Introduction
For months, the prospect of a spot Ethereum exchange-traded fund (ETF) seemed uncertain. Analysts doubted the U.S. Securities and Exchange Commission (SEC) would approve such a product, citing regulatory ambiguity over whether Ether qualifies as a commodity and ongoing investigations into Ethereum-related entities. Notably, Bloomberg analysts Eric Balchunas and James Seyffart initially estimated only a 25% chance of approval in May 2024. However, that outlook shifted dramatically when reports emerged of SEC engagement with securities exchanges—prompting them to revise their odds to 75%. By May 23, all 19b-4 filings for spot Ether ETFs were approved, paving the way for potential trading launches in July 2024.
With Bitcoin ETFs already demonstrating strong market traction since their January 2024 debut, attention has now turned to Ethereum. This report leverages insights from Bitcoin ETF performance to forecast demand for spot Ethereum ETFs, assess structural differences between BTC and ETH, and evaluate potential price sensitivity implications.
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The Road to Ethereum ETF Approval
Nine issuers are currently competing to launch ten spot Ethereum ETFs in the United States. While some—including ARK, Valkyrie, Hashdex, and WisdomTree—have withdrawn or restructured their applications, the remaining contenders remain active. Grayscale aims to convert its existing Ethereum Trust (ETHE) into an ETF, mirroring its successful transformation of GBTC.
The SEC’s approval of 19b-4 rule changes marks a critical milestone, allowing exchanges to list these products. However, individual S-1 registration statements must still be cleared before trading can begin. Based on industry analysis, including reporting from Bloomberg Intelligence, spot Ethereum ETFs could go live as early as the week of July 11, 2024.
Lessons from Bitcoin ETFs
Bitcoin ETFs have been operational for just under six months but have already reshaped institutional and retail investment dynamics.
- Strong inflows: As of June 15, 2024, U.S. spot Bitcoin ETFs recorded $15.1 billion in net inflows, averaging $136 million per trading day.
- Market impact: These ETFs now hold approximately 870,000 BTC—about 4.4% of the total supply—representing roughly $58 billion in assets under management (AUM).
- Price correlation: A regression analysis shows a 0.55 r-squared value between weekly BTC price changes and ETF inflows, indicating a strong relationship. Notably, price movements tend to lead inflows rather than the reverse.
- Grayscale outflows: The conversion of GBTC to an ETF triggered significant outflows, peaking at $642 million on March 18. While outflows have since stabilized, they highlight the transitional friction during product shifts.
- Investor base: Over 900 U.S. investment firms held Bitcoin ETFs as of Q1 2024, accounting for about 20% of total holdings. Major institutions like JP Morgan, Morgan Stanley, and Citadel are among early adopters.
- Wealth platform access remains limited: Despite growing institutional interest, most major wealth management platforms have yet to enable broker recommendations for Bitcoin ETFs. When access expands—which could take years—it will unlock a major new wave of demand.
Projecting Ethereum ETF Inflows
Using Bitcoin ETF data as a benchmark, we estimate that spot Ethereum ETFs will attract 20–50% of BTC ETF inflows over the first five months post-launch, with 30% as our central case. This translates to approximately $1 billion per month**, or **$5 billion in net inflows within five months.
This projection is based on comparative metrics:
- BTC’s market cap is roughly 2.9x that of ETH.
- BTC futures markets show 2x higher volume and 8.4x higher open interest on CME.
- Existing fund AUM for BTC ranges from 2.6x to 5.3x larger than ETH equivalents.
Given this context, we expect ETH ETF inflows to settle around one-third of BTC levels, aligning with relative market caps.
Key Factors Influencing ETH ETF Demand
Staking Opportunity Cost
One major structural difference is staking. Unlike Bitcoin, Ethereum validators earn rewards through staking—comprising block issuance, priority fees, and MEV (Maximal Extractable Value). Forgoing these benefits creates an opportunity cost estimated at 5.6 percentage points annually, making non-staked ETH less attractive. Outside the U.S., some ETPs offer staking yields; domestic ETFs may face adoption headwinds without similar features.
Grayscale ETHE Conversion Impact
Like GBTC, ETHE is expected to experience outflows upon conversion. Assuming a similar withdrawal rate (54.2% over 150 days), outflows could reach 319,000 ETH per month, equivalent to $1.1 billion at current prices. However, ETHE represents only 2.4% of ETH supply versus GBTC’s 3.2% of BTC supply—and lacks forced sellers like bankrupt entities (e.g., 3AC). Thus, sell pressure should be relatively muted.
Hedge Fund Demand via Basis Trade
Basis trading—arbitraging price differences between spot and futures—has driven hedge fund participation in Bitcoin ETFs. With ETH consistently showing higher funding rates than BTC in 2024, there may be even greater arbitrage incentives for ETH, potentially boosting institutional inflows.
Why ETH May Be More Price-Sensitive Than BTC
Even if inflows are proportionate to market cap, Ethereum’s price may react more strongly due to tighter effective supply dynamics:
- Exchange-held supply: Only 10.3% of ETH is held on exchanges vs. 11.7% for BTC—suggesting lower liquidity.
- Net issuance: Since The Merge (September 2022), Ethereum has seen net deflation (-0.19% annually), though recent low base fees have led to temporary positive inflation (+0.42%).
- Staked supply: Approximately 27% of ETH is staked—reducing available float.
- Dormant/lost supply: Applying a 50% discount to long-dormant addresses removes another layer of liquidity.
- Smart contract & bridge locks: Around 11.4% of ETH is locked in smart contracts or bridges—less liquid than exchange-held tokens.
After adjusting for staking (30% discount), dormancy (50%), and contract locks (25%), we estimate ETH’s available market supply is 14.4% lower than reported—compared to BTC’s 8.7% reduction.
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This tighter supply structure implies that ETH may exhibit greater price sensitivity to ETF inflows, especially when combined with lower net emissions and reduced exchange availability.
Frequently Asked Questions
Will Ethereum ETFs attract new investors or just shift existing ones?
While some investors may rebalance from BTC to ETH, we expect spot Ether ETFs to bring in new marginal buyers, particularly those seeking exposure to decentralized finance (DeFi), NFTs, and tokenization—use cases more closely tied to Ethereum’s ecosystem.
Can staking be added to U.S.-based Ethereum ETFs later?
Regulatory clarity will determine this possibility. If the SEC permits staking mechanisms within ETF structures—similar to Canadian offerings—it could significantly boost demand by eliminating opportunity cost.
How might Ethereum ETF approval affect other altcoins?
Approval would signal broader regulatory acceptance of non-Bitcoin digital assets. This could increase investor confidence in high-cap alts like Solana or Cardano and potentially accelerate future ETF applications.
Are retail investors likely to dominate ETH ETF flows?
Initially yes—similar to Bitcoin—but institutional adoption should grow once wealth platforms integrate these products into advisory workflows.
Could outflows from ETHE delay price appreciation?
Short-term downward pressure is possible during conversion, but given smaller trust size and absence of distressed sellers, impact should be less severe than with GBTC.
Is Ethereum’s inflationary trend a concern for long-term holders?
Recent positive inflation is temporary and tied to low network activity. Historically, high usage leads to fee burning and net deflation—a built-in economic advantage over proof-of-work chains.
Looking Ahead: Broader Implications
The launch of spot Ethereum ETFs represents more than just a new investment vehicle—it signals deeper integration of crypto into mainstream finance. Greater accessibility through regulated products will likely drive adoption across both retail and institutional segments.
Moreover, formal recognition by regulators and trusted financial brands enhances legitimacy, encouraging further innovation in digital asset strategies. As financial advisors become more familiar with Ethereum’s utility beyond speculation—such as smart contracts and decentralized applications—we anticipate accelerated capital allocation across the ecosystem.
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