Original title: Four Reasons Ether ETFs Have Underperformed
By CoinDesk
Compiled by: Scof, ChainCatcher
Ethereum ETFs haven’t received as much attention as Bitcoin ETFs, and even saw net outflows this week. Tom Carreras investigates.
The performance of Ethereum spot exchange-traded funds (ETFs) has failed to attract the same demand as Bitcoin spot ETFs.
But given the enormous popularity of Bitcoin products, that’s a tall order.
Disadvantages include the lack of staking returns for ETFs and the difficulty in marketing Ethereum to investors.
For many investors, the performance of spot Ethereum ETFs has been disappointing.
By comparison, spot bitcoin ETFs have handled nearly $19 billion in inflows over a 10-month period, while the Ethereum ETF, which began trading in July, has failed to generate the same traction.
To make matters worse, Grayscale’s ETHE, which existed as an Ethereum Trust before converting to an ETF, suffered massive redemptions during the conversion process, while demand from other Ethereum funds failed to offset this trend.
This means that Ethereum ETFs have experienced $556 million in net outflows since launch. According to Farside data, this week alone, these products have seen net outflows of $8 million.
So why is the Ethereum ETF behaving so differently? There are several possible reasons.
Fund inflow background
First, it’s important to note that the Ethereum ETF doesn’t look good compared to the Bitcoin ETF. The Bitcoin product broke many records and is arguably the most successful ETF of all time.
For example, 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 raised by BlackRock’s Climate Awareness Fund in its first month in August 2023.
While the Ethereum ETF failed to replicate these stunning results, three of the funds are still among the top 25 best performing ETFs this year, according to ETF Store President Nate Geraci.
BlackRock’s ETHE, Fidelity’s FBTC, and Bitwise’s ETHW have taken in nearly $1 billion, $367 million, and $239 million in assets, respectively — not bad for two-and-a-half-month-old funds.
“A spot ethereum ETF was never intended to challenge a spot bitcoin ETF in terms of inflows,” Geraci told CoinDesk.
“If you look at the underlying spot market, Ethereum’s market cap is about a quarter of Bitcoin’s. That should be a reasonable guide to where the demand for a spot Ethereum ETF might be relative to a spot Bitcoin ETF over the long term.”
The problem is that Grayscale’s ETHE swamped the performance of these funds with its massive outflows.
ETHE was established as a trust in 2017, and initially, for regulatory reasons, the design did not allow investors to redeem their ETF shares - the funds were 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 assets, and while some of those assets were moved by Grayscale itself to another of its funds — the e the r mini ETF — ETHE suffered nearly $3 billion in outflows.
Notably, Grayscale’s Bitcoin ETF, GBTC, has also experienced outflows of more than $20 billion since its conversion in January. However, the outperformance of BlackRock and Fidelity’s spot Bitcoin ETFs has more than offset GBTC’s outflows.
Lack of staking income
One big difference between Bitcoin and Ethereum is that investors can stake Ethereum — essentially locking it up in the Ethereum network to earn a yield paid out in Ethereum.
However, Ethereum ETFs in their current form do not allow investors to gain exposure to the collateral. Therefore, holding Ethereum through an ETF means missing out on that yield (currently around 3.5%) — and paying issuer management fees, which range from 0.15% to 2.5%.
While some traditional investors might not mind giving up that yield in exchange for the convenience and security of an ETF, it makes sense for crypto natives to find other ways to hold Ethereum.
“If you’re a competent fund manager with even a basic understanding of the crypto markets and you’re managing other people’s money, why would you buy an Ethereum 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 (the underlying asset is custodied at Coinbase), or you buy the underlying asset yourself and stake it with the same provider in exchange for some yield,” McCarthy said.
Difficulty Selling Ethereum to Customers
Another hurdle for an Ethereum ETF is that it may be difficult for some investors to understand Ethereum’s core use case as it attempts to lead in multiple different crypto sectors.
Bitcoin’s supply is strictly capped: the total number of bitcoins will never exceed 21 million. 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 Ethereum will accrue value — is another task.
“One of the challenges of an Ethereum ETF breaking into the 60s/40s baby boomer world is distilling its purpose/value into an easily digestible slogan,” Bloomberg Intelligence ETF analyst Eric Balchunas wrote in May.
McCarthy agreed. “Ethereum is just a little bit more complex and hard to communicate to people — it doesn’t lend itself to an elevator pitch,” he told CoinDesk.
It’s no surprise, then, that crypto index fund Bitwise recently launched an educational advertising campaign highlighting Ethereum’s technological advantages.
“As investors learn more about stablecoins, decentralized finance, tokenization, prediction markets, and the many other applications powered by ethereum, they will enthusiastically embrace the technology and U.S.-listed ethereum ETPs,” Zach Pandl, head of research at Grayscale, told CoinDesk.
Poor price performance
There’s also the fact that ETH itself hasn’t performed too well this year compared to BTC.
The second-largest cryptocurrency by market value is up just 4% since Jan. 1, while BTC has rallied 42% and has been hovering around its 2021 all-time high.
“One factor in the success of bitcoin ETFs, which are largely retail-driven, is investor animal spirits and fear of missing out, which itself was driven by BTC’s 65% rally prior to the ETF launch and 33% rally thereafter,” Brian Rudick, head of research at crypto trading firm GSR, told CoinDesk.
“The price of ETH has fallen 30% since the ETFs were launched, which has significantly reduced retail enthusiasm for buying these funds,” Rudick added. “Sentiment around Ethereum is low, with some seeing it as sandwiched between Bitcoin as the best monetary asset and Solana as the best high-performance smart contract blockchain.”
Valuations not attractive enough
Finally, it’s possible that traditional investors simply view Ethereum’s valuation as unattractive at these levels.
With a market cap of around $290 billion, Ethereum is already valued higher than any bank in the world, with the exception of JPMorgan Chase and Bank of America, which are valued at $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 Ethereum’s valuation also appears high compared to tech stocks.
Ethereum’s valuation “is now uglier than other assets because no valuation framework can justify its price,” Thompson wrote in September. “Either the price must fall or a new, universally accepted framework for valuing assets needs to become widely accepted.”
