Author: ASXN Digital Asset Research
Translation: xiaozou, Bijie.com
Ethereum spot ETF will be launched on July 23. There are many aspects of ETH ETF that are not visible in BTC ETF and are easily overlooked by the market.
ETHE outflow forecast
ETFs have a similar fee structure to the BTC ETF. Most ETF providers do not charge any fees for a certain period in order to better accumulate AUM. As is the case with the BTC ETF, Grayscale has maintained its ETHE fee rate at 2.5%, an order of magnitude higher than other providers. The key difference here is the introduction of the Grayscale Mini ETH ETF, which was previously applied for the BTC ETF but was not approved.
The mini-trust product is a new ETF product from Grayscale, with an initially disclosed fee of 0.25%, similar to other ETF providers. Grayscale's idea is to charge 2.5% from less active ETHE holders while attracting more active, fee-sensitive ETHE holders to their new product, rather than letting funds flow to lower-fee products, such as Blackrock's ETHA ETF. After other providers lowered their fees by 25bps, Grayscale reduced the mini-trust fee to 15bps to make it the most competitive product. On top of that, they transferred 10% of ETHE AUM (asset management scale) to the mini-trust and presented this new ETF to ETHE holders. This transition was completed on the same basis, which means it is not a taxable event.
The corresponding impact is that ETHE outflows will be more modest as holders transition to this mini-trust compared to GBTC .
ETH ETF Inflow Forecast
There are many estimates of ETF inflows, some of which we highlight below. Normalizing these estimates gives an average estimate of $1 billion per month. Standard Chartered Bank gives the highest estimate at $2 billion per month, while JP Morgan gives a lower estimate of $500 million per month.
Fortunately, we have the help of Hong Kong and European ETPs (Exchange Traded Products), as well as ETHE Discount Close, to help us estimate flows. If we look at the AUM of Hong Kong ETPs, we can draw two conclusions:
(1) The relative AUM of BTC and ETH ETPs is higher than that of BTC vs. ETH, with a relative market capitalization of 75:25 and an AUM of 85:15.
(2) Among these ETPs, the ratio of BTC to ETH is fairly constant and consistent with the ratio of BTC market capitalization to ETH market capitalization.
In Europe, we have a much larger sample size to look at — 197 crypto ETPs with $12 billion in cumulative AUM. After we ran our data analysis, we found that the breakdown of AUM across European ETPs is roughly in line with the market caps of Bitcoin and Ethereum. Solana is over-allocated relative to its market cap, at the expense of “other crypto ETPs” (anything that’s not BTC, ETH, or SOL). Solana aside, a pattern is starting to emerge — the breakdown of AUM between BTC and ETH globally roughly reflects a market cap-weighted basket.
Given that GBTC outflows were the origin of the “sell the news” narrative, it is important to consider the possibility of ETHE outflows. In order to simulate potential ETHE outflows and their impact on price, it is necessary to look at the proportion of ETH supply in ETHE.
Once adjusted for Grayscale’s mini-seed capital (10% of ETHE AUM), the proportion of ETH supply as a function of total supply on hand in ETHE is similar to GBTC at launch. It is not clear what the rotation vs. exit ratio is for GBTC outflows, but if we assume that rotation flows are in similar proportions to exit flows, then ETHE outflows have a similar price impact as GBTC outflows.
Another key piece of information that is overlooked by most is ETHE’s NAV (Net Asset Value) premium/discount. ETHE has been trading in a 2% range to par since May 24th, while GBTC first traded in a 2% range to NAV on January 22nd (just 11 days after GBTC converted to an ETF). The approval of a spot Bitcoin ETF and its impact on GBTC were slowly reflected in the market, while ETHE’s discount to NAV is more reflected in the existing narrative of GBTC.
When the ETH ETF goes live, ETHE holders will have 2 months to exit at a price range close to par. This is a key variable that will help prevent ETHE outflows, especially exit flows.
ASXN ’s internal estimate is $ 800 million to $ 1.2 billion per month. This is calculated by taking a market cap-weighted average of monthly Bitcoin inflows and multiplying it by ETH ’s market cap.
Our estimates are supported by global crypto ETP data, which suggests that market cap-weighted baskets are the dominant strategy (we may see rotation flows from BTC ETFs that employ similar strategies). Additionally, given ETHE’s unique dynamics of trading at par prior to launch and the launch of the mini-trust, we are open to upside surprises in ETH prices.
Our estimates of ETF inflows are proportional to their respective market capitalizations, so the impact on prices should be similar. However, it is also important to measure what fraction of assets are liquid and can be sold - assuming that the smaller the "flow rate", the greater the price response to inflows.
There are two specific factors that influence ETH's liquid supply, namely native staking and supply in smart contracts. As a result, ETH has a lower liquid and sellable percentage than BTC, making it more sensitive to ETF inflows. However, it is worth noting that the liquidity difference between the two assets is not as large as some people believe (ETH's cumulative +-2% order depth is 80% of BTC's).
Our approximate calculation of liquid supply:
Ethereum Reflexivity
When we look at ETFs, it is important to understand the reflexivity of Ethereum. The mechanism is similar to BTC, but Ethereum’s destruction mechanism and the DeFi ecosystem built on top of it make the feedback loop more powerful.
The reflexive loop looks like this:
ETH flows into ETH ETF → ETH price rises → Interest in ETH rises → DeFi/chain usage rises → DeFi fundamentals improve → EIP-1559 burns increase → ETH supply falls → ETH price rises → More ETH flows into ETH ETF → Interest in ETH rises → ...
One thing that is missing from the BTC ETF is the lack of a “wealth effect” in the ecosystem. In the emerging Bitcoin ecosystem, we do not see a lot of gains being reinvested into base layer projects or protocols. Ethereum, as a “decentralized application store” with a complete ecosystem, will benefit from the continued inflow of base assets.
We believe this wealth effect has not received enough attention, especially in DeFi. There is 20 million ETH ($63 billion) of TVL in Ethereum DeFi protocols, and as ETH trades higher, the investment appeal of ETH DeFi is increasing as TVL and revenues denominated in USD surge.
ETH has a reflexivity that does not exist in the Bitcoin ecosystem.
Other factors to consider
1. What will be the rotation inflow from BTC ETF to ETH ETF? Assume that some BTC ETF allocators are unwilling to increase their net cryptocurrency exposure but want to diversify. In particular, TradFi investors prefer market capitalization weighted strategies.
2. How well does TradFi understand ETH assets and the Ethereum smart contract layer? Bitcoin’s “digital gold ” narrative is both easy to understand and well-known. How well will Ethereum’s narrative (settlement layer of the digital economy, three-point asset theory, tokenization, etc.) be understood?
3. How will previous market conditions affect ETH’s flow and price trends?
4. The ivory tower elites have designated two crypto assets as bridges to their worlds - Bitcoin and Ethereum. These assets have crossed the proverbial zeitgeist. How the launch of a spot ETF changes how TradFi capital allocators view ETH, given that they are now able to offer products that can charge fees. TradFi's thirst for yield makes Ethereum's native yield through staking very attractive to providers, and we believe that staking ETH ETFs is an "if" rather than a "when". Providers can offer 0 fee products and simply stake ETH on the back end to earn an order of magnitude higher income than normal ETH ETF fees.
