The US Securities and Exchange Commission (SEC) has approved several spot Etherum (ETH) exchange-traded funds (ETFs), allowing major financial institutions to launch these funds on platforms such as NYSE Arca and the Options Exchange. of Chicago (CBOE). This approval marks a significant milestone for Ethereum and ether, potentially influencing their market dynamics and staking economics. This decision is not only intended to raise ETH's profile in the investment community, but also to have a substantial impact on its price and overall market behavior.

Please note that the following analysis estimates the possible effects of the approval of the ETH ETF, and there is no guarantee that the scenarios described in this summary will materialize. Past market performance is not an indicator of future behavior; Always remember to do your own research before making any investment decisions.

Demand and Price
The approval of ether spot ETFs will likely drive a significant increase in ETH prices due to increased demand from institutions that will buy and hold ETH. This mirrors the impact seen with BTC ETFs earlier this year, which reduced the availability of bitcoin on exchanges and led to price appreciation.

According to analysts at Galaxy Digital, ETH ETF inflows are expected to be approximately one-third of BTC ETF inflows, reflecting the relative market capitalizations of the two assets. As institutions acquire and hold ETH, reduced supply on exchanges may create upward pressure on prices.

At the same time, there are substantial differences between bitcoin and ether that justify caution when extrapolating the BTC market dynamics following the approval of the respective ETF to the situation of ETH. On the one hand, the “digital gold” narrative behind BTC is relatively simple, making it easier to explain the asset and its value to traditional capital allocators. The notion of Ethereum as a distributed supercomputer might be a little harder to summarize in a compelling sentence.

An intriguing point to consider is the relationship between bitcoin and ether spot ETFs. Some market observers predict that ether ETFs may capture a portion of the investment flows previously directed toward bitcoin ETFs. Considering that many traditional investors prefer market cap-weighted strategies and may not want to increase overall cryptocurrency exposure, it seems possible that at least some of them will rotate capital from BTC to ETH ETFs. On the other hand, if the arrival of ether ETFs makes their BTC counterparts look like a safer investment option, BTC ETF inflows could increase.

Currently, a higher proportion of BTC (11.7%) is held on exchanges compared to ETH (10.3%), partly because a significant amount of ETH is locked in staking and smart contracts. Unlike BTC, ether is used extensively in DeFi protocols and other blockchain applications, meaning that a significant portion of its supply is always engaged in various forms of on-chain activity. This inherent scarcity, combined with new demand driven by ETFs, could lead to steeper price movements and greater volatility, creating both opportunities and risks for investors. Additionally, with ETH's smaller market cap compared to BTC, these inflows could have a more pronounced effect on the price.

Impact on the Staking Economy
One of the biggest questions is how the introduction of ETH spot ETFs will affect staking. Currently, around 27% of ETH supply is staked, and as ether prices rise, so does the value of staking rewards, which could make staking more attractive. However, ETF issuers and holders in the US will not be able to stake their holdings due to SEC regulations introduced earlier this year.

This restriction could lead more crypto-savvy ETH holders to prefer holding and staking their ETH directly rather than investing in ETFs. This scenario could suppress some of the demand for the newly launched ETFs. However, the audiences for direct ETH holding and staking versus ETF investments are likely to remain distinct, with cryptocurrency users opting for direct staking and institutional and conventional investors choosing ETFs.

Staking dynamics are critical because they affect the supply of ETH available in the market. Higher staking rewards, driven by rising ETH prices, could incentivize more holders to lock their ETH in stake, thereby reducing the circulating supply and contributing to price appreciation. However, it remains to be seen whether the exclusion of ETH in ETFs from staking will dampen this effect.

A Long Term Horizon
The approval of ether spot ETFs by the SEC is a significant development with far-reaching implications for ETH market dynamics and staking economics. As the market adjusts to these new instruments, the interplay between direct ETH holding, staking, and ETF investments will likely define the next phase of Ethereum ecosystem development.

Richard Teng, CEO of Binance, summarizes the broader impact: “While we anticipate a steady deployment of capital into these ETFs, it is unlikely to be dramatic initially and will fluctuate depending on various macroeconomic factors. However, I believe the potential for ETF liquidity to grow exponentially is significant. With SEC approval and listing, these ETFs can now be invested by institutions, which typically have a long-term investment horizon. This institutional participation could provide a stable and substantial influx of capital over time.”

The introduction of spot ETFs marks a new chapter in the journey of Ethereum and ether, one that promises to enhance their appeal to a broader range of investors while also testing the resilience and adaptability of their underlying economic model.

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