Main topics of the post;

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

  • With a smaller supply of ETH on exchanges due to staking and smart contracts, ETH prices may be more sensitive to ETF inflows compared to BTC, potentially leading to sharper price movements.

  • The Securities and Exchange Commission's (SEC) restriction on staking of ETH held for ETFs could lead experienced cryptocurrency investors to favor direct staking, which could decrease demand for ETFs while catering to distinct investor audiences.

The SEC has approved several spot Ether (ETH) exchange-traded funds (ETFs), allowing major financial institutions to launch these funds on platforms such as NYSE Arca and the Chicago Board Options Exchange (CBOE). This approval marks a significant milestone for Ethereum and Ether, potentially influencing their market dynamics and staking economics. This decision is poised to raise ETH’s profile in the investment community, as well as have a significant impact on its price and market behavior more broadly.

The following analysis estimates the potential impact of an ETH ETF approval, but there is no guarantee that the scenarios described in this overview will materialize. Past market performance is not a guide to future behavior – remember to always do your own research before making any investment decisions.

Demand and price

The approval of spot Ether ETFs will likely drive a significant increase in ETH prices, due to increased demand from institutions buying and holding ETH. This mirrors the impact of 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 about one-third of BTC ETF inflows, reflecting the respective market capitalizations of the two assets. As institutions acquire and hold ETH, the reduced supply on exchanges could create upward pressure on prices.

At the same time, there are enough significant differences between Bitcoin and Ether that it warrants caution when extrapolating BTC’s market dynamics in the respective ETF approval from the situation with ETH. On the one hand, the “digital gold” narrative behind BTC is relatively straightforward, making it easier to explain the asset and its value to traditional investors. The notion of Ethereum as a distributed supercomputer may be a bit harder to explain in a concise and convincing way.

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

Currently, a larger proportion of BTC (11.7%) is held on exchanges compared to ETH (10.3%), in part because a considerable amount of ETH is locked up in staking and smart contracts. Unlike BTC, Ether is widely used in DeFi protocols and other blockchain applications, meaning that a significant portion of its supply is always involved in various forms of on-chain activity. This inherent scarcity, combined with new ETF-driven demand, could lead to sharper price movements and increased volatility, creating both opportunities and risks for investors. Furthermore, with ETH’s smaller market cap compared to BTC, these inflows could have a more pronounced effect on price.

Impact on staking economics

One of the biggest questions is how the introduction of ETH spot ETFs will affect staking. Currently, around 27% of the ETH supply is staked, and as Ether prices increase, the value of staking rewards will also increase, potentially making staking more attractive. However, US ETF issuers and holders will not be able to stake their holdings due to regulations introduced by the SEC earlier this year.

This restriction may lead to more crypto-savvy ETH holders opting to hold and stake ETH directly rather than investing in ETFs. This scenario could reduce demand for the newly launched ETFs. However, the demographics for direct ETH holding and staking versus ETF investments are likely to remain distinct, with crypto users opting to stake directly and traditional and institutional investors choosing ETFs.

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

A long-term perspective

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

Binance CEO Richard Teng sums up the broader impact: “While we anticipate continued capital deployment into these ETFs, it is unlikely to be significant initially and will fluctuate based on various macroeconomic factors. However, I believe the potential for exponential growth in ETF liquidity is significant. With SEC approval and listing, these ETFs are now investable by institutions that typically have a long-term investment perspective. This institutional involvement could provide a stable and substantial flow of capital over time.”

The introduction of spot ETFs marks a new chapter in the journey of Ethereum and Ether, which promises to increase its appeal to a wider range of investors, while also testing the resilience and adaptability of its underlying economic model.

Further reading

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