The discussion around ethereum exchange-traded funds (ETFs) has taken center stage, especially with the anticipation of the potential launch of ethereum spot ETFs in the US within this year.
Analysts at ethereum-etfs-staking/” target=”_blank” rel=”noopener nofollow”>BitMEX have recently weighed in on this issue, highlighting a critical aspect that could affect the attractiveness of these ETFs to investors: the provision of staking returns.
According to the analyst, the offering of eth staking rewards presents both an opportunity and a challenge for the formulation of ETFs around the digital asset.
In particular, staking rewards refer to the profits that participants receive for depositing their digital assets to support the operations and security of a blockchain network. These rewards are typically a portion of transaction fees, new coins created through block rewards, or a combination.
The ethereum Staking Yield Dilemma
The attractiveness of eth spot ETFs to institutional investors and ETF buyers depends heavily on “bet performance,” as BitMEX Research analysts noted. They posit that without the inclusion of staking returns, the appeal of eth spot ETFs could decline, given the importance of these rewards in improving returns.
Analysts suggest that the price of eth could even lag that of bitcoin in the long term if ETFs do not incorporate staking returns, despite the potential for bettors to achieve higher returns through rewards. The analysts noted:
However, the staking system may make ethereum less attractive or unsuitable for some ETF investors, where ETFs would presumably not be able to participate. (…) At the same time, new money may be reluctant to invest in an ethereum ETF, when they know they are getting a worse deal than punters and could therefore get lower returns, perhaps these investors could choose a bitcoin ETF instead.
Notably, the analysts also noted that the ethereum staking system poses unique challenges to establishing spot eth ETFs, primarily due to the complexities of managing ETF swaps alongside the eth staking exit queuing system.
The system requires participants to go through two queues to exit, including a standard exit queue that limits daily withdrawals and a validator sweep delay that adds wait time.
For ETFs, managing daily outflows within these constraints presents operational hurdles, analysts say, which could impact the fund's liquidity and its appeal to investors.
BitMEX analysts highlight that during periods of market volatility, the wait time to exit staking could be significantly extended, posing a challenge for potential eth staking ETFs.
Navigating through challenges
Despite the obstacles, there are paths that analysts have explored to get around the issue of staking returns on eth ETFs.
One strategy the analyst highlighted, employed by some eth exchange-traded products (ETPs) in Europe, involves staking only a portion of holdings. This maintains liquidity for refunds while capitalizing on staking rewards. However, this approach inherently reduces potential returns.
The analyst noted:
Another idea, which we like, is to avoid ethereum Staking ETFs altogether and instead issue a stETH ETF. With this, the refund issue is completely resolved or transferred to the Lido.
So far, institutions like Ark Invest/21Shares and CoinShares have already ventured into offering ethereum-staked ETPs in Europe, analysts noted, with services like Figment Europe and Apex Group set to launch similar products on the SIX Swiss Exchange.
Notably, the discourse around eth ETFs and the inclusion of staking returns is playing out against a backdrop of regulatory scrutiny, with the US Securities and Exchange Commission (SEC) taking a cautious approach to the time to approve these products.
Analysts maintain that the eventual approval of ethereum ETFs is inevitable, but remains a matter of time, considering regulatory challenges and the distinctive nature of staking on ethereum. Analysts stated
As with bitcoin, the courts may eventually bind the SEC and again, as with bitcoin, the SEC may be accused of hypocrisy for allowing ethereum futures ETFs.
They also added:
Some argue that because ethereum staking generates a return or because participants propose blocks, this makes ethereum a “security” and therefore provides justification for the SEC to reject ethereum ETFs.
Featured image from Unsplash, chart from TradingView
