ETFs
ETH ETFs will be approved. But could grayscale releases drive down the price of ETH?
The Spot ETH ETF approval has galvanized the Ethereum community. But if ETHE outflows from Grayscale exceed inflows to ETFs, what impact could that have on the price of ETH?
Potential outflows from Grayscale’s Ethereum Trust could create short-term bearish pressure on ETH despite the hype surrounding the ETF approval.
Posted May 24, 2024 at 9:01 AM EST.
While the crypto community is excited about the pending approval of the Ethereum Spot ETF, an important question arises: Once they begin trading, Grayscale’s Ethereum Trust (ETHE) outflows will exceed- are they the entries?
The question is not only relevant for Grayscale or ETHE holders, but for all ETH holders, as large enough ETHE outflows could put downward pressure on the ETH price. -even.
Learn more: Why ETH Isn’t Rising After SEC Approves Key Filings for Spot ETFs
The reason capital outflows are expected is because ETHE operates as a closed-end fund, meaning it can trade at a price below or above its net asset value (NAV). This discount has been historically significant due to the fund’s structure and high fees. The expectation of an ETF conversion, which would eliminate the discount, further encourages ETHE outflows as investors will look to capitalize on the immediate price correction, just as happened with Bitcoin Trust (GBTC) of Grayscale.
The ETHE discount on NAV decreases from 203% to 5.5% following the announcement of the likely approval of ETFs.
How much ETH could leave ETHE?
Currently, there is $11 billion worth of ETH in ETHE. If the same percentage of assets leaves ETHE as the Grayscale Bitcoin Trust (GBTC) – around 47% – this could result in outflows of around $5 billion in the first four months, as note on X by Quinn Thompson, founder of macro crypto hedge fund Lekker Capital.
However, it is not yet clear whether Grayscale will set fees as high on its ETH ETF as it does on GBTC, which likely caused these outflows, or if it will try a different strategy.
“I expect outflows from ETHE when it converts. But it will be interesting to see what Grayscale does with the fees,” James Seyffart, research analyst at Bloomberg Intelligence, told Unchained.
Grayscale traditionally charges fees of 2% or more on its investment products. For example, it charged 2% on GBTC, and when converting it to an ETF, it lowered the fee to 1.5%.
However, the 1.5% fee was so much higher than the 0.19% to 0.25% charged by the competition that it likely played a significant role in the half of Bitcoin leaving GBTC since its conversion to an ETF.
“The other interesting thing is that it looks like Grayscale might be able to launch its mini-trust at the same time. Which will likely have very low and competitive fees,” Seyffart said, referring to Grayscale’s new mini Bitcoin ETF, which will trade under the ticker BTC. It will carry a 0.15% fee, making it the cheapest of all spot Bitcoin ETFs. This could generate additional Grayscale revenue, giving the company more room to reduce fees on ETHE, which are currently 2.5%, and be more competitive with fees on other ETH ETFs.
How much ETH could go into Spot ETH ETFs?
Another factor, when it comes to assessing the impact this could have on the price of ETH, is to consider how much ETH could be injected into ETFs once they start trading. be traded – and whether that would be enough to offset ETH outflows.
How much interest there will be in ETH ETFs is an open question. Will the ratio of assets in the two ETF types mimic the ratio between the market caps of Ethereum and Bitcoin, which after Monday’s ETH price surge is now around 30% ?
Eric Balchunas, senior ETF analyst, believes Ethereum ETFs will only rake in 10-15% of what Bitcoin ETFs made. “For the normal person, one is enough. You would really have to have a good deal for that other guy to buy it,” Balchunas said.
Meanwhile, his Bloomberg colleague Seyffart suggests a higher range of 20%. These forecasts place Ethereum ETF assets under management between $5 billion and $10 billion.
THE recently launched spot Bitcoin and Ethereum ETFs in Hong Kong, who have a total of $287 million in assets under management, provides insight into the potential demand for Ethereum ETFs in the United States. “Hong Kong is a good example,” Seyffart said in the latest episode of Bits + Bips. “Demand, again, is less than the ratio of market capitalizations between the two assets.”
HK Bitcoin ETFs hold $246 million and Ethereum ETFs hold $41 million, giving ETH a 15% market share.
Thomspon estimates that it would only take about 9% of total Bitcoin ETF funds (around $5 billion) to offset potential outflows from ETHE. Along the same lines, even if Balchunas’ lower estimates are correct, inflows to ETFs could offset outflows to ETHE.
A wild card is the fact that ETF issuers cannot offer stake returns. This could further decrease interest in ETH ETFs, since ETH investors could instead choose to stake and receive a return.
While the approval of Ethereum ETFs is an important milestone, the short-term impact on ETH price could be negative due to large outflows from the Grayscale fund. However, if interest in ETH ETFs ends up being similar to that in Hong Kong, the expected influx into new Ethereum ETFs could be enough to offset these outflows.