Author: @asxn_r
Compiled by: Vernacular Blockchain
The Ethereum ETF went live on July 23. The market has overlooked some dynamics of the ETH ETF that do not exist in the BTC ETF. In this article, we will focus on flow forecasts, ETHE unwinding, and the relative liquidity of ETH:
1. Fee Structure
The fee structure of the ETFETF is similar to that of the BTC ETF. Most providers waive fees during specific periods to help accumulate assets under management (AUM). Similar to the BTC ETF, Grayscale maintains its ETHE fee at 2.5%, an order of magnitude higher than other providers. The key difference this time is the introduction of Grayscale's mini ETH ETF, which has not been approved before in the BTC ETF.
The Mini Trust is a new ETF product from Grayscale with an initially disclosed fee of 0.25%, similar to other ETF providers. Grayscaleâs idea is to charge lazy ETHE holders a 2.5% fee while directing more active and fee-sensitive ETHE holders to their new product, rather than directing funds to low-fee products like Blackrockâs ETHA ETF. After other providers cut Grayscaleâs 25bps fee, Grayscale pulled back and reduced the Mini Trustâs fee to just 15bps, making it the most competitive product. In addition to this, they transfer 10% of ETHE AUM to the Mini Trust and gift this new ETF to ETHE holders. This transfer is done on an equal footing, so it is not a taxable event.
As a result, outflows from ETHE will be more modest than from GBTC, as holders will only have to transition to the mini-trust.
2. Liquidity
Now let's look at liquidity. There are many estimates of ETF liquidity, some of which we have highlighted below. Normalizing these estimates gives an average estimate of around $1 billion per month. Standard Chartered Bank provides the highest estimate at $2 billion per month, while JPMorgan Chase's estimate is lower at $500 million per month.
Fortunately, we have the help of Hong Kong and European ETPs, as well as the closure of the ETHE haircut, to help estimate liquidity. If we look at the AUM breakdown of Hong Kong ETPs, we draw two conclusions:
1) In the relative AUM of BTC and ETH ETP, BTC is overweight relative to ETH, with a relative market capitalization of 75:25 and an AUM ratio of 85:15.
2) The ratio of BTC to ETH in these ETPs is relatively constant and consistent with the ratio of BTC market capitalization to ETH market capitalization.
Looking at Europe, we have a much larger sample to reference - 197 crypto ETPs with a total AUM of $12 billion. After analyzing the data, we found that the distribution of AUM of European ETPs is roughly consistent with the market capitalization of Bitcoin and Ethereum. Solana's allocation is overweight relative to its market capitalization, which is mainly at the expense of "other crypto ETPs" (i.e. any other crypto asset that is not BTC, ETH or SOL).
Solana aside, a pattern begins to emerge â the distribution of BTC and ETH AUM globally roughly mirrors a portfolio weighted by market cap.
Given that GBTC outflows sparked the âsell the newsâ narrative, it is important to consider potential outflows from ETHE. In order to model potential outflows from ETHE and their impact on price, it is necessary to look at the percentage of ETH supply that is in the ETHE instrument.
Adjusting for Grayscaleâs mini-seed fund (10% of ETHE AUM), the ETHE vehicleâs share of total supply is similar to that of GBTC at launch. Itâs unclear how much of GBTC outflows are rotations rather than exits, but if we assume that rotation flows are similar in proportion to exit flows, then ETHE outflows have had a similar price impact as GBTC outflows.
Another key piece of information that is overlooked by most is the premium/discount of ETHE relative to net asset value (NAV). ETHE has been trading within 2% of par since May 24th, while GBTC first traded within 2% of par on January 22nd, just 11 days after converting to an ETF. The approval of a spot BTC ETF and its impact on GBTC was gradually priced in by the market, while ETHE trading at a discount relative to NAV was widely foreshadowed through the GBTC story. By the time the ETH ETF goes live, ETHE holders will have two months to exit ETHE near par. This is a key variable that helps curb ETHE outflows, especially exit flows.
