Ethereum
An ETH ETF Would Not Provide Full Return to Investors
ETFs raise awareness but are less effective than private funds as an ETH investment vehicle.
With the recent approval, launch and success of Bitcoin Spot ETF, all eyes are on the possibility of spot regulatory approval of ETH ETFs, an outcome we believe unlikely under the current administration. Additionally, an ETH ETF will not, at least initially, have a staking reward element, a key aspect of ETH’s total return.
We consider that the main value of crypto-ETFs is the standardization crypto investment platform for traditional financial allocators. Large ETF providers entering the space are gaining legitimacy, allowing allocators to invest in crypto without taking career risks. However, despite all the industry advantages of a spot ETH ETF, the yield characteristics are not as attractive as total return options.
At the time of writing, Eth staking rewards are over 3% per year, according to CESR, the benchmark composite staking rate on ether. In other words, if an investor invests in an ETH ETF, they may be at a disadvantage compared to someone investing in a staking investment. CESR has reached 8% over the last twelve months.
You read Crypto Long and Shortour weekly newsletter featuring information, news and analysis for the professional investor. register here to receive it in your inbox every Wednesday.
ETH ETF — A liquidity imbalance due to staking
Mechanically, staking reduces liquidity due to validator entry and exit queues. In summer 2023, the queue at the entrance increased to 45 days due to increased activity. As a network security activity, staking is not designed with the liquidity needed for securitization in mind. Due to the immense liquidity demand of an ETF, issuers will struggle to provide liquidity and total return in ETH, including staking rewards.
Structural underperformance
Passively holding unstaked ETH is equivalent to holding useless fiat currency for long periods of time in an interest-free demand deposit account. In other words, passively holding unstaked ETH will create structural underperformance and, when compared to a total return benchmark, persistent negative tracking error. From any angle, this is an untenable position for an investor.
For qualified investors, private funds offer an effective solution for gaining exposure to total return ETH. Purchasing and staking ETH through a private fund structure does not face regulatory challenges. Managers can also match fund liquidity to stake and withdraw ETH on behalf of investors. With a thoughtful operational configuration, compromises are limited; a private fund can be audited, compared and keep assets in qualified custody.