Sizing up demand for the ‘sub-standard’ US spot ether ETFs

The expected launches of spot ether ETFs wouldn’t be as successful as bitcoin funds, industry watchers say, as educating investors may be a taller task this time around.

Plus, the proposed ETFs are set to leave out one of ETH’s more attractive attributes.

On the latter point, issuers disclosed last week that the proposed funds would not stake their ETH holdings. While the Securities and Exchange Commission approved 19b-4 proposals from the exchanges on which these funds would list, it could be weeks or months before the ETFs are able to launch.

Staking ether is the process of depositing ETH to help secure the Ethereum blockchain. Those who do so earn a yield on that ether.

Christopher Jensen, who leads crypto research at Franklin Templeton, told Blockworks in April that ETH resonates with some institutional investors given that its yield resembles that seen in more traditional assets.

But without this feature, ether ETF holders won’t have access to the annual staking yield of between 3% and 4%, Two Prime CEO Alexander Blume noted.

“A lack of staking makes the products somewhat less attractive and keeps the question of whether ETH is a security versus a commodity somewhat murky for now,” he added in an email.

The current annualized average reward rate for ETH is about 3.5%. That yield compares favorably — when accounting for inflation — to traditional investments like US Treasurys, according to CoinFund President Christopher Perkins.

But the SEC likely wants to better understand the risks staking could pose to investors, such as the “liquidity issue around redemptions,” he noted in an X space last week. Until then, the current planned US spot ether ETFs will serve as “interim” funds, Perkins argued.

“My point is that this product is sub-standard,” Perkins added about the spot ether ETFs. “I can’t wait for the day when we get into yield-bearing products; that is going to be the next thing we have to look at and get done.”

Education and the possible flows into future US ETH funds

Then, there’s the education piece.

While some use ETH as a store of value, it is a native token that facilitates operations on the Ethereum network. ETH is transferred, for example, to create smart contracts.

CF Benchmarks CEO Sui Chung said educating clients on ether’s value proposition will be critical to adoption of the ETFs.

“This will include key components like smart contract functionality, proof-of-stake, dapps, oracles and scaling solutions that may serve to differentiate ether from the bitcoin they may already have in their portfolio through the spot ETF.”

A Bitwise survey published in January found that 71% of advisers favor bitcoin over ether — up from 53% from the previous year.

That said, more advisers reported a greater interest in ETH compared to segments like crypto equities and the broader DeFi and Web3 categories.

Whereas bitcoin is often characterized as digital gold, ether is a bit more complicated to understand.

That is one reason Bloomberg Intelligence’s Eric Balchunas said he expects US spot ether ETF inflows to represent only about 15% to 20% of bitcoin ETF flows. Fellow Bloomberg Intelligence analyst James Seyffart puts his prediction closer to between 20% and 25%.

These estimates would be somewhere in the middle of the difference in demand between the spot bitcoin and ether funds trading elsewhere in the world. Ether ETF assets in Hong Kong and Canada, for example, represent about 15% and 30% of the assets within their bitcoin ETF counterparts in those regions, respectively.

Canada ether ETFs can stake a portion of their ETH holdings — a possible reason demand is greater there.

“In my mind there will be a lot of 60/40 investors who are just going to be happy with bitcoin being their crypto hot sauce,” Balchunas told Blockworks co-founder Michael Ippolito.

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Balchunas added: “If you can make that explanation of intrinsic value and what the purpose is and why it’s better or additional to bitcoin into something a fifth grader can understand…that is what ether needs, I think, to go anywhere above 20%.”

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