US investors started buying ether through spot ETFs (exchange-traded funds) for the first time today. While that could be great for the No. 2 crypto overall, one thing has investors concerned in the short term – that Grayscale’s high fees could spark a selloff in the market. So let me explain the situation first, and then I’ll tell you where the potential opportunity is.
What’s going on with those Ethereum ETFs and Grayscale?
Nine spot Ethereum ETFs began trading today on the Nasdaq, Chicago Board Options Exchange (CBOE), and NYSE Arca Exchange, following a final stamp of approval from US regulators on Monday. And that means investors can now buy ether in a regulated ETF wrapper – just like a traditional stock or bond. And it means the ETF issuers – which include BlackRock, Fidelity, and other big names – will have to buy ether one-for-one to match demand for their ETF shares.
The ETF issuers are competing for investor capital by keeping their yearly fees to a minimum, roughly between 0.19% and 0.25%. And Fidelity, VanEck, and Franklin Templeton are even scrapping their fees altogether for at least a year. Grayscale, though, has taken a bolder approach – its fees will be as high as 2.5% from the get-go. However, Grayscale is also set to launch a “mini trust” ETF with no fee for the first six months, and a 0.15% fee after that.
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 (ticker: ETHE; expense ratio: 2.5%) is actually a conversion from the original Grayscale Ethereum Trust. Even before the spot ETF debuts, it had around $10 billion in ether to its name – about 2.5% of the total coin supply – with investors holding shares in this trust for a few key reasons.
First, its shares have traded below the actual value of the underlying ether, creating a discount that investors hoped would close with the conversion. That way, they could earn a bit extra on top of the price of ether by buying shares in the trust.
The Grayscale Ethereum Trust (ETH) has traded at a discount to its net asset value for most of this year. The discount has moved closer to zero as it became more likely that the trust would convert into an ETF. Source: Grayscale.
Second, the trust has a mandatory holding period for “private placements” when it creates new shares for accredited investors, restricting immediate resale for some of its shares.
And third, many investors haven’t sold shares because the trust was one of the few traditional ways to get better-regulated exposure to ether.
But with the trust now morphing into an ETF, there’s no more discount incentive, no mandatory lock-in for private placement investors, and plenty of fully regulated (and way cheaper) ETF alternatives. So, yeah, you can expect a lot of investors to dump their Grayscale ETF shares.
What’s the opportunity here?
We’ve seen this movie before – when Grayscale converted its bitcoin trust into an ETF in January. Since then, the Grayscale Bitcoin Trust ETF (GBTC; 1.5%) has seen almost $20 billion worth of outflows, which just about matches the inflows of BlackRock’s iShares Bitcoin Trust (IBIT; 0.25%). Despite Grayscale’s outflows, the nine spot bitcoin ETFs have still raked in positive inflows as a whole – with bitcoin’s price up about 40% since launch day. But it wasn’t exactly a walk in the park: bitcoin dipped about 20% in January, with relatively bigger daily outflows from Grayscale’s fund at first. And, frankly, bitcoin’s also been pretty up and down of late, 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 the one bitcoin saw 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 the price of ether, like they’ve been with bitcoin so far. Like bitcoin, ether has a limited supply, and with these ETFs, there could be a lot more demand over time. Think of it this way: institutional and retail investors, who might not have bought ether on a crypto exchange, now can.
Ethereum ETFs aren’t allowed to “stake” investors' ether yet – a holding process that could potentially earn them between 3% and 6% in interest per year. And some analysts believe that fewer investors will buy into those ETFs as a result. While that might be true to some extent, I’m not so worried. According to crypto data provider The Block, about 26% of all the ether in existence is already being staked. Notice in the chart below how that number has been trending higher – effectively leaving fewer ethers for the rest of us to buy. My guess is that those stakers (who tend to be more experienced when it comes to crypto anyway) will probably keep staking to lock in those yields. As for newer crypto investors, though, the convenience and regulation of ETFs might just be enough to get them on board.
The total percentage of ether that is held in staking contracts. Source: The Block.
And consider this: there’s only $16 billion worth of ether on crypto exchanges now, according to data from CryptoQuant – that’s less than 4% of the total coin supply and a new all-time low for that gauge. That means the rest of that ether is likely being held by more experienced crypto investors, using off-exchange wallets and custodians instead. And those folks may well be less inclined to part ways with their ether at these prices.
So if BlackRock and crew have successful Ethereum ETF launches – and manage to absorb the potential Grayscale selloff – there might not be so much ether left to go around.
To understand why investors own ether in the first place, check out our Ethereum guide.
