Coin Metrics: The impact of spot ETH ETFs on the Ethereum ecosystem

Author: Tanay Ved & Matías Andrade Source: Coin Metrics Translation: Shan Ouba, Golden Finance

Key Takeaways:

• Nine Ethereum spot ETFs will debut on July 23, with fees ranging from 0.15% for Grayscale’s Ethereum Mini Trust to 2.5% for Grayscale’s ETHE.

• Ethereum’s market cap is $420 billion, about a third of Bitcoin’s $1.3 trillion market cap, and ETH’s daily spot trading volume on Coin Metrics’ trusted exchanges is about half of BTC’s.

• 33.2 million ETH (28% of supply) is staked on the Ethereum consensus layer, of which 13.5 million ETH (11% of supply) is locked in smart contracts and 12.5 million ETH (10% of supply) is currently on exchanges. ETFs can further stimulate prices by locking up funds in an already well-utilized asset.

The launch of a Bitcoin spot ETF in January marked the end of a decade of waiting, giving people broader exposure to the largest crypto asset through a familiar, regulated investment vehicle. Recent 13-F filings reveal the companies behind $16 billion (and counting) of inflows into these products. With this development, market attention has naturally turned to the next frontier: Ethereum (ETH). With a market cap of $420 billion today, ETH is the logical successor, and its ETF approval is a matter of when, not if. The unexpected approval of a spot Ethereum ETF by the U.S. Securities and Exchange Commission (SEC) in May brought clarity to ETH’s status as a commodity, further strengthening the asset class’s value proposition. Now, just six months later, a spot Ethereum ETF is set to launch.

In this edition of the Coin Metrics State of the Network report, we take a deep dive into the launch of a spot Ethereum ETF, the supply and demand dynamics, and its impact on Ethereum and the broader digital asset ecosystem.

Issuers in the ETH ETF Race

Nine Ethereum ETFs are set to debut on July 23, expanding the range of crypto-based financial products. Sponsored by traditional asset managers like BlackRock and Fidelity, as well as crypto-native firms like Bitwise and Grayscale, the products will track the spot price of Ether (ETH). With listings on public exchanges such as the Chicago Board Options Exchange (CBOE), the New York Stock Exchange (NYSE) and Nasdaq, investors will now have another way to gain exposure to ETH through major brokerage platforms, complementing existing options such as user-owned wallets.

As launch date approaches, fee wars ensue. Issuers have filed final S-1 registration statements disclosing that management fees for their respective funds range from 0.15% for the newly launched Grayscale Ethereum Mini Trust (ETH) to 2.50% for Grayscale’s Ethereum Trust (ETHE), which will convert from its current trust structure to an ETF at launch. Some issuers are also temporarily waiving fees, a strategic move to attract AUM, much like the Bitcoin ETF.

Contextual Analysis of Demand and Short-Term Pressures

Using the indicators that serve as a barometer of demand for ETH relative to BTC, we can understand the potential demand for an Ether ETF. 

Ethereum (ETH) has a market cap of $420 billion, about one-third of Bitcoin’s (BTC) market cap of $1.3 trillion. On average, daily spot volume (across trusted exchanges) is half that of BTC, reflecting relative market activity and liquidity. In futures markets, BTC’s open interest is roughly 2.6x higher than ETH across all exchanges and roughly 9x higher on CME. Prior to the launch of their respective ETFs, Grayscale's Bitcoin Trust (GBTC) had approximately 2.8 times the assets under management (AUM) of its Ethereum Trust (ETHE). Overall, these metrics suggest that inflows into the ETH ETF may be roughly in line with the established size difference between the two assets.

An important consideration is that the current ETF structure does not include staking, which creates an opportunity cost for potential investors who forgo the additional staking returns. This restriction could impact demand for an Ether ETF in the short term and could spark discussion about developing more comprehensive ETH investment products that incorporate staking returns. However, incorporating staking also involves considerations of ETH’s stake ratio and rewards, overall network security, and regulatory clarity around the Proof of Stake (PoS) consensus mechanism.

Grayscale Fund Focus

As Grayscale’s Ethereum Trust (ETHE) transitions from a trust structure to an exchange-traded fund (ETF) at launch, it is important to consider the potential outflows that the product could generate. The dynamics of Grayscale’s Bitcoin Trust (GBTC) can serve as a precedent. Prior to the launch of the spot Bitcoin ETF, GBTC held approximately 620,000 BTC (approximately 3.1% of the BTC supply) and had total assets under management of approximately $30 billion. The conversion of GBTC from a trust to an ETF created an opportunity for investors who previously purchased GBTC at a discount to exit capital or roll into an ETF with lower management fees. As a result, GBTC’s Bitcoin holdings have fallen by about 55% to 270,000 BTC, putting downward pressure on the price of BTC.

On the other hand, Grayscale’s Ethereum Trust (ETHE) held about $10 billion in AUM prior to launch, including 3 million ETH (2.5% of ETH supply). While ETHE may experience similar outflows, the series of events leading up to the launch of the ETH ETF and the launch of Grayscale’s Ethereum Mini Trust (ETH) may mitigate the extent of these outflows.

On the one hand, ETHE’s NAV discount narrowed rapidly following the approval of the ETF in May, giving investors ample time to exit at close to par value. Additionally, the Mini Trust charges a fee of 0.15%, providing fee-sensitive investors with the option to transition to this low-cost product. 10% of ETHE has been transferred as seed money into the new mini-trust product, resulting in a reduction of $1 billion or 300,000 ETH holdings in AUM. ETH’s supply dynamics ETH’s multifaceted utility gives it a relatively high velocity (turnover rate) and has a significant impact on its supply dynamics into ETFs. Ether (ETH) plays a vital role as the native asset in the Ethereum ecosystem. It is the backbone of the Proof of Stake (PoS) consensus mechanism, a means of paying network fees, and is used as collateral or a source of liquidity for decentralized finance (DeFi) platforms such as lending applications and decentralized exchanges (DEX). In addition, as the Ethereum Layer 2 ecosystem grows, more and more ETH is being bridged to access infrastructure and services built on top of the Ethereum base layer.

As of July 22, of the 120 million ETH supply in circulation, 33.2 million ETH (about 28% of the supply) was staked on the Ethereum consensus layer, 13.5 million ETH (about 11% of the supply) was locked in various smart contracts, and 12.5 million ETH (about 10% of the supply) was in exchanges. In total, this is equivalent to 39% of the ETH supply that cannot be easily obtained on the market, not including the inactive supply.

The launch of Ethereum ETFs could further absorb ETH, potentially limiting the available market supply. However, the extent of this effect will depend on the adoption rate of these newly launched ETFs.

Other Ethereum Data to Watch

Despite recent inflationary trends, driven in part by growth in Layer 2 activity and lower fees on Dencun, ETH supply has remained largely deflationary (-0.24%) since the “merge.” The interaction between ETH's constrained supply and potential ETF inflows could kickstart a flywheel of network activity and benefit ETH's overall economics and on-chain metrics.

Increased activity on Ethereum, whether through increased stablecoin supply, L2 blob adoption, or DEX trading, could impact base fees on the Ethereum mainnet and, in turn, the ETH burn rate. This would ultimately further constrain supply, making prices potentially more susceptible to shifts in demand.

ETH Performance and Volatility

As shown by the ETH/BTC ratio, ETH's performance relative to BTC has been in a consolidation phase since 2021. The ratio is currently 0.052, trending down from 0.084 when it consolidated. Since the launch of the spot Bitcoin ETF in January, ETH has returned 35%, lagging behind the performance of Coin Metrics' Total Market Index (CMBITM) and BTC, which have returned 41% and 46%, respectively, driven by a surge in BTC demand.

It remains to be seen to what extent ETH's trajectory will change, however, the launch of a spot ether ETF represents an important catalyst for broader awareness and adoption of ETH as an asset, the Ethereum ecosystem, and the entire digital asset industry.

Conclusion

While initial attention may be focused on the immediate performance of Ethereum ETFs, their true impact will be apparent in the coming months. This period will provide insights into the demand for ETH ETFs relative to Bitcoin, the characteristics of these investment groups, and the broader implications for the Ethereum ecosystem, including network adoption, scaling infrastructure, and applications. Nonetheless, this launch marks a key milestone in the expansion and maturation of the crypto asset market. By expanding the accessibility of ETH and its ecosystem, the launch of the ETH ETF represents not only a new investment vehicle, but also an important catalyst for Ethereum's expanding role in the global financial landscape.