Four Reasons Ether ETFs Have Underperformed

Spot ether ETFs have failed to attract the same kind of demand as spot bitcoin ETFs.
But that was a tall order, considering how immensely popular the bitcoin products have been.
Headwinds include the lack of staking yield in the ETFs and a difficulty in marketing Ethereum to investors.

As someone who has been closely following the crypto market for several years now, I must say that the recent development of Ethereum Exchange-Traded Funds (ETFs) is an exciting yet challenging prospect. Having seen the success of Bitcoin ETFs, it’s clear that there’s a growing interest in digital assets among traditional investors. However, when it comes to Ethereum, I believe we’re dealing with a different beast altogether.Many investors have found the returns from Ether (ETH) exchange-traded funds (ETFs) underwhelming.

While Bitcoin (BTC) ETFs accumulated approximately $19 billion through inflows over a period of 10 months, Ethereum (ETH) ETFs, debuting in July, haven’t managed to generate the same level of enthusiasm from investors.

Additionally troubling is the situation with Grayscale’s ETHE, originally a trust based on ethereum before its transition into an ETF. Unfortunately, it has experienced substantial withdrawals, and the interest in other ethereum-related funds hasn’t been enough to compensate for these losses.

In simpler terms, since their launch, Exchange-Traded Funds (ETFs) have seen a total of approximately $556 million being withdrawn. This week alone, these products have lost around $8 million, as per the latest data from Farside.

So why are ether ETFs performing so differently? There are a few possible reasons.

Putting inflows into context

To begin with, it’s crucial to mention that Ethereum ETFs may seem less favorable when compared to Bitcoin ETFs. However, the performance of Bitcoin-related ETFs has shattered numerous records, making them some of the most thriving ETFs ever introduced.

In their initial 30-day period, exchange-traded funds (ETFs) like BlackRock’s IBIT and Fidelity’s FBTC raised an astonishing $4.2 billion and $3.5 billion respectively, shattering the previous record set by BlackRock’s Climate Conscious fund in August 2023, which had amassed $2.2 billion in its first month.

Despite not delivering record-breaking performance like some other assets, three Ether ETFs have managed to rank within the top 25 highest performing ETFs of the year, as indicated by ETF Store President Nate Geraci.

In just over two and a half months, BlackRock’s ETHE, Fidelity’s FBTC, and Bitwise’s ETHW have attracted approximately $1 billion, $367 million, and $239 million in assets respectively, which is quite impressive for funds of their age.

Geraci told CoinDesk that Ether ETFs would likely not surpass Bitcoin ETFs in terms of investments, given their differences in market capitalization. Since Ether’s market cap is approximately a quarter that of Bitcoin, it can serve as an estimate for where demand for Ether ETFs might eventually stand compared to Bitcoin ETFs.

The issue here is that the significant inflows into Grayscale’s ETHE have overshadowed the performances of these other funds.

Established as a trust back in 2017, ETHE initially didn’t allow investors to redeem their ETF shares due to regulatory requirements, essentially trapping the investment money within the product. However, on July 23rd, Grayscale secured approval for converting its trust into a standard ETF, which now permits redemption of ETF shares.

Initially, ETHE held approximately a billion dollars worth of assets. A portion of these assets were transferred by Grayscale to one of its other funds, the ether mini ETF. However, ETHE has experienced nearly 3 billion dollars in withdrawals since then.

It’s important to point out that Grayscale’s Bitcoin ETF (GBTC) has been facing a similar issue, with over $20 billion in withdrawals since its conversion in January. Yet, the outstanding successes of BlackRock and Fidelity’s spot Bitcoin ETFs have effectively counterbalanced GBTC’s losses.

Lack of staking yield

One of the big differences between bitcoin and ether is that investors can stake ether – essentially locking it into the Ethereum network to earn a yield paid out in ether.

Instead of directly investing in ether ETFs, investors are unable to participate in the staking process which provides a return (approximately 3.5% at present). This is because they’re also charged management fees by issuers, with rates ranging from 0.15% to 2.5%. In other words, investing through an ETF means forgoing the yield and paying fees on top.

As a financial analyst, I recognize that while some conventional investors might be willing to sacrifice yield for the ease and security offered by an ETF, crypto-savvy individuals may prefer exploring different methods for maintaining their Ether holdings.

If you’re a skilled fund manager who has some familiarity with the cryptocurrency market and are responsible for managing someone else’s funds, why would you invest in an Ether exchange-traded fund (ETF) at this moment? That’s the question posed by Adam Morgan McCarthy, an analyst at crypto data firm Kaiko Research, to CoinDesk.

either pay to have access to Ethereum (ETH) while it’s held securely by Coinbase, or acquire the actual ETH and deposit it with the same service provider to earn a return.

Marketing Ethereum to clients

Another obstacle for ether ETFs is that it can be hard for some investors to understand the core use-case for Ethereum because it seeks to lead in several, diverse areas of crypto.

Bitcoin has a limited maximum supply of just 21 million units, which is why many investors view it as a digital equivalent of gold, offering a possible safeguard against inflation.

As a keen analyst, I’d like to delve into the significance of a decentralized, open-source smart contract platform and why I believe ether could appreciate in worth.

As a crypto investor, I’ve noticed that one hurdle for Ether ETFs in reaching the 60/40 Boomer demographic is finding a simple and straightforward explanation of its purpose and value. This is according to Eric Balchunas, an ETF analyst at Bloomberg Intelligence, who expressed this in May.

McCarthy concurred, stating that “Ether can be a tad harder to explain to others because it’s not designed for a quick summary like an elevator pitch.” (He said this to CoinDesk.)

As a researcher delving into the digital realm, it’s only natural that I find myself marveling at the recent educational advertising initiative by Bitwise for their crypto index fund. This campaign has been designed to emphasize the technological advantages that Ethereum brings to the table.

As investors grow familiar with concepts like stablecoins, decentralized finance, tokenization, prediction markets, and the various applications driven by Ethereum, they will likely take a keen interest in both this technology and U.S.-listed Ethereum Exchange-Traded Products (ETPs), as suggested by Zach Pandl, Grayscale’s head of research.

Poor price performance

There’s also the fact that ETH itself hasn’t performed all that well compared to BTC this year.

Among the top cryptocurrencies, the one with the second-largest market value has increased by just 4% from January 1st, while Bitcoin has experienced a significant surge of 42%, frequently approaching its record highs set in 2021.

One key reason behind the thriving performance of Bitcoin ETFs, predominantly driven by individual investors, has been the influence of investor enthusiasm and the fear of missing out. This fervor was ignited by Bitcoin’s 65% surge prior to the ETF launch and a subsequent 33% increase since then, as stated by Brian Rudick, director of research at crypto trading firm GSR, in his conversation with CoinDesk.

“The 30% decrease in ETH‘s price since its ETFs were launched has significantly dampened retail interest in purchasing these funds,” Rudick noted. “Current sentiment towards Ethereum is relatively low, with some considering it as being stuck between Bitcoin, which is seen as the superior monetary asset, and Solana, perceived as the top blockchain for smart contracts with high performance.

Unattractive valuation

It’s plausible that conventional investors might view the current value of Ether as unappealing.

With an estimated market value of about $290 billion, Ether’s worth surpasses that of virtually all banks worldwide, save for JPMorgan Chase ($608 billion) and Bank of America ($311 billion).

Moreover, even though it may appear as if we’re comparing oranges with apples, Quinn Thompson, the founder of crypto hedge fund Lekker Capital, stated to CoinDesk that Ether’s value seems high when compared to traditional tech stocks.

In simpler terms, Thompson stated in September that Ether’s current valuation looks less appealing compared to other assets because there is no solid reasoning behind its price based on any standard valuation method. He suggested either the price should decrease or a new commonly accepted valuation approach for this asset needs to be adopted by many.

2024-10-10 23:01