Ether ETFs face crucial demand test

Debut US exchange-traded funds for the Ether cryptocurrency may generate much less demand than spot-Bitcoin products, according to analysts, muddying the outlook for the second-largest token.

BlackRock Inc. and Fidelity Investments are among the issuers seeking to list Ether funds pending final Securities and Exchange Commission approvals. JPMorgan Chase & Co. strategists expect far smaller Ether ETF net inflows versus the $15.3 billion that has poured into Bitcoin vehicles this year.

The five-month-old Bitcoin ETFs benefited from a controversial narrative that pitches the market-leading token as digital gold, a spin that Ether lacks. The Ether funds also won’t offer so-called staking rewards for blockchain maintenance, a return that can be harnessed by owing the token directly.

“Ether doesn’t have the profile of Bitcoin,” said BTC Markets Pty Chief Executive Officer Caroline Bowler, adding that Bitcoin’s market value of $1.4 trillion is three times larger than Ether’s. “It won’t have the same impact.”

Surprise Pivot

The SEC last month surprisingly pivoted toward approval of spot-Ether ETFs after grudgingly allowing Bitcoin funds in the wake of a court reversal in 2023. The shift boosted Ether’s price but over the past year the token’s 109% advance still lags a 169% surge in Bitcoin that included a record high in March.

JPMorgan strategists led by Nikolaos Panigirtzoglou have estimated that the prospective Ether portfolios will attract a “modest” $1 billion to $3 billion of net inflows over the rest of the year. The products may struggle to get 20% of Bitcoin ETF assets in the US, which currently stand at $62.5 billion, according to Bloomberg Intelligence Senior ETF Analyst Eric Balchunas. 

Vetle Lunde, senior research analyst at crypto specialist K33 Research, is in the optimists’ camp. He has predicted $4 billion worth of net inflows in the first five months and a “monumental supply absorption shock” that should boost Ether.

Meanwhile fund manager VanEck — which is seeking to launch an Ether ETF — sees a tailwind from the popularity of the token’s underlying Ethereum blockchain for applications such as crypto financial services. 

“Over time, we expect investors to conclude that the potential for application and innovation within the Ethereum ecosystem could be much larger than that of Bitcoin,” said VanEck’s Head of Digital-Asset Research Matthew Sigel. 

Arbitrager Exits

Bitcoin initially sank after nine new US ETFs for the token listed on Jan. 11, the same day the more than decade-old Grayscale Bitcoin Trust — then the largest such portfolio — converted into an ETF from a closed-ended structure.

The retreat reflected uncertainty about likely demand as well as outflows from the Grayscale fund, as arbitragers exited after profiting from a discount in the portfolio’s unit price to net asset value that closed when it became an ETF. 

Eventually, the strength of demand for the new ETFs overshadowed the Grayscale outflows and Bitcoin resumed its march higher.

This time around, Grayscale Investments LLC intends to convert its $11 billion Ethereum offering into an ETF. As in the case of the Bitcoin fund, a discount to net asset value has closed and arbitragers may depart the largest Ether fund. Grayscale didn’t reply to a request for comment about the product’s outlook.

“Selling pressure” on Ether due to redemptions from the Grayscale fund is a “reasonable” expectation once the ETFs go live, but the overall market impact from the potential outflows is unclear, research firm Kaiko has said. 

Ether was trading at $3,847 as of 9:40 a.m. Thursday in London. While Bitcoin remains in sight of achieving fresh records, Ether is some way off the all-time peak of $4,866 set during a pandemic-era bull run.

“Global investors have been less enthusiastic about Ether, which they have had access to through Europe and Canada for years,” a ByteTree Asset Management team including Chief Investment Officer Charlie Morris wrote in a note.