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The Implications of the Ethereum ETF and Beyond
Disclosure: The views and opinions expressed here are solely those of the author and do not represent the views and opinions of the crypto.news editorial team.
After launching our Ethereum Exchange Traded Funds In Hong Kong, we have experienced first-hand the unlocking that comes with increased visibility among investors. We have seen an immediate shift in the excitement, tone and tenor of our conversations with investors, both institutional and retail, who have seen this moment as a shift in legitimacy for the asset class.
So, like Ethereum (ETH) ETFs begin trading on one of the world’s largest exchanges this week, and we see this as another milestone on the path to full integration of digital assets into traditional finance. The move paves the way for more diversified financial products, including cryptocurrency basket ETFs, staking options ETFs, tokenized securities, and other financial innovations.
So what will be the real impact of expanded access to ETH as an investment class? Will we see ATH in the coming months? How can we overcome the complexity of Ethereum as an infrastructure versus Bitcoin’s reputation as digital gold? Let’s explore these questions and how they might lead to a more gradual adoption curve among investors.
The BTC Effect
When you spot Bitcoin (BTC) ETFs debuted, seeing over $25 billion traded in the first month. It is unlikely that Ethereum ETFs will match this volume initially, considering that Ethereum’s 24-hour average trading volume is currently 70% off 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 will be larger than we expect. This would indicate a bullish sentiment that could drive momentum and give Ethereum a positive psychological boost as an accepted asset class for investors of all types.
However, many investors will directly compare ETH to BTC, and this is a major challenge to the message. If BTC is digital gold, then what is ETH? How do investors fit it into their diversified portfolios? The success of the ETH ETF depends on its marketing, which must focus on ETH as a utility layer for the cryptocurrency industry.
Potential for a price rally
By the end of the year, we expect Ethereum to be priced between $6,000 and $10,000. This price represents 1.6x to 2.5x its 52-week high. Our relatively bullish outlook on Ethereum is driven by rising demand from ETF introductions, growing interest in Ethereum-linked calls, and growing adoption of ERC-20 Tokens and the broader Ethereum ecosystem.
While initial ETF launches could push Ethereum higher, there could be short-term outflows from Grayscale’s Ethereum Trust, similar to what we’ve seen with Bitcoin ETFs. Investors could shift funds into lower-fee options, temporarily impacting market sentiment.
The launch of an Ethereum ETF could trigger a modest price rally for ETH, driven by rising demand. This rally could also positively impact other cryptocurrencies through a spillover effect. However, the macroeconomic environment will significantly impact the long-term trajectory of digital assets. If the bearish headwinds subside and optimism grows with the advent of new funds, Ethereum could see more 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 election year in the United States, 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 lack of staking rewards, a significant incentive to hold Ethereum directly. Staking allows investors to earn rewards, making it attractive to those comfortable with self-custody. This could limit its appeal to crypto natives, who may not consider adding ETH to their brokerage accounts.
Unlike retail investors, ETFs provide a regulated and convenient way for institutional investors to gain exposure to Ethereum without having to manage direct ownership. Strong institutional interest in ETH suggests a growing acceptance of ETFs as exposure tools, even without staking returns. Work is underway with regulators to potentially introduce a staking ETH ETF in the future, which could improve market competitiveness.
However, staking is not the deciding factor. And income is not the main reason why many investors would want to add ETH ETFs to their portfolios. Instead, they are looking for price appreciation and exposure to the digital asset vertical.
Institutional adoption
Institutional interest in Ethereum may differ from Bitcoin ETFs because of Ethereum’s potential as an infrastructure layer for decentralized applications across industries, including finance, supply chain, and technology. These industries offer significant opportunities, making Ethereum attractive beyond simply being a store of value like Bitcoin. And as regulatory frameworks evolve and provide greater clarity and certainty, institutions may find Ethereum a valuable addition to portfolio diversification.
Staking is a major draw for institutional investors considering Ethereum ETFs. Institutional staking within crypto ETFs represents a sophisticated means of generating returns by leveraging the intrinsic value of staked assets.
This could potentially outperform traditional fixed income instruments by providing a steady return that protects against market volatility. Incorporating staking into crypto ETFs potentially allows institutions to maximize asset utilization by capturing price appreciation and generating additional returns through staking rewards. This dual-purpose approach can optimize overall investment strategies and could stabilize fund performance in down markets.
Additionally, institutional participation in staking could improve governance within the ecosystem, encouraging stronger regulatory guidance from regulators and creating a safer, more transparent environment that benefits everyone. This is most evident when it comes to liquidity, as institutions tend to provide more reliable support over time as they become more comfortable with an asset class prone to instability and volatility.
A positive 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 cryptocurrency-related financial products, it attracts new investors who were previously hesitant due to regulatory uncertainty, thus expanding the market.
More importantly, this exposure will add legitimacy to Ethereum in the public eye, which will benefit the broader digital asset ecosystem. We will see more people consider investing not only in other digital assets, but also in companies innovating in the broader blockchain ecosystem.
We see potential for a rotation into utilities, as investors consider projects that address real-world solutions and have the potential to disrupt industries on a global scale. We could also see a push into defi, as financial products that bridge the gap between traditional 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.
Vivien Wong
Vivien Wong leads the licensed asset management business at HashKey Capital, a global leader in digital assets and blockchain technologies. Vivien was instrumental in bringing crypto spot ETFs to market in Hong Kong. Prior to HashKey Capital, she served as Managing Director of Huobi Asset Management in Asia. Vivien has also held various roles at Fosun Group and Deutsche Bank, where she focused on investment and research in new sectors of the economy, including artificial intelligence, cloud computing and healthcare. Vivien began her career at Barclays Global Investors. She holds an MBA from Warwick Business School and a BA from the University of Hong Kong.