Empire Newsletter: Can ETFs make ETH the next big tech stock?

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Spot the (ETF) difference

Crypto secures another milestone today: Spot ether ETFs start trading in the US.

But it could be that whatever good things come Ethereum’s way as a result will be largely overshadowed by what happens to other cryptocurrencies.

As was the case with bitcoin, there are already loads of investment products physically backed by ether available outside of the US. TrackInsight counts 30 with almost $2.6 billion in ETH under management, the equivalent of about 730,000 ETH.

And then there’s Grayscale Ethereum Trust (ETHE). It has $9.2 billion in ETH — over three and a half times as much as the global products combined — which works out to be almost 2.2% of the circulating supply.

Bulls may look for Grayscale’s new low-fee Ethereum Mini Trust, which is designated to receive 10% of the larger Trust’s ETH, to lead the charge in accumulating tons of ETH.

The data suggests that it might be more reasonable to look to the debuntents for that. ETHE, which will transform into an ETF as the other spot funds launch, has been bleeding crypto ever since the first half of 2021.

Ether has gone up and down but the collective trend has been largely the same

A string of newer products, however, have picked up some of the stack, albeit on a much smaller scale to the wave of ETH inflows Grayscale recorded between mid-2019 and late 2020.

Entities from CoinShares, VanEck, 21Shares and CI-Galaxy, among others, saw the largest inflows around the time of ETH’s all-time high in November 2021.

Interest waned throughout the bear market. Treating the top six by AUM as a cohort shows they slowly shed coins until markets really picked up last October.

But zooming into each entity individually shows some bought the dip. VanEck’s VETH, CoinShare’s ETHE (not to be confused with Grayscale’s product with the same ticker) and 21Shares’ AETH have been steadily accumulating ETH ever since they launched.

Those three products have gone from an estimated 178,750 ETH ($630.3 million) to 276,000 ETH ($973.2 million) over the past three years, an increase of more than 55%.

Slow and steady growth amid a major crash after Terra

Keep in mind that the figures on these charts are broad estimates. Entities generally don’t publish historical data for how much actual ETH they hold per day.

Instead, AUM data was pulled from TradingView and cross-referenced with daily asset prices to generalize how much ETH each product was holding.

Interestingly, a more dominant trend shows up in the data for investment products backed by solana (SOL).

There are six spot SOL products on the market, including Grayscale’s Trust. All of them bar one saw their SOL-denominated AUMs grow as SOL struggled following the collapse of FTX.

Back then, they held about 3 million SOL ($534.4 million) altogether — today they hold an estimated 8.31 million SOL ($1.48 billion).

That’s growth of nearly 180%, far more than the 55% growth recorded for the seven analyzed ETH equivalents.

Granted, it took a few weeks for bitcoin’s price to hit its stride after spot ETFs launched. Still, it could be that ETH opened the floodgates for other cryptocurrencies to find their own way into spot ETFs, somewhere down the line.

In which case, parts of the market could end up betting on whatever coin might be next, rather than what’s right in front of them.

— David Canellis

Data Center

• ETH is even for the past day and up 2.6% over the past week, now just under $3,500. BTC is meanwhile down 1% to $66,666.
• ENS has broken out, currently up 13% on the daily candle to lead CoinGecko’s front page.
• Solana is the no. 1 chain for DEXvolume in the past week, recording $14.52 billion compared to $12.1 billion on Ethereum mainnet.
• $288 million in crypto has flowed out of Ethereum bridges this week, per DeFiLlama.
• Optimism and Polygon bridges have seen the most inflows — $93 million and $20.9 million — respectively.

It’s all happening

Another set of crypto ETFs are finally here.

Some seem caught between the bullishness of another set of crypto ETFs launching six months after bitcoin ETFs were greenlit, and the fact that these funds weren’t able to offer staking yields.

“Holding ETH without staking is akin to holding dollars in a ‘checking’ account instead of a ‘savings’ account,” Adam Levine, senior vice president of corporate development and partnerships at Fireblocks told me. “Nobody would want to hold billions of dollars without earning interest. Holding an ETH ETF without staking is essentially that situation. Staking is a way to generate a return on the ETH with relatively low risk.”

He wouldn’t be surprised if the existing ETH ETF issuers moved towards staking as soon as the SEC allowed it.

Though, let’s be clear, the SEC didn’t seem so happy about the staking language earlier this spring, when we all thought the ETFs had no shot at approval this year. It’s unclear what could change the current agency’s mind. This November could bring the winds of change, however.

Then there’s also the fact that the ether futures ETFs were met with “underwhelming demand,” Will Cai, Kaiko’s head of indices, wrote.

“Although a full demand picture may not emerge for several months, ETH price could be sensitive to inflow numbers of the first days,” he said.

One thing’s for sure: Everyone’s going to be reading into the flows for the next few weeks.

Bitcoin ETFs have been incredibly successful, but the narrative has taken months to play out. It’s not at all surprising that it could be the same for ETH ETFs, especially given that Grayscale is similarly converting its ETH fund to an ETF.

Framework Ventures co-founder Vance Spencer warned that the two ETFs shouldn’t be tossed in a bucket together. But overall, he’s taking a bullish approach to the products.

“I don’t think that the institutional flows for the ether and bitcoin ETFs will be mutually exclusive. The two networks have entirely different use cases and market structures. If Bitcoin is digital gold, then perhaps it’s best to describe Ethereum like Apple, as it is a platform, almost like an app store, but for open finance,” he told Blockworks.

Spencer continued: “I believe it’s likely that institutional investors will seek exposure to both of these perspectives by including the Ethereum ETF in their portfolios. Just like how tech investors might purchase a basket of FAANG stocks, I think many investors will soon seek new types of crypto exposure beyond bitcoin ETFs, and the launch of the Ethereum ETF will kickstart that trend.”

He argues that it’s a glass-half-full scenario. If you’re a pessimist, then perhaps you prefer a bitcoin ETF. But if your investing narrative is a bit more optimistic, then the ETH ETFs may be perfect for you.

For some investors, the ETH ETFs will serve as a gauge for how the market would react to more crypto ETFs like, let’s say, a solana fund. While the SEC may not be there yet, crypto’s notorious for jumping 500 steps ahead when the industry’s feeling bullish.

But the price reaction will also be interesting. Will we see fresh all-time highs from ETH the same way we did for bitcoin?

Bybit thinks we could, for example, see a 70% increase by year-end, with a price target of $5,160.

— Katherine Ross

The Works

• Bitwise will donate 10% of profits from its ether ETF to Protocol Guild and PBS Foundation, the issuer announced.
• Hamilton Lane announced that it’s launching a private credit fund on Solana, Fortune reported.
• Bitcoin worth roughly $2.8 billion was transferred by Mt. Gox per Arkham Intelligence.
• Polymarket carved out a new all-time high in July, hitting trading volumes of $213 million, Blockworks reported.
• BlackRock’s bitcoin ETF recorded inflows of over $500 million, notching a high not seen since March.

The Riff

Q: Are people still excited about the ETH ETFs?

It’s been such a long and weird journey to get here, and the news isn’t the sole focus right now unlike when the bitcoin ETFs launched back in January.

I think there is a decent amount of excitement bubbling under the surface. But there’s also a bit of a “make it or break it” narrative playing out too.

Bitcoin ETFs carved out the path, but now ETH ETFs will be expected to follow in their footsteps and that is a bit daunting.

The two are inherently different though, as I wrote above, and obviously crypto investors are aware of that. But, how familiar are institutions?

I guess we’ll see, but I think there are a lot of reasons for the excitement and overall momentum to keep up. And I think we’ll really find it in the way people analyze and react to the funds flows.

— Katherine Ross

You can probably forgive any lack of excitement. We’ve been bombarded by potential catalysts, both positive and negative, so many times this year.

Beyond the major runup leading up to the launch of spot bitcoin ETFs — which excitingly culminated in a new all-time high for bitcoin — markets have been relatively boring.

Mt. Gox distributing billions in bitcoin to creditors? Mostly “meh.”

The German state of Saxony dumping billions in seized bitcoin? Big whoop, even with the short-term volatility.

Trump saying nice things about bitcoin? It surely hasn’t hurt, but there’s been no real big pump to be seen…yet.

So, by the time the SEC comes around to formally approve ETH ETFs for launch, no wonder ETH is still nearly 30% below its 2021 record high. Maybe the news is moving too fast for the markets to care.

Or, maybe, all the new developments are just the hum-drum of an asset class that’s no longer nascent. Great, I guess!

— David Canellis

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