When Ethereum exchange-traded funds began trading last week, they were welcomed with a $2.6 billion surge as investors rushed to the new products.
But fast-forward a week, and demand is drying up.
While Ethereum ETFs received positive inflows on their first day of trading, some $546 million left the products over the following four days.
“The Ethereum ETFs are faring worse than the Bitcoin ETFs did,” Katalin Tischhauser, Head of Investment Research at Sygnum Bank, told DL News.
Many had hoped that the launch of Ethereum ETFs could reignite interest in the crypto market, similar to how the launch of Bitcoin ETFs in January pushed the top crypto’s price up some 58%.
So far, that hasn’t happened.
Grayscale’s Ethereum Trust
The biggest reason for the lull is asset manager Grayscale’s Ethereum Trust, Tischhauser said.
When the Ethereum ETFs launched on July 23, Grayscale converted its existing Ethereum Trust into an ETF. This allowed those holding shares of the trust to exit it for the first time since its inception in 2017.
Investors have so far withdrawn $1.84 billion from Grayscale’s Ethereum ETF. Many cite the high management fees Grayscale charges compared to its competitors as a reason for the outflows.
The same situation of outflows played out in January when Grayscale converted its Bitcoin trust to an ETF.
However, Tischhauser said, this time there’s one key difference.
More holders of Grayscale’s Ethereum Trust are leaving it for spot Ether instead of other ETFs so they can capture the asset’s staking yield, she said.
Ether holders can earn a baseline 3.24% by staking the asset on the Ethereum blockchain.
Once all the investors who plan to exit Grayscale’s Ethereum ETF have done so, aggregate inflows into the ETFs should improve.
Marketing woes
There are other reasons the Ethereum ETFs aren’t having the same impact as the Bitcoin ones, Tischhauser said.
Ethereum’s name recognition is much lower than Bitcoin’s — only about half, according to recent US polls.
Ethereum ETF issuers also only had a very short period to market the new products due to the sudden surprise approval in June.
Some, like Bitwise Asset Management, Tischhauser said, even hoped for a delayed approval as they were still busy marketing and educating investors on their Bitcoin ETFs.
It doesn’t mean investors won’t warm to Ethereum ETFs — eventually.
In a Monday interview, Bloomberg Intelligence analyst Eric Balchunas asked BlackRock’s Samara Cohen when large broker-dealers like Morgan Stanley will start recommending Ethereum ETFs in their portfolios.
“Towards the end of this year and into the start of next year, we will see allocations,” said Cohen, chief investment officer of ETF and index investments at the firm. “They are doing their job and their job is risk analytics and due diligence.”
The muted demand may also pay dividends in the future, Tischhauser said.
“The market has not priced in almost any upside from ETF inflows,” she said. “The price of Ether is likely to react strongly to any positive surprises.”
“When the net flows turn positive and accelerate, this will be a strong driver for the price of Ether — but this may take some time.”
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.
