For many investors, the performance of the spot Ethereum (ETH) exchange-traded fund (ETF) has been disappointing.
While the spot Bitcoin ETF has processed nearly $19 billion in inflows in 10 months, the Ethereum ETF that began trading in July has failed to generate the same level of interest.
Worse, Grayscale's ETHE, which existed as an Ethereum trust before converting to an ETF, has faced significant redemptions, and demand for other similar funds has failed to offset these redemptions.
This means that
since its launch, the net outflow from the spot Ethereum ETF has reached $556 million. According to Farside data, the net outflow of these products reached $8 million just this week.
So why has the performance of Ethereum ETFs been so different? There may be a few reasons.
Background of Fund Inflows
First, it's important to note that
compared to Bitcoin ETFs, the performance of Ethereum ETFs has not been ideal. Bitcoin products have broken so many records, arguably the most successful ETFs ever.
For example, the ETFs issued by BlackRock and Fidelity, IBIT and FBTC, raised $4.2 billion and $3.5 billion, respectively, in the first 30 days after listing, breaking the record set by another BlackRock fund, Climate Conscious, which raised $2.2 billion in its first month (August 2023).
The president of The ETF Store, Nate Geraci, said that while Ethereum ETFs have not "made a splash," three of them have still ranked among the 25 best-performing ETFs of the year.
BlackRock's ETHE, Fidelity's FBTC, and Bitwise's ETHW have each absorbed nearly $1 billion, $367 million, and $239 million in assets, respectively - quite impressive for funds that are just over two and a half months old.
Geraci told CoinDesk, "In terms of inflows, spot Ethereum ETFs will never challenge spot Bitcoin ETFs."
"If you look at the underlying spot markets, you'll find that Ethereum's market cap is about a quarter of Bitcoin's. This should reasonably represent the long-term demand for spot Ethereum ETFs relative to spot Bitcoin ETFs."
The issue is that the massive outflows from Grayscale's ETHE have overshadowed the performance of these funds.
ETHE was established as a trust in 2017, and due to regulatory reasons, its initial design did not allow investors to redeem their ETF shares - the funds were trapped in the product. This changed on July 23rd when Grayscale received approval to convert its trust into a formal ETF.
At the time of the conversion, ETHE had around $1 billion in assets, and although some of these assets were transferred by Grayscale to its other fund, the Ethereum Mini ETF, ETHE has suffered nearly $3 billion in outflows.
Notably, Grayscale's Bitcoin ETF - GBTC - has experienced a similar situation, with over $20 billion in outflows since its conversion in January. However, the excellent performance of BlackRock and Fidelity's spot Bitcoin ETFs has been enough to offset the losses from GBTC.
Lack of Staking Rewards
One significant difference between Bitcoin and Ethereum is that investors can stake Ethereum - essentially locking it into the Ethereum network to earn Ethereum-paid rewards.
However, Ethereum ETFs in their current form do not allow investors to participate in staking. Therefore, holding Ethereum through an ETF means missing out on that yield (currently around 3.5%) and paying management fees of 0.15% to 2.5% to the issuer.
While some traditional investors may not mind forfeiting the yield in exchange for the convenience and security of an ETF, it makes sense for crypto-native investors to seek alternative ways to hold Ethereum.
Kaiko Research analyst Adam Morgan McCarthy told CoinDesk, "If you're a competent fund manager with a basic understanding of the crypto markets and you're managing someone's money, why would you now buy an Ethereum ETF?"
McCarthy said, "You can pay to get Ethereum exposure (with the underlying asset custodied at Coinbase), or you can buy the underlying asset yourself and stake it with the same provider to earn a yield."
Marketing Challenges
Another hurdle facing Ethereum ETFs is that some investors may have difficulty understanding Ethereum's core use cases, as it seeks to be a leader in multiple different areas of cryptocurrency.
Bitcoin has a hard cap on its supply: there will never be more than 21 million Bitcoins. This makes it relatively easy for investors to view it as "digital gold" and a potential hedge against inflation.
Explaining why a decentralized, open-source smart contract platform is important - and more importantly, why the value of ETH will continue to increase - is another matter.
Bloomberg Intelligence ETF analyst Eric Balchunas wrote in May, "One of the challenges Ethereum ETFs face in penetrating the 60/40 boomer world is distilling their purpose/value into something easily digestible."
McCarthy agreed, telling CoinDesk,
"The concept of ETH is more complex than other cryptocurrencies and not as easily explained in a single sentence."
As a result, the crypto index fund Bitwise has recently launched an educational advertising campaign to highlight Ethereum's technological advantages, which is necessary.
Grayscale research head Zach Pandl told CoinDesk, "As investors become more familiar with stablecoins, decentralized finance, tokenization, prediction markets, and many other applications supported by Ethereum, they will enthusiastically embrace both technologies and the Ethereum ETPs listed in the U.S."
Valuation Concerns
In fact, the performance of ETH itself this year has not been as good compared to BTC.
The second-largest cryptocurrency by market cap has only risen 4% since January 1st, while BTC has risen 42% and continues to hover near its all-time highs in 2021.
GSR research head Brian Rudick told CoinDesk, "A factor in the success of Bitcoin ETFs is investor risk appetite and fear of missing out, which are still primarily driven by retail, and this was further fueled by BTC rising 65% when the ETFs launched and then another 33% after."
Rudick added, "Since the ETFs launched, ETH has fallen 30%, which has greatly dampened the enthusiasm of retail investors to buy these funds, as sentiment around Ethereum has been quite mediocre, with some seeing it as caught between Bitcoin (the best monetary asset) and Solana (the best high-performance smart contract blockchain)."
Unattractive Valuation
Finally, traditional investors may simply not find ETH's valuation at these levels to be attractive.
ETH's market cap of around $290 billion is already higher than any bank in the world, second only to JPMorgan Chase and Bank of America, which have market caps of $608 billion and $311 billion, respectively.
While this may seem like comparing apples and oranges, Lekker Capital founder Quinn Thompson told CoinDesk that ETH's valuation is also high compared to tech stocks.
In September, Quinn Thompson wrote that ETH's valuation "is now worse compared to other assets because no valuation framework can justify its price. Either the price must go down, or a new widely accepted asset valuation framework needs to be formed."
