On Thursday May 23, 2024, the Securities and Exchange Commission (SEC) announced its approval of a number of Ethereum (ETH) exchange-traded funds (ETFs) to be listed on national securities exchanges. This approval follows the successful launch of eleven Bitcoin ETFs in the U.S. on January 11.

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Each ETF is still undergoing the review process of their S-1 registration statements. Once the S-1 is approved, these ETFs will be allowed to trade on the exchanges. 

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While ETH ETFs are actively listed and traded internationally, crypto ETFs are relatively new in the U.S. market. This approval marks a pivotal moment for the industry, bringing the second-largest crypto asset by market capitalization closer to a Wall Street listing.

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In this blog, we explain the significance of this ETH ETF, its importance to the market, its impact on staking, and what’s next. 

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What is an ETH ETF and How Does it Work?

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An Ethereum ETF is an exchange-traded fund that tracks the price of ETH. By investing in an ETH ETF, investors gain exposure to Ethereum without needing to buy or manage the cryptocurrency directly. 

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An ETH ETF holds ETH as its underlying assets. The ETF provider manages the fund, buying and selling ETH to maintain the ETF's value in line with ETH’s market price. A financial institution acts as the custodian, securely holding the ETH. This ensures the assets are protected and stored safely. The ETF's price reflects the performance of ETH. Investors can buy and sell shares of the ETF on major stock exchanges, just like traditional stocks. 

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The ETF’s liquidity allows for easy buying and selling, providing a straightforward way to gain or reduce exposure to Ethereum. ETH ETFs operate under regulatory oversight, offering an added layer of security and transparency compared to direct cryptocurrency investments.

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What is the Potential Impact of ETH ETFs on the Ethereum Market? 

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ETH ETFs simplify the process of investing in Ethereum. 

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They provide a regulated and accessible way for investors to include Ethereum in their portfolios without dealing with the complexities of digital wallets and exchanges. This ease of access broadens the appeal of Ethereum, attracting a wider range of institutional investors, such as asset managers and pension funds. 

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To assess the potential impact of an ETH ETF, it is useful to look at the success of Bitcoin’s. This is relevant, as according to Bloomberg ETF analyst Eric Balchunas, the spot ETH ETFs might grab about ‘20%’ of the BTC ETF’s market share. 

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In the first two weeks of trading, BlackRock’s IBIT (iShares Bitcoin Trust) AUM passed $2B. This marked one of the most successful ETF launches in history. Today, a snapshot of recent total Bitcoin ETF inflows for the week of 22 May 2024 to 28 May 2024 amounted to $558.8 million, with average daily inflows being $111.76 million, according to Farside Investors. 

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The US spot BTC ETFs saw a cumulative $13.7 billion in total flows as of 29 May. An ETH ETF capturing 20% of this would equate to $2.7 billion of ETH ETFs over the same period. 

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In March 2024, Ethereum reached the $4k mark for the first time in two years, today nearing all time high levels. This follows its successful transition to Proof-of-Stake, massively reducing the number of ETH issued by the protocol, compared to Proof-of-Work.

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For an Ethereum ETF, some expect $20 billion and $35 billion inflows into spot ETH ETFs throughout 2024. A combination of lower daily reward issuance (relative to Proof-of-Work), and high inflows, could lead to a significant growth in the demand for ETH as an asset. 

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Additionally, the staking rate has risen significantly over the last 1-2 years, reaching up to 27% now. This increasing staking rate highlights the growing interest and participation in Ethereum’s Proof-of-Stake system. As more ETH gets staked, the overall supply available for trading decreases, potentially driving up the asset’s value.

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As reported by Bloomberg, the options market shows a flurry of wagers on Ethereum reaching a $5,000 all-time peak. Traders are actively placing bets that the price of Ethereum will hit $5,000, surpassing its previous highest value. This surge in activity signals strong confidence among traders about Ethereum's potential to reach new heights in light of the ETF.

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The SEC’s Role in ETH ETF Approvals

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While the SEC’s recent 19b-4 approval is positive for ETH ETFs, it doesn’t mean they’ll start trading immediately. The next crucial step is the approval of the S-1 documents, a process that will require additional time, ranging from weeks to months. 

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S-1 documents include important information about the ETF, such as financial statements, management details, and risk factors. The SEC must review and approve these documents, and only after this approval can the ETH ETFs begin trading. 

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Fidelity has reportedly amended its ETF S-1 filing to remove reference to ETH staking, as well as BlackRock. This would mean that their tokens will not be staked. However, it remains to be seen what role staking will play in these ETFs in the future. 

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ETH ETF Impact on ETH Staking

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Despite ETF applicants excluding staking from their filings, there may be benefit to those who self-stake, or choose to stake through a service such as Blockdaemon. 

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As reported by Unchained, the SEC's likely exclusion of staking from ETH ETFs means ETF investors will miss out on staking rewards. This setup transfers value to those who stake their ETH via protocol inflation, indirectly enhancing their rewards. 

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Institutions that offer products incorporating staking rewards could gain a competitive edge over ETFs. By including staking, these products can attract customers seeking additional rewards from their ETH holdings. As staking rewards currently offer around ~3.5% Protocol Reward Rate (PRR), products that capitalize on this can provide a more appealing selling point compared to traditional ETFs that exclude staking.

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However, ETH ETFs may evolve, potentially integrating staking in the future. ETPs with staking as a key selling point already exist in other jurisdictions. Incorporating staking would allow ETF customers to benefit directly from staking, aligning with broader market trends and preferences.

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The exclusion of staking from current ETH ETFs highlights a significant opportunity for products that do include staking. These products not only offer a competitive advantage but also cater to demand for higher rewards. As the market evolves, we may see new ETFs that incorporate staking, further enhancing their appeal and impact on the Ethereum ecosystem.

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Ultimately, if successful, an ETH ETF will be a positive tailwind, and set the stage for further institutional participation. 

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To discuss your ETH strategy in more detail, book a call with Blockdaemon below. 

This material is for informational purposes only, without any express or implied warranty of any kind.  This material does not constitute investment advice, financial advice, trading advice, legal advice, or any other sort of recommendation or advice, and should not be treated as such.