Author: Tom Carreras, Benjamin Schiller
Compiled by: BitpushNews Mary Liu
For many investors, the performance of the spot ETH ETF has been disappointing.
While the spot Bitcoin ETF has seen nearly $19 billion in inflows in 10 months, the ETH ETF that started trading in July has failed to generate the same level of interest.
Worse, Grayscale's ETHE, which existed as an ETH trust before converting to an ETF, has faced massive 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 ETH 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 the ETH ETF been so different? There may be a few reasons.
Background of Inflows
First, it's important to note that the performance of ETH ETFs has not been as impressive as that of Bitcoin ETFs. 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).
Nate Geraci, president of The ETF Store, said that while ETH ETFs have not "blown the doors off," 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 close to $1 billion, $367 million, and $239 million in assets, respectively - not bad for funds that are just over two and a half months old.
Geraci told CoinDesk, "In terms of inflows, spot ETH ETFs will never challenge spot Bitcoin ETFs."
"If you look at the underlying spot markets, you'll find that the market cap of ETH is about a quarter of Bitcoin's. This should reasonably represent the long-term demand for spot ETH 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 ETH Mini ETF, ETHE has suffered nearly $3 billion in outflows.
Notably, Grayscale's Bitcoin ETF - GBTC - has also experienced the same situation, with over $20 billion in outflows since its conversion in January. However, the strong performance of BlackRock and Fidelity's spot Bitcoin ETFs has been enough to offset the losses from GBTC.
Lack of Staking Rewards
One major difference between Bitcoin and ETH is that investors can stake ETH - essentially locking it into the Ethereum network to earn ETH-paid rewards.
However, the current form of ETH ETFs does not allow investors to participate in staking. Therefore, holding ETH 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 ETH.
Adam Morgan McCarthy, an analyst at crypto data firm Kaiko Research, 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 buy an ETH ETF right now?"
McCarthy said, "You can pay to get ETH 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 ETH ETFs is that some investors may have difficulty grasping the core use cases of ETH, as it seeks to be a leader in multiple different areas of cryptocurrencies.
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.
In May, Bloomberg ETF analyst Eric Balchunas wrote, "One of the challenges ETH ETFs face in penetrating the 60/40 boomer world is distilling their purpose/value into something easily digestible."
McCarthy agrees, telling CoinDesk, "The concept of ETH is more complex than other cryptocurrencies and not easily summed up in a single sentence."
As such, the crypto index fund Bitwise has recently launched an educational ad campaign highlighting the technical advantages of ETH, which is necessary.
Zach Pandl, head of research at Grayscale, told CoinDesk, "As investors become more familiar with stablecoins, decentralized finance, tokenization, prediction markets, and many other applications supported by ETH, they will enthusiastically embrace both technologies and the ETH ETPs listed in the US."
Valuation Unattractive
Finally, traditional investors may simply not find the valuation of ETH at these levels to be attractive.
ETH's market cap is around $290 billion, with a valuation that has surpassed 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 an apples-to-oranges comparison, Quinn Thompson, founder of crypto hedge fund Lekker Capital, 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 relative to other assets because no valuation framework can justify its price. Either the price must come down, or a new widely accepted asset valuation framework needs to emerge."
