Written by: RockFlow
Key Points
① From $40,000 to $70,000, the approval of the Bitcoin spot ETF has played a good catalyst role in the price of Bitcoin. Now, the market is looking forward to the approval and full trading of the Ethereum spot ETF to further boost confidence.
② The 19 b-4 forms of eight spot Ethereum ETFs have been approved by the SEC and are expected to start trading after the S-1 registration statement takes effect in a few weeks. The participation of traditional asset management giants such as BlackRock is expected to bring Ethereum into the vision of more traditional investors.
③ The cost and liquidity of ETFs, the background and reputation of the issuing institution are important considerations for investing in Ethereum ETFs. The current crypto market is ushering in a new innovation cycle. Combined with the macro-environmental improvement, the monetary cycle with further liquidity release, and the upcoming US election cycle, the crypto market is expected to continue to usher in a good upward trend.
Since the US SEC approved the Bitcoin spot ETF earlier this year, the legitimacy of crypto assets as an emerging investment category has been greatly strengthened. This is undoubtedly an important moment for global investors - we are getting closer and closer to the inflection point of the integration of traditional finance and crypto assets.
Since its launch, the Bitcoin spot ETF has attracted the attention of various important institutional investors. U.S. state government investment funds, major banks, top hedge funds, well-known asset management companies, investment consulting companies, and other commercial companies have all poured in. Currently, the Wisconsin State Government Fund is one of the largest holders of BlackRock's Bitcoin spot ETF.
The massive entry of institutional investors has also played a good catalyst role in the price of Bitcoin itself (the increase is close to 70% in less than 2 months). Now, the market is looking forward to the approval and full trading of Ethereum spot ETF to further boost confidence.
As the second largest cryptocurrency by market capitalization, Ethereum has the most extensive decentralized application ecosystem (dApps). A few weeks ago, the U.S. SEC officially approved the 19b-4 forms of eight spot Ethereum ETFs from BlackRock, Fidelity, and Grayscale. This news not only caused the price of Ethereum to rise by more than 10% within a few hours, but also opened the door for Ethereum to further move towards the traditional financial market.
Although the S-1 registration statement still needs to take effect before it can officially start trading, the approval of 19b-4 has in fact consolidated Ethereum's position as a digital commodity. This article will analyze the investment value, selection strategy and future prospects of various spot ETFs for Ethereum, the second largest cryptocurrency in the crypto market.
1. ETHE: 303% increase in one year
Grayscale Ethereum Trust Fund ETHE was once one of the most important tools for US stock investors to invest in Ethereum. The fund was issued and managed by Grayscale Fund, a subsidiary of Digital Currency Group, and its asset size once exceeded US$10 billion. It was established in December 2017 and listed in July 2019, using the same trust structure as GBTC.
In theory, the price of ETHE should fluctuate in a narrow range around the price of Ethereum, but in reality, its secondary price performance is not completely in line with the market. Since its listing in 2019, it has maintained a positive premium to Ethereum for a long time, even exceeding 1000% at one point. However, since February 2021, ETHE has entered a bleak discount mode, which has continued to expand during the bear market.
The long-term discount is mainly related to the inability to redeem the product directly. In addition, the limitation of arbitrage opportunities, the forced liquidation of large speculators, the discount of opportunity costs, and the impact of competitive products have also led to the widening of the discount, so ETHE has not been able to track the price of Ethereum itself well in the past few years.
But precisely because of the bear market, this discount has created an excellent opportunity to buy the dips- compared to Ethereum's nearly 100% increase in the past year, ETHE's one-year increase has reached 300%.
Given that many issuers are actively applying for Ethereum spot ETFs, Grayscale is also actively promoting the conversion of ETHE to a spot ETF, which is expected to eliminate the discount. In the foreseeable future, ETHE is expected to become one of the largest Ethereum spot ETFs in the United States, similar to GBTC for Bitcoin.
2. Ethereum spot ETF is expected to be officially approved
As mentioned earlier, the 19 b-4 forms for eight spot Ethereum ETFs have been approved by the SEC, as shown below:
ARK 21Shares Ethereum ETF: jointly applied by well-known fund ARK Ark Fund and digital asset management company 21Shares. It should be noted that ARK has successfully issued an Ethereum futures ETF before - ARK21Shares Active Ethereum Futures ETF (code: ARKZ), which mainly allocates funds to Ethereum futures products.
Bitwise Ethereum ETF: Bitwise has taken the lead in updating the S-1 form of the Ethereum spot ETF, and is the first to be submitted by all ETF issuers recently. It also stated that Pantera Capital is interested in purchasing $100 million of the ETF product. Previously, as an investor in Bitwise, Pantera Capital has purchased $200 million of Bitwise's Bitcoin spot ETF (code: BITB).
Fidelity Ethereum ETF: Financial services giant Fidelity Investments is looking to launch an ETF that holds the Ethereum cryptocurrency, and the filing comes just a day after BlackRock filed its own Ethereum ETF application.
Franklin Ethereum ETF: Franklin’s application was submitted in early 2024.
Grayscale Ethereum ETF: As mentioned earlier, Grayscale hopes to convert its Ethereum Trust ETHE into a spot ETF product.
Invesco Galaxy Ethereum ETF: This ETF, jointly filed by Invesco and Galaxy Capital, aims to provide exposure to the spot price of Ethereum.
BlackRock iShares Ethereum Trust: BlackRock filed for late 2023. The ETF aims to provide direct exposure to Ethereum, which is expected to increase market confidence.
VanEck Ethereum ETF: As a well-known US asset management company and ETF giant, VanEck is known for its pioneering role. The company is also actively applying for Ethereum ETF products.
It is worth noting that these applications reflect the significant interest of mainstream financial institutions in integrating Ethereum into traditional investment portfolios, and most of them, like Bitcoin spot ETFs, have found Coinbase as an asset custodian, as shown in the figure below:
Why did the approval of the Ethereum spot ETF not lead to a sustained surge in Ethereum? To be precise, it is not "fully approved" yet. We need to clarify the difference between the two documents:
19b-4 filings are used to notify the SEC of rule changes that would allow ETFs to be traded on an exchange—such as introducing a new product, modifying trading mechanisms, or other relevant exchange policies. Once submitted, the SEC will review the proposal and make it available for public comment before deciding whether to approve it.
However, the ETF listing also requires the ETF issuer to obtain the S-1 document approved by the SEC. The S-1 document is not the last step, but it is a very critical step under the supervision of the US SEC. Only when the SEC approves the S-1 document to take effect can fund managers continue to prepare for the official listing of the ETF, including determining the listing date and conducting marketing.
The approval of 19b-4 means that the project is feasible; the approval of S-1 means that it is a done deal. Currently, this process takes weeks to months, so the price of Ethereum will not rise sharply in a short period of time.
However, now that multiple spot Ethereum ETFs have been listed on the DTCC website, they are likely to repeat the script of the Bitcoin spot ETF.
3. Ethereum Spot ETF Concise Investment Guide
In the previous analysis of Bitcoin spot ETFs, the RockFlow investment research team gave some strategies, focusing on three indicators: fees, liquidity and transaction costs. Buy-and-hold investors should focus on fees, active traders should pay special attention to liquidity, and all stakeholders should pay attention to how the issuer's own transaction costs ultimately affect ETF performance.
As an ordinary investor, if you want to invest in Ethereum ETF, the idea is actually similar. Given that the underlying assets of the first batch of Ethereum spot ETFs are the same, the final returns will be almost the same. Therefore, the RockFlow investment research team believes that everyone can focus on two dimensions:
1) Cost and liquidity of Ethereum ETF
For ETFs, cost is obviously very important, and giving priority to competitive low-fee ETFs will maximize your long-term returns; while liquidity is crucial for ease of trading. ETFs with larger assets under management usually mean greater investor confidence and stability, and are therefore more suitable for long-term holding.
2) Background and reputation of the ETF issuer
The first batch of Ethereum ETF issuers are all established companies, which can often provide higher reliability, and the performance of the giants in issuing ETFs in the past is enough to prove this.
4. How do you view the future of Ethereum ETF?
Bloomberg research shows that if the Ethereum ETF is successfully approved, future capital inflows will account for 10-20% of the inflows of Bitcoin spot ETFs. Given that the price of Bitcoin was around $40,000 when the ETF was launched and rose to $70,000 two months later (a 75% increase), ETH is expected to show a similar trend (pushing the asset above its all-time high of $4,800).
The logic behind this number depends on several factors: compared with Bitcoin, institutional investors are currently less interested in Ethereum; the current Ethereum futures ETF trading volume is much smaller than the Bitcoin futures ETF (10-20%); the current Ethereum spot trading volume is smaller than Bitcoin (about 50%); Ethereum currently accounts for about 1/3 of Bitcoin's market value.
That being said, there are significant differences between Ethereum and Bitcoin, including but not limited to:
Ethereum does not have the same degree of “structural selling pressure” as Bitcoin, because Ethereum validators do not incur operating expenses like Bitcoin miners (forcing them to sell a portion of the mined Bitcoin);
Currently, 38% of Ethereum supply is staked on-chain, with low willingness to sell;
Ethereum is more reflexive than Bitcoin. This reflexivity can be expressed by price action leading on-chain activity, leading to more Ethereum being destroyed, which can better drive the Ethereum narrative, more on-chain activity, and more Ethereum being destroyed;
Ethereum is a more resilient "crypto bull call option", while Bitcoin is "digital gold". In the short term, Ethereum's volatility is expected to continue to expand.
Taken together, Ethereum is more likely to exceed Bloomberg’s forecast of 10-20% net inflows into Bitcoin.
From a broader perspective, the current crypto market is ushering in a round of innovation cycle, coupled with the macro-environmental improvement, the monetary cycle with the expected further release of liquidity, and the upcoming US election cycle. The approval of spot ETF products has obviously eliminated the market's important compliance concerns. The RockFlow investment research team believes that the crypto market is expected to continue to usher in a good upward trend.
