The implications of the Ethereum ETF and beyond

After launching our own ethereum ETFs in Hong Kong, we have experienced first-hand the unlocking that comes with increased visibility among investors. We saw an immediate shift in enthusiasm, tone, and tenor of our conversations with investors, both institutional and retail, who saw this moment as a shift in the legitimacy of the asset class.

Therefore, the start of trading of ethereum (eth) ETFs on one of the world’s largest exchanges this week leads us to consider another milestone on the road to full integration of digital assets into traditional finance. This move paves the way for more diverse financial products, including cryptocurrency basket ETFs, ETFs with participation options, tokenized securities, and other financial innovations.

So what will the impact of expanded access to eth as an investment class actually be? Will we see all-time highs in the coming months? How can we overcome the complexity of ethereum as an infrastructure compared to bitcoin’s reputation as digital gold? Let’s explore these questions and how they can lead to a more gradual adoption curve among investors.

The btc effect

When bitcoin (btc) spot ETFs debuted, over $25 billion was traded in the first month. ethereum ETFs are unlikely to match this volume initially, considering that ethereum’s average 24-hour trading volume is currently at a 70% discount to bitcoin. We expect ethereum spot ETFs to trade between $15 billion and $20 billion in the first month.

Of course, it is possible that inflows are larger than we expect. This would indicate bullish sentiment that could boost momentum and give ethereum a positive psychological boost as an asset class embraced by investors of all stripes.

However, many investors will compare eth directly to btc, and that is a big challenge for communication. If btc is digital gold, what is eth? How do investors place it in their diversified portfolios? The success of the eth ETF depends on its marketing, which should focus on eth as a utility layer for the cryptocurrency industry.

Potential for a price rebound

By the end of this year, we expect the ethereum price to be between $6,000 and $10,000. This price represents between 1.6 and 2.5 times its 52-week high. Our relatively optimistic outlook on ethereum is driven by rising demand from ETF introductions, increased interest in ethereum-linked call options, and increasing adoption of ERC-20 tokens and the broader ethereum ecosystem.

While initial ETF launches may boost the price of ethereum, there could be short-term capital outflows from Grayscale’s ethereum Trust, similar to what was seen with bitcoin ETFs. Investors could move their funds to lower-fee options, temporarily affecting market sentiment.

The launch of an ethereum ETF could trigger a modest rally in eth prices, driven by increased demand. This rally could also positively impact other cryptocurrencies through a contagion effect. However, the macroeconomic environment will significantly influence the long-term trajectory of digital assets. If bearish headwinds subside and optimism increases with the arrival of new funds, ethereum could experience larger price swings.

The sustainability of these gains will depend on external factors such as stock prices, interest rates, emerging sectors and institutional adoption rates. There is also the US election year, which injects a modicum of uncertainty into the medium-term appetite for risk assets such as cryptocurrencies.

Staking Rewards: Retail vs. Institutional

One potential limitation of ethereum ETFs is the absence of staking rewards, a major incentive to hold ethereum directly. Staking allows investors to earn rewards, making it attractive to those comfortable with self-custody. That could limit the appeal to crypto natives, who may not consider adding eth to their brokerage accounts.

Unlike retail investors, ETFs offer institutional investors a regulated and convenient way to gain exposure to ethereum without having to deal with direct ownership. Strong institutional interest in eth suggests a growing acceptance of ETFs as exposure instruments, even without yield staking. Work is underway with regulators to potentially introduce a staking eth ETF in the future, which could improve market competitiveness.

Still, staking is not a deal-breaker and income is not the main reason why many investors would want to add eth ETFs to their portfolio. Rather, they are looking for price appreciation and exposure to the digital asset sector.

Institutional adoption

Institutional interest in ethereum could differ from that of bitcoin ETFs due to ethereum’s potential as an infrastructure layer for decentralized applications across a number of sectors, including finance, supply chain, and technology. These sectors offer significant opportunities, making ethereum attractive beyond simply being a store of value like bitcoin. And, as regulatory frameworks evolve and provide more clarity and certainty, institutions could find ethereum a valuable addition for portfolio diversification.

Staking is a major draw for institutional investors considering ethereum ETFs. Institutional staking within cryptocurrency ETFs represents a sophisticated tool for yield generation, leveraging the inherent value of staked assets.

This could potentially outperform traditional fixed-income instruments by providing a consistent return that dampens market volatility. Incorporating staking into cryptocurrency ETFs potentially allows institutions to maximize asset utilization, capture price appreciation, and generate additional returns through staking rewards. This dual-purpose approach can optimize overall investment strategies and could stabilize fund performance in bear markets.

Furthermore, institutional participation in staking could improve governance within the ecosystem, encouraging stronger regulatory guidelines from relevant authorities and creating a safer and more transparent environment that benefits everyone. This is most evident when it comes to liquidity, as institutions tend to provide more reliable backing over time as they become more comfortable with an asset class prone to instability and volatility.

A bullish catalyst

The approval of ethereum ETFs promises to be a catalyst for market growth, attracting significant capital inflows from investors who prefer the regulated environment of traditional financial markets. As each new jurisdiction approves crypto-related financial products, it attracts new investors who were previously hesitant due to regulatory uncertainties, thus expanding the market.

More importantly, this exposure will add legitimacy to ethereum in the eyes of the public, which will benefit the digital asset ecosystem at large. We will see more people consider investing not only in other digital assets, but also in the companies that innovate in the blockchain ecosystem at large.

We see the potential for a rotation into the utilities sector, with investors considering projects that address real-world solutions and have the potential to revolutionize industries on a global scale. We could also see a push for decentralized finance, as financial products that bridge the gap between traditional finance and decentralized finance become more attractive as investors become more comfortable with digital assets.

And while initial trading volumes may not match those of bitcoin ETFs, the long-term impact on ethereum and the broader crypto ecosystem promises to be substantial, paving the way for greater awareness and innovation that will enable the future of finance.