Ethereum Spot ETFs Begin Trading Today, But One Thing Scares Investors

U.S. investors are expected to start buying ether via spot ETFs (exchange-traded funds) for the first time today. While this could be a good thing for the No. 2 cryptocurrency overall, there’s one thing that worries short-term investors: Grayscale’s high fees could trigger a massive selloff in the market. So let me first explain the situation, and then I’ll tell you where the potential opportunity lies.

What’s going on with these Ethereum and Grayscale ETFs?

Up to nine spot Ethereum ETFs are expected to begin trading today on the Nasdaq, Chicago Board Options Exchange (CBOE), and New York Action Stock market, following final approval from U.S. regulators on Monday. And that means investors will be able to buy ether in a regulated ETF wrapper — just like a traditional stock or bind. And that means ETF issuers — including BlackRock, Fidelity and other big names — will have to buy ether on a one-for-one basis to meet demand for their ETF shares.

ETF issuers are competing for investor capital by keeping their annual fees low, between about 0.19% and 0.25%. And Fidelity, VanEck and Franklin Templeton have all waived their fees altogether for at least a year. Grayscale, however, has taken a bolder approach: Its fees will hit 2.5% right out of the gate. However, Grayscale is also set to launch a “Mini Trust” ETF that will have no fees for the first six months, and then a fee of 0.15%.

Listing information for nine Ethereum ETFs, including their tickers, fees and discounts, exchange and custodian. Source: James Seyffart, Bloomberg.

Now the Grayscale Ethereum Trust ETF (teleprinter: ETHÉ; expense ratio: 2.5%) is actually a conversion of the original Grayscale Ethereum Trust. Before the spot ETF even debuted, it had about $10 billion worth of ether under its belt, or about 2.5% of the total coin supply, with investors holding shares in this trust for a few key reasons.

First of allIts shares were trading below the true value of the underlying ether, creating a discount that investors hoped would be closed with the conversion. That way, they could earn a little more on top of the ether price by buying shares in the trust.

The Grayscale Ethereum Trust (ETH) has been trading at a discount to its net asset value for most of this year. The discount has moved closer to zero as it becomes more likely that the trust will convert into an ETF. Source: Grayscale.

SecondThe trust has a mandatory holding period for “private placements” when it creates new shares for accredited investors, limiting the immediate resale of some of its shares.

And thirdlyMany investors did not sell shares because the trust was one of the few traditional ways to get more regulated exposure to ether.

But with the transformation from trust to ETF, there is no incentive to surrender, no mandatory lock-up for private placement investors, and plenty of fully regulated (and much cheaper) alternatives to ETFs. So yes, you can expect many investors to dump their Grayscale ETF shares.

What is the opportunity here?

We’ve seen this movie before – when Grayscale converted its Bitcoin fund into an ETF in January. Since then, Grayscale Bitcoin Trust ETF (GBTC; 1.5%) recorded capital outflows worth almost $20 billion, roughly matching the capital inflows BlackRock’s iShares Bitcoin fund (I BITE; 0.25%). Despite Grayscale’s outflows, all nine spot bitcoin ETFs still saw positive inflows overall—with bitcoin up about 40% since launch day. But it wasn’t exactly a walk in the park: Bitcoin fell about 20% in January, with relatively larger daily outflows from Grayscale’s fund early on. And, frankly, bitcoin was also pretty up and down lately too.

Total flows for each of the nine Bitcoin ETFs to date. Source: Farside Investors.

And sure, ether could see an initial Grayscale-led selloff like bitcoin did in January, so you should be open to that scenario. But if you’re playing the long game, the new ETFs are likely to be good for ether’s price, as they have been with bitcoin so far. Like bitcoin, ether has a limited supply, and with these ETFs, demand could be much stronger over time. Think of it this way: institutional and retail investors who might not have bought ether on a cryptocurrency exchange now can.

Ethereum ETFs are not yet allowed to “stake” investors’ ether – a holding process that could potentially earn them between 3% and 6%. interest per year. And some analysts believe that fewer and fewer investors will buy these ETFs as a result. While that may be true to some extent, I’m not that worried. According to crypto data provider The Block, about 26% of all ether in existence is already staked. Notice in the chart below that this number is trending upwards, effectively leaving less ether for the rest of us to buy. My guess is that these stakers (who tend to be more experienced in crypto anyway) will likely continue staking to lock in those returns. As for new crypto investors, though, the convenience and regulation of ETFs might be enough to convince them.

The total percentage of Ether held in staking contracts. Source: The Block.

And consider this: There’s currently only $16 billion worth of ether on cryptocurrency exchanges, according to data from CryptoQuant — that’s less than 4% of the total coin supply and a new all-time low for that metric. That means the rest of that ether is likely held by more experienced crypto investors using off-exchange wallets and custodians. And those people may be less likely to part with their ether at these prices.

So if BlackRock and its team are successful in their Ethereum ETF launches – and manage to absorb Grayscale’s potential sell-off – there may not be as much ether left to distribute.

To understand why investors own ether in the first place, check out our Ethereum Guide.

Fuente