Ethereum Spot ETF Launch: Limited Short-term Impact, Profound Long-term Significance

On July 23, 2024, the U.S. Ethereum Spot ETF officially launched for trading, coinciding with the 10th anniversary of Ethereum's first public sale. This event is a milestone for the sustainable development of the crypto world, marking an important step for POS public chains into the mainstream financial sector. It will attract more dimensions and numbers of developers to join the Ethereum ecosystem construction and pave the way for other public chains like Solana to enter the mainstream world, which is of great significance for the popularization process of the blockchain ecosystem.

However, due to regulatory reasons, Ethereum ETFs are currently not allowed to be staked, and investors holding the ETF will receive 3%-5% less staking rewards compared to directly holding Ethereum. Additionally, the understanding threshold for ordinary investors regarding Ethereum is relatively high, so the short-term impact of this ETF listing on the price of Ethereum may not be as significant as the impact when the Bitcoin ETF was approved; it more so increases the stability of Ethereum's price and reduces volatility.

The following will analyze the impact of the Ethereum Spot ETF listing from two perspectives: the short-term effects on the buying and selling power of Ethereum participants, and the long-term effects on the crypto ecosystem.

1. Short-term impact: The forces of buyers and sellers are not as strong as that of Bitcoin ETF, and the impact on Ethereum is expected to be less than that on Bitcoin.

According to the tracking data of Bitcoin Spot ETFs, the most significant factor affecting the coin price is the daily net inflow, which refers to the actual new trading volume brought to the crypto world by ETF cash subscriptions and redemptions. The redemption mechanism of the US Ethereum Spot ETF is the same as that of the Bitcoin ETF, both supporting only cash subscriptions and redemptions; therefore, the daily net inflow will also be an important observation indicator for the Ethereum ETF. There are two main differences:

1. Selling pressure: The relocation effect brought by Grayscale ETHE conversion ETF is still present, but its impact is less than that of GBTC.

Grayscale Ethereum Trust ( ETHE ) has over 10 times the management fee difference compared to competitors, which will still lead to early relocation sell-offs, but the impact is expected to be less than that of GBTC. The main reasons are:

• ETHE splits an additional 10% of net assets to establish a low-fee mini trust (ETH) when converting to ETF, alleviating the pressure of high fees on asset relocation.
• The discount on ETHE has converged ahead of schedule, and the outflow pressure from the closure of the arbitrage positions is less than that of GBTC.

2. Buy side: The consensus on Ethereum is weaker than that of Bitcoin, with relatively weak allocation momentum.

For ordinary investors, Bitcoin has a simple logic and a consensus has been reached: digital gold, with clear scarcity. On the other hand, Ethereum, as a public chain, has a complex mining mechanism and its development is influenced by multiple ecological factors, resulting in a high cognitive threshold. From the supply perspective, Ethereum is theoretically unlimited in supply; under the POS mechanism, block rewards and Gas fees burning create a dynamic supply-demand balance, with a recent annualized inflation rate of 0.6%-0.8%. From a fundamental perspective, Ethereum faces competition from other public chains, making the endgame difficult to judge. Therefore, ordinary investors may be more inclined to allocate scarce, non-competitive Bitcoin ETFs.

Public data also shows that the popularity of Ethereum ETF is not as high as that of Bitcoin ETF.

• Google search popularity, Ethereum is only about 1/5 of Bitcoin.
• The seed capital scale of ETFs, Ethereum ETFs are generally smaller than the Bitcoin ETFs of the same issuer.

3. Buying pressure in the crypto circle: Due to the lack of staking rewards, demand is basically non-existent.

For cryptocurrency investors, holding an Ethereum ETF will yield 3%-5% less annual staking income compared to directly holding Ethereum. Considering the deposit and withdrawal costs of cryptocurrencies and fiat currencies, there is a significant difference in returns between holding an ETF and holding coins directly, making the buying interest for Ethereum ETFs negligible in the crypto community.

2. Long-term Impact: Paving the Way for Other Crypto Assets to Integrate into the Mainstream World

Ethereum, as the largest public blockchain at present, having its Spot ETF approved is an important step for public blockchains to integrate into the mainstream financial world. From the SEC's approval standards, Ethereum meets the requirements in terms of anti-manipulation, liquidity, pricing transparency, and other aspects.

• Anti-manipulation: Node decentralization, ETF assets are not pledged, and there is a mature futures market.
• Liquidity & Pricing Transparency: Market capitalization of approximately $420 billion, daily trading volume of $18 billion, listed on nearly 200 exchanges.

In comparison, public chains like Solana also meet the above indicators to some extent. In the future, more crypto asset ETFs may be approved, further occupying the minds of traditional investors and accelerating development.

In summary, the buying and selling power of the Ethereum spot ETF is weaker than that of the Bitcoin ETF, and the market is already prepared. It is expected that the short-term impact on the price of Ethereum will be less than that of the Bitcoin ETF on Bitcoin, and the volatility may also be smaller. If there is a mispricing caused by outflows from Grayscale in the initial listing phase, it could represent a good investment opportunity.

In the long term, the cryptocurrency ecosystem is moving towards integration with the mainstream world, during which there will be a period of cognitive adjustment. The cognitive differences between new and old participants may be the core factor affecting the price fluctuations of cryptocurrencies and creating investment opportunities in the next 1-2 years. Historically, the process of emerging assets integrating into the mainstream world is often accompanied by divergences and fluctuations, which is worth looking forward to.

The approval of the Ethereum ETF paves the way for the integration of crypto ecosystem applications into mainstream asset allocation, and in the future, other public chains with a large number of users and ecosystems will gradually merge into the mainstream world. Meanwhile, mainstream financial assets such as U.S. Treasury bonds are also being tokenized through RWA, achieving efficient circulation of global financial assets.

The approval of the Bitcoin ETF has opened the door to the integration of crypto and traditional finance, while the Ethereum ETF is the first step into this door.