Four Reasons Behind the Underwhelming Performance of Ethereum Spot ETFs
TechFlow Selected TechFlow Selected
Four Reasons Behind the Underwhelming Performance of Ethereum Spot ETFs
ETH's market cap is approximately $290 billion, surpassing the valuation of any single bank worldwide.
Navigating Web3 tides with focused insightsAuthors: Tom Carreras, Benjamin Schiller
Translation: Mary Liu, BitpushNews
For many investors, spot ether (ETH) exchange-traded funds (ETFs) have been a disappointment.
While spot bitcoin ETFs have seen nearly $19 billion in inflows over 10 months, the ether ETFs that began trading in July have failed to generate similar enthusiasm.
Worse still, Grayscale’s ETHE, which existed as an Ethereum trust before converting into an ETF, has suffered massive redemptions, and demand from other similar funds hasn't offset these outflows.
This means that since launch, spot ether ETFs have recorded a net outflow of $556 million. According to Farside data, these products saw $8 million in net outflows this week alone.
So why are ether ETFs performing so differently? There may be several reasons.
Fund Flow Context
First, it's important to note that ether ETFs aren’t underperforming relative to expectations—they’re simply not matching the extraordinary success of bitcoin ETFs. The latter have broken so many records they could arguably be considered the most successful ETFs ever launched.
For example, BlackRock’s and Fidelity’s ETFs, IBIT and FBTC, raised $4.2 billion and $3.5 billion respectively within their first 30 days, surpassing even BlackRock’s Climate Conscious fund, which raised $2.2 billion in its first month (August 2023).
Nate Geraci, president of The ETF Store, said while ether ETFs haven’t had a “blowout” start, three of them still rank among the top 25 best-performing ETFs launched this year.
BlackRock’s ETHA, Fidelity’s FETH, and Bitwise’s ETHW have attracted nearly $1 billion, $367 million, and $239 million in assets respectively—solid results for funds barely two-and-a-half months old.
“In terms of inflows, spot ether ETFs will never rival spot bitcoin ETFs,” Geraci told CoinDesk.
“If you look at the underlying spot markets, Ethereum’s market cap is about a quarter of Bitcoin’s. That should reasonably represent the long-term demand for spot ether ETFs relative to spot bitcoin ETFs.”
The issue is that ETHE’s massive outflows have overshadowed these gains.
ETHE was established as a trust in 2017, and due to regulatory constraints, its original structure didn’t allow investors to redeem shares—capital was effectively trapped. That changed on July 23, when Grayscale received approval to convert its trust into a formal ETF.
At the time of conversion, ETHE held around $1 billion in assets. However, it has since suffered nearly $3 billion in outflows, despite some internal transfers by Grayscale to its other fund—the Ethereum Mini ETF.
Notably, Grayscale’s bitcoin ETF, GBTC, experienced a similar situation, recording over $20 billion in outflows since its conversion in January. But strong inflows into BlackRock’s and Fidelity’s spot bitcoin ETFs were enough to offset GBTC’s losses.
Lack of Staking Yield
A major difference between bitcoin and ether is that investors can stake ether—essentially locking it into the Ethereum network to earn yield paid in ETH.
However, current ether ETFs do not allow investors to participate in staking. Holding ether via an ETF means forgoing that yield (currently around 3.5%) while paying management fees ranging from 0.15% to 2.5%.
While traditional investors may accept giving up yield for the convenience and security of an ETF, crypto-native investors have good reason to seek alternative ways of holding ether.
Adam Morgan McCarthy, analyst at crypto data firm Kaiko Research, told CoinDesk: “If you're a competent portfolio manager with basic knowledge of crypto markets managing someone else’s money, why would you buy an ether ETF right now?”
McCarthy added: “You can either pay for exposure to ETH (with underlying assets custodied at Coinbase), or buy the asset yourself and stake it with the same provider to earn yield.”
Marketing Challenges
Another hurdle for ether ETFs is that some investors may struggle to understand Ethereum’s core use cases, given its ambition to lead across multiple areas of crypto.
Bitcoin has a hard supply cap—its total issuance will never exceed 21 million. This makes it relatively easy for investors to view it as “digital gold” and a potential hedge against inflation.
Explaining why a decentralized, open-source smart contract platform matters—and more importantly, why ETH’s value keeps increasing—is another matter entirely.
Bloomberg Intelligence ETF analyst Eric Balchunas wrote in May: “One challenge for ether ETFs entering the 60/40 baby boomer world is distilling its purpose/value into something digestible.”
McCarthy agrees, telling CoinDesk: “The concept of ETH is more complex than other cryptocurrencies and doesn’t lend itself well to a one-sentence explanation.”
Hence, Bitwise, the crypto index fund, recently launched an educational advertising campaign highlighting Ethereum’s technological advantages—a necessary step.
Zach Pandl, head of research at Grayscale, told CoinDesk: “As investors learn more about stablecoins, decentralized finance, tokenization, prediction markets, and many other applications powered by Ethereum, they’ll enthusiastically embrace both the technology and listed ether ETPs in the U.S.”
Poor Value Proposition
In fact, ETH itself hasn’t performed particularly well compared to BTC this year.
The second-largest cryptocurrency by market cap has risen just 4% since January 1, while BTC has surged 42%, continuing to hover near its 2021 all-time highs.
Brian Rudick, head of research at crypto trading firm GSR, told CoinDesk: “A factor behind bitcoin ETF success has been investor risk appetite and fear of missing out—these ETFs remain largely retail-driven, fueled by BTC’s 65% rise leading up to the ETF launch and a subsequent 33% gain.”
Rudick added: “Since the ETF launch, ETH’s price has fallen 30%, significantly dampening retail appetite for these funds. Sentiment toward Ethereum is lukewarm, with some viewing it as sitting between Bitcoin (best monetary asset) and Solana (best high-performance smart contract blockchain).”
Unattractive Valuation
Finally, traditional investors may simply not find ETH’s valuation appealing at current levels.
With a market cap of approximately $290 billion, ETH is already valued higher than any bank globally, trailing only JPMorgan Chase ($608 billion) and Bank of America ($311 billion).
While such comparisons may seem like apples-to-oranges, Quinn Thompson, founder of crypto hedge fund Lekker Capital, told CoinDesk that ETH’s valuation also appears high relative to tech stocks.
Thompson wrote in September that ETH’s valuation is “worse versus other assets now, as no valuation framework justifies its price. Either prices must fall, or a new widely accepted valuation framework for the asset must emerge.”
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
