$5 Billion in Ethereum ETFs Inflows Could Propel Prices Above $4,000
Eight fund issuers are currently waiting for the U.S. Securities and Exchange Commission (SEC) to give final approval to list and launch exchange-traded funds (ETFs) that will track the spot price of Ethereum (ETH). This could have a significant impact on Ethereum prices.
All About ETH: ETF Flow Predictions and Risks
Ethereum (ETH) has underperformed the broader cryptocurrency market so far this year. In this report, we delve into the factors driving ETH prices and estimate potential net inflows of $3-5 billion into ETH ETFs upon final approval, explaining how this could lead to a price rally for ETH.
Why ETH is Lagging
Despite a broad upswing in crypto prices since 2023, ETH has been a notable laggard. As the second largest cryptocurrency by market capitalization, Ethereum’s market cap was over 50% that of Bitcoin in September 2022. This was just before the shift from Proof of Work to Proof of Stake. Today, that ratio is 33% after a prolonged decline. In contrast, Solana, a Layer 1 competitor, saw its market capitalization grow from 3% to over 20% of Ethereum’s in early 2023.
Factors Behind ETH’s Underperformance
There are three main factors driving ETH’s underperformance:
- Approval of Spot Bitcoin ETFs: The success of spot Bitcoin ETFs in attracting investor inflows has impacted ETH’s market dynamics.
- Speculative Activity: A surge in speculative activity led by memecoins has favored Solana over Ethereum.
- Regulatory Scrutiny: Increased regulatory scrutiny on the Ethereum ecosystem, including its major applications like Uniswap, has affected investor sentiment.
The Case for Spot Bitcoin ETFs
The launch of spot Bitcoin ETFs in January 2024 was a major success. By mid-June 2024, net inflows into these ETFs were just under $15 billion. This includes over $18 billion in net outflows from Grayscale’s Bitcoin Trust (GBTC), which converted to an ETF. The success of Bitcoin ETFs is largely due to Bitcoin being viewed as decentralized digital gold.
Expected Inflows for ETH ETFs
We estimate that spot ETH ETFs will garner $3-5 billion in the first six months of trading. Comparisons with international markets suggest that ETH ETFs could have around 25-30% of the assets under management relative to Bitcoin ETFs. In Sweden, for example, ETH assets are almost 60% of Bitcoin’s, while in Canada, they are about 28%.
The Impact of ETH ETF Approvals
Currently, eight fund issuers have received initial approvals for spot ETH ETFs and are waiting for final approval. Although the timeline has been delayed, an eventual approval is expected. Prediction markets are currently pricing a 73% chance of launch by early July 2024, although this has recently dropped to 2%.
ETH vs. BTC: Market Dynamics
Ethereum has a market capitalization ratio of 33% compared to Bitcoin. From a risk perspective, ETH has a slightly higher volatility ratio compared to BTC. This makes it difficult to argue for significant portfolio diversification benefits beyond an equally-weighted allocation of both assets.
Ethereum’s Use Cases
Unlike Bitcoin, which is seen as digital gold, Ethereum has various use cases and strong on-chain fundamentals. The ratio of daily active addresses on Ethereum versus Bitcoin has consistently exceeded 60%. Additionally, transaction fees paid to use Ethereum are twice those of Bitcoin. Layer 2 scaling solutions have also grown sharply, handling far more transactions than Ethereum’s Layer 1. Most stablecoins are based on Ethereum, further boosting its utility.
Supply Dynamics Favoring ETH
The shift to Proof of Stake has also improved Ethereum’s supply dynamics. The total supply ratio of Ethereum relative to Bitcoin has decreased from 6.3 in summer 2022 to 6.1 today. This reduction in supply is another factor that could boost ETH prices.
Risks and Rewards of an ETH Catch-Up Trade
Given the factors discussed, we estimate net inflows of $3-5 billion into spot ETH ETFs in the first six months. This would mean a total AUM of $13-15 billion for spot ETH ETFs in the US, including the current ETHE AUM. Inflows below $3 billion would be disappointing, while inflows exceeding $5 billion would be a strong positive surprise.
Impact of Memecoins on Ethereum
Memecoins like DOGE and SHIB, which are based on Ethereum, have seen their trading volumes diminish in 2024 in favor of memecoins on Solana, where fees are cheaper. Memecoins briefly surpassed ETH spot trading volumes in March 2024. However, memecoins carry significant risks due to their speculative nature and concentrated ownership structures.
Regulatory Scrutiny on Ethereum
In 2024, the Ethereum ecosystem faced several regulatory actions. Uniswap Labs received a Wells Notice, and Consensys filed a lawsuit against the SEC. Developers of TornadoCash, an anonymizing service, were also targeted. However, recent developments suggest a shift in regulatory stance. The SEC has closed its investigation into Ethereum 2.0, and there is growing support for Ethereum-based stablecoins to hold US Treasuries.
Conclusion
Spot ETH ETFs are likely to begin trading soon, with Ethereum’s market value relative to Bitcoin near multi-year lows. Given the strong on-chain metrics and international ETF comparisons, there is a favorable risk-reward scenario for an ETH catch-up trade in the coming months. A return to the median of the ETH/BTC ratio range from the last three years would imply a 20% rally, while a return to the maximum would mean a 55% rally.
