Original Title: Four Reasons Ether ETFs Have Underperformed
Author: CoinDesk
Compiled by: Scof, ChainCatcher
Ether ETFs have not received the same widespread attention as Bitcoin ETFs, and even saw net outflows this week. Tom Carreras investigated the matter.
- Spot Ether ETFs have failed to attract the same level of demand as spot Bitcoin ETFs.
- But given the huge popularity of Bitcoin products, this is a high bar to clear.
- Negative factors include the lack of staking yields and the difficulty in pitching Ether to investors.
For many investors, the performance of spot Ether ETFs has been disappointing.
In contrast, spot Bitcoin ETFs have handled nearly $19 billion in inflows over 10 months, while the Ether ETF that started trading in July has failed to generate the same appeal.
Worse, Grayscale's ETHE, which existed as an Ether trust before converting to an ETF, suffered massive redemptions during the conversion process, and demand for other Ether funds has failed to offset this trend.
This means that since their launch, Ether ETFs have experienced $556 million in net outflows. According to Farside data, these products saw net outflows of $8 million just this week.
So why have Ether ETFs performed so differently? There are a few possible reasons.
Inflow Context
First, it's important to note that Ether ETFs look poor compared to Bitcoin ETFs. Bitcoin products have broken many records and can be considered 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 their first 30 days, breaking the previous record of $2.2 billion set by BlackRock's climate-conscious fund in the first month of August 2023.
While Ether ETFs have failed to replicate these astonishing results, according to ETF Store president Nate Geraci, three of them are still among the top 25 best-performing ETFs of the year.
BlackRock's ETHE, Fidelity's FBTC and Bitwise's ETHW have attracted nearly $1 billion, $367 million and $239 million in assets respectively, which is not bad for funds that are just over two and a half months old.
"Spot Ether ETFs never expected to challenge spot Bitcoin ETFs in terms of inflows," Geraci told CoinDesk.
"If you look at the underlying spot markets, Ether's market cap is about a quarter of Bitcoin's. This should be a reasonable reference to predict how the long-term demand for spot Ether ETFs will compare to spot Bitcoin ETFs."
The problem 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 initially, due to regulatory reasons, was designed not to allow investors to redeem their ETF shares - the capital was trapped in the product. This changed on July 23, when Grayscale received approval to convert its trust into a regular ETF.
At the time of the conversion, ETHE had about $1 billion in AUM, and while some of this was transferred by Grayscale itself to its other fund, the Ether mini ETF, ETHE suffered nearly $3 billion in outflows.
Notably, Grayscale's Bitcoin ETF, GBTC, has also experienced over $20 billion in outflows since its conversion in January. However, the excellent performance of BlackRock and Fidelity's spot Bitcoin ETFs has completely offset GBTC's outflows.
Lack of Staking Yields
A major difference between Bitcoin and Ether is that investors can stake Ether - essentially locking it into the Ethereum network to earn yields paid in Ether.
However, the current form of Ether ETFs does not allow investors to gain exposure to staking. So holding Ether through an ETF means missing out on that yield (currently around 3.5%) - and still paying the issuer's management fees, which range from 0.15% to 2.5%.
While some traditional investors may not mind forfeiting that yield in exchange for the convenience and security of an ETF, for crypto natives, it makes sense to seek other ways to hold Ether.
"If you're a competent fund manager, even with just a basic understanding of the crypto markets, and you're managing other people's money, why would you buy an Ether ETF right now?" Adam Morgan McCarthy, an analyst at crypto data firm Kaiko Research, told CoinDesk.
"You pay a fee to get exposure to ETH (with the underlying asset custodied at Coinbase), or you buy the underlying asset yourself and stake it with the same provider to earn some yield," McCarthy said.
Difficulty Pitching Ether
Another hurdle for Ether ETFs is that for some investors, understanding Ether's core use cases may be difficult, as it aims to lead in multiple different crypto domains.
Bitcoin's supply is strictly capped: 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 inflation hedge.
Explaining why a decentralized, open-source smart contract platform is important - and more importantly, why Ether will accrue value - is another task.
"One of the challenges of Ether ETFs penetrating the 60/40 boomer world is distilling its purpose/value into an easily digestible soundbite," Bloomberg Intelligence ETF analyst Eric Balchunas wrote in May.
McCarthy agrees. "Ether is just a little more complex, harder to convey to people - it's not elevator pitch material," he told CoinDesk.
So it's no surprise that crypto index fund Bitwise recently launched an educational ad campaign highlighting Ether's technical advantages.
"As investors become more familiar with stablecoins, decentralized finance, tokenization, prediction markets and many other applications supported by Ethereum, they will enthusiastically embrace the technology and the Ether ETPs listed in the US," Grayscale's head of research Zach Pandl told CoinDesk.
Poor Price Performance
There is also the fact that ETH itself has not performed as well as BTC this year.
The second-largest cryptocurrency by market cap has only gained 4% since January 1, while BTC has risen 42% and has been hovering around its 2021 all-time high.
"A factor in the success of Bitcoin ETFs, these ETFs being primarily retail-driven, is investor animal spirits and FOMO, which was driven by BTC rallying 65% prior to the ETF launch and then another 33% afterwards," Brian Rudick, head of research at crypto trading firm GSR, told CoinDesk.
"Since the ETF launch, ETH has fallen 30%, greatly dampening the retail enthusiasm to buy these funds," Rudick added. "Sentiment around Ethereum is quite low, with some seeing it squeezed between Bitcoin as the best monetary asset and Solana as the best high-performance smart contract blockchain."
Lack of Valuation Appeal
Finally, it's possible that traditional investors simply find Ether's valuation at these levels unappealing.
At around $290 billion in market cap, Ether's valuation is already higher than any bank in the world, except for JPMorgan Chase and Bank of America, at $608 billion and $311 billion respectively.
While this may look like comparing apples to oranges, crypto hedge fund Lekker Capital's founder Quinn Thompson told CoinDesk, Ether's valuation also appears high compared to tech stocks.
Thompson wrote in September that the valuation of "is now more difficult to see compared to other assets, as there is no valuation framework that can justify its price.""Either the price must fall, or a new, widely accepted asset valuation framework is needed."
