Expectations and Analysis for the Ethereum ETF Launch

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It’s Official, the launch of multiple Ethereum ETFs is now scheduled for July 23, 2024, with the Chicago Board Options Exchange (CBOE) confirming the date.

The U.S. Securities and Exchange Commission (SEC) has approved at least three funds, with indications of up to eight ETFs launching concurrently. The final approval from the SEC is expected to be a formality, given the preparatory steps taken by the issuers and the regulatory body’s previous approvals.

Inflow Expectations

The ETFs are anticipated to attract significant interest from both retail and institutional investors. According to analyst estimates, the Ethereum ETFs are expected to get around $4 billion in inflows within the first six months, potentially absorbing 1% of Ether in circulation by the end of the year.

Some other analysts have said they expect the Ethereum inflows as a percentage of market cap to essentially match that of Bitcoins, so to get an idea of how this scenario would affect the price, we can look at the total supply on exchanges for both assets at the time of the ETF launches.

Liquid supply on exchanges at time of ETF launch:

  • Bitcoin: 13% of the total supply.
  • Ethereum: 14% of the total supply.

Because the amount of liquid supply on exchanges is the same, we expect that the effect of the ETFs will be similar to that of Bitcoins. However, one other factor to note is also that there is much more leverage in the Ethereum ecosystem, so that could add more of a reflexive effect in either direction after the ETFs launch, whether that be inflows (bullish) or outflows (bearish).

The Short-Term Risks To Be Aware Of

While this whole launch is exciting and good for the long-term adoption of crypto assets, there are two key short-term risks to the launch, both of which have to do with the (ETHE) grayscale Ethereum trust. First is that the grayscale Ethereum trust will maintain its current 2.5% fee after converting to an ETF, which is astronomical compared to the competing funds.

This high fee could drive a significant amount of outflows from the fund as investors move assets into competing funds to take advantage of the lower fees. The Second risk is that many hedge funds were buying the ETHE during the bear market while it was trading at a significant discount to its NAV Net Asset Value – otherwise known as how many billion in assets it holds.

The idea of this trade is to buy ETH at a discount betting that the fund would convert to an ETF making its price permanently on par with the value of its assets so they could then profit off of the arbitrage.

This being the case there’s a chance that many funds playing this arbitrage trade will take profits when the fund converts to an ETF. Both of these scenarios took place with the grayscale bitcoin trust back when it converted to an ETF, which caused about a month of bearish price action before the big move in the second half of Q1.

If this plays out the same way for Ethereum, it will probably be that we get another dip-buying opportunity before we begin seeing net inflows go positive.

Our Outlook

This is mostly due to the fact that ethereum has more “real world usecases” with smart contracts as well as it also having cashflows that get distributed back to the token holders via network fees being burned or distributed to ETH stakers.

In terms of the risks associated with the Grayscale Fund, we’ll have to wait and see how that effects the market in th first few days after the launch. However, all-in-all our outlook is very positive in the medium to long-term following the launch of these new innovative products.