Ethereum spot ETF is expected to be listed for trading on the evening of July 23. While the market focus is on the listing of ETFs, many dynamics related to Ethereum ETFs have been overlooked. These dynamics do not exist in Bitcoin ETFs. We will explore liquidity expectations, the dissolution of Grayscale ETHE, and the relative liquidity of ETH:
The fee structure of Ethereum ETFs is similar to that of Bitcoin ETFs, with most providers waiving fees for a specified period to help accumulate assets under management (AUM). Similar to Bitcoin ETFs, Grayscale maintains its ETHE fees at 2.5%, which is higher than other providers. However, this time Grayscale introduced a mini ETH ETF, which does not exist in Bitcoin ETFs.
The mini trust launched by Grayscale initially disclosed a fee of 0.25%, similar to other ETF providers. Grayscale's strategy is to charge a 2.5% fee to inactive ETHE holders while directing more active and fee-sensitive ETHE holders to their new product rather than turning to low-fee products such as Blackrock's ETHA ETF.
Grayscale reduced the mini trust fee to just 15 bps after other providers cut Grayscale’s 25 bps fee, making it the most competitive product. In addition, they transferred 10% of ETHE AUM to the mini trust and gifted this new ETF to ETHE holders. This transition was done on an equal basis, so it was not a taxable event.
There are many estimates of ETF liquidity, with the average being around $1 billion per month. The highest estimate provided by Standard Chartered is $2 billion per month, while the lowest estimate from JPMorgan is $500 million per month. We can use data from Hong Kong and European ETPs and the disappearance of the ETHE discount to help estimate liquidity.
If we look at the AUM distribution of Hong Kong ETPs, we can conclude the following:
In Europe, the total AUM of 197 crypto ETPs is $12 billion, and data shows that the AUM distribution of European ETPs is consistent with the market capitalization of Bitcoin and Ethereum.
It is important to assess the potential for ETHE outflows. After adjusting for Grayscale mini seed capital (10% of ETHE AUM), ETHE as a carrier, in which the supply of ETH should account for a similar proportion of total supply as when GBTC was launched. If the turnover and exit ratios are assumed to be similar, the impact of ETHE outflows on price will also be similar to GBTC outflows.
Another key factor is the premium/discount of ETHE relative to net asset value (NAV). Since May 24, ETHE has been trading within 2% of NAV. This situation helps to curb ETHE outflows, especially direct outflows of funds exiting the market. ASXN's internal estimates of monthly inflows are between $800 million and $1.2 billion.
It is important to understand Ethereum's reflexivity. Its mechanism is similar to BTC, but Ethereum's burning mechanism and the DeFi ecosystem on it make the feedback loop more powerful. The reflexive cycle is roughly as follows:
ETH flows into ETH ETF → ETH price increases → increased interest in ETH → increased DeFi/chain usage → improved DeFi fundamentals → increased EIP-1559 burn → reduced ETH supply → increased ETH price → more ETH flows into ETH ETF → increased interest in ETH…
An important factor missing from the BTC ETF is the “wealth effect” of the ecosystem. In the emerging Bitcoin ecosystem, we don’t see a lot of earnings being reinvested into base layer projects or protocols. Ethereum, as a “decentralized app store”, has a whole ecosystem that will benefit from continued inflows into the base asset.
There is 20 million ETH ($63 billion) in total value locked (TVL) in Ethereum DeFi protocols. As ETH price increases, ETH DeFi becomes more attractive as TVL and revenues in USD surge. ETH has a reflexivity that does not exist in the Bitcoin ecosystem.
The desire for returns in traditional finance makes the native returns of Ethereum through staking a very attractive proposition. We believe that staking ETH ETFs is a matter of time, not a question of whether. Providers can offer zero-fee products and earn returns that are an order of magnitude higher than ordinary ETH ETFs by simply staking ETH in the background.
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