Why are Ethereum ETFs Underperforming? Bitcoin ETF's Frenzy Fails to ReplicateWhile spot Bitcoin ETFs have garnered nearly $19 billion in inflows within 10 months, Ethereum ETFs, which began trading in July, have failed to ignite the same market enthusiasm and are significantly underperforming their Bitcoin counterparts. Spot Ethereum ETFs have seen net outflows of $556 million since their launch, with $8 million in net outflows this week alone
Why are Ethereum ETFs Underperforming? Bitcoin ETF's Frenzy Fails to Replicate
While spot Bitcoin ETFs have garnered nearly $19 billion in inflows within 10 months, Ethereum ETFs, which began trading in July, have failed to ignite the same market enthusiasm and are significantly underperforming their Bitcoin counterparts. Spot Ethereum ETFs have seen net outflows of $556 million since their launch, with $8 million in net outflows this week alone. This begs the question: why are Ethereum ETFs so unpopular?
Background on Inflows
First, it's important to acknowledge that the success of Bitcoin ETFs has shattered records, being hailed as one of the most successful ETF launches in history. IBIT and FBTC, launched by BlackRock and Fidelity respectively, raised $4.2 billion and $3.5 billion in the first 30 days of trading, surpassing the previous record of $2.2 billion set by BlackRock's ClimateConscious fund in August 2023.
While Ethereum ETFs failed to replicate this fanfare, three of them still managed to rank among the top 25 performing ETFs this year. BlackRock's ETHE, Fidelity's FBTC, and Bitwise's ETHW have gathered nearly $1 billion, $367 million and $239 million in assets respectively - impressive figures for funds that have only been in existence for two and a half months.
Nate Geraci, president of TheETFStore, believes that spot Ethereum ETFs will never be able to challenge spot Bitcoin ETFs in terms of inflows. He explains that Ethereums market cap is about a quarter that of Bitcoin, which should reasonably reflect the long-term demand for spot Ethereum ETFs relative to spot Bitcoin ETFs.
The Shadow of Grayscale's ETHE
The issue is that Grayscales ETHE has overshadowed the performance of other Ethereum ETFs by experiencing massive outflows. ETHE, launched in 2017, initially did not allow investors to redeem their shares, locking funds within the product. That changed on July 23rd when Grayscale was granted permission to convert its trust into a formal ETF.
At the time of the conversion, ETHE held about $1 billion in assets, but has faced approximately $3 billion in outflows. Notably, Grayscale's Bitcoin ETF - GBTC - went through a similar scenario, handling over $20 billion in outflows since its conversion in January. However, the stellar performance of BlackRock's and Fidelity's spot Bitcoin ETFs was sufficient to offset GBTCs losses.
Lack of Staking Rewards
One major difference between Bitcoin and Ethereum is that investors can stake Ethereum. This means locking Ethereum into the Ethereum network to earn rewards paid out in ETH. However, Ethereum ETFs in their current form do not allow investors to participate in staking.
Therefore, holding Ethereum through an ETF means missing out on staking rewards (currently around 3.5%) and paying a management fee of 0.15% to 2.5% to the issuer. While some traditional investors might be content with forgoing rewards in exchange for the convenience and security of ETFs, for crypto-native investors, it makes more sense to seek alternative ways to hold Ethereum.
Adam Morgan McCarthy, analyst at crypto data firm Kaiko Research, points out that it may not be necessary for fund managers who are well-versed in the crypto market and manage funds to buy Ethereum ETFs. They can choose to pay for exposure to ETH either through funds or simply directly purchase Ethereum themselves and stake it with a provider to earn rewards.
Marketing Challenges
Another hurdle facing Ethereum ETFs is that some investors may struggle to understand the core use cases for Ethereum. Unlike Bitcoin, whose limited supply and use as an inflation hedge are readily apparent, Ethereum's value as a decentralized, open-source smart contract platform requires a more complex explanation.
Eric Balchunas, ETF analyst at Bloomberg Intelligence, wrote in May that one of the challenges Ethereum ETFs face in penetrating the traditional investor pool is distilling their purpose and value into something easily understood.
Worse Value for Money
The fact is that ETH itself hasn't performed too well this year, rising only 4% since January 1st versus BTCs 42% gain. Brian Rudick, head of research at crypto trading firm GSR, believes that Bitcoin ETFs success is partly attributed to investors risk appetite and fear of missing out, with these ETFs largely driven by retail investors.
He points out that ETHs price has fallen 30% since the ETF launches, which has significantly dampened retail enthusiasm for buying Ethereum ETFs. Some believe that Ethereum is stuck in a no-man's land between Bitcoin and Solana, lacking a clear edge.
Unattractive Valuation
Finally, traditional investors might find ETHs current valuation unattractive. ETH has a market cap of around $290 billion, surpassing any bank globally, second only to JPMorgan Chase and Bank of America.
While this may be an inappropriate comparison, Quinn Thompson, founder of crypto hedge fund Lekker Capital, believes that ETH is also highly valued compared to tech stocks. He notes that it's difficult to justify ETH's price with any valuation framework at the moment, and its price either needs to come down or a new asset valuation framework needs to be formed.
Conclusion
The lackluster performance of Ethereum ETFs is not a coincidence. It reflects the challenges inherent in Ethereum's own characteristics and investors' understanding and expectations of its value. From fund inflows, staking rewards, marketing challenges, value for money, and valuation, Ethereum ETFs face significant hurdles.
While Ethereum holds immense promise for the future, replicating Bitcoin ETFs success will require more time and effort.
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