Original Title: Four Reasons Ether ETFs Have Underperformed

Author: CoinDesk

Translation: Scof, ChainCatcher

Ethereum ETFs have not garnered the same level of attention as Bitcoin ETFs, and there has even been a net outflow of funds this week. Tom Carreras investigated this.

• The performance of Ethereum spot exchange-traded funds (ETFs) has failed to attract the same demand as Bitcoin spot ETFs.
• However, given the immense popularity of Bitcoin products, this is a high bar to meet.
• Disadvantages include the lack of staking yields for ETFs and difficulties in marketing Ethereum to investors.

For many investors, the performance of spot Ethereum ETFs has been disappointing.

In contrast, spot Bitcoin ETFs have processed nearly $19 billion in inflows over 10 months, while the Ethereum ETFs that began trading in July have failed to generate the same appeal.

Worse still, Grayscale's ETHE, which existed as an Ethereum trust before converting to an ETF, suffered massive redemptions during the conversion, and demand for other Ethereum funds did not offset this trend.

This means that since their launch, Ethereum ETFs have experienced a net outflow of $556 million. According to Farside data, these products saw a net outflow of $8 million just this week.

So, why has the performance of Ethereum ETFs been so different? There are several possible reasons.

Background on Fund Inflows

First, it is important to note that Ethereum ETFs look poor compared to Bitcoin ETFs. Bitcoin products have broken numerous records and can be considered the most successful ETFs of all time.

For example, the ETFs issued by BlackRock and Fidelity, IBIT and FBTC, raised $4.2 billion and $3.5 billion, respectively, in their first 30 days, breaking the previous record of $2.2 billion set by BlackRock's climate-conscious fund in its first month in August 2023.

While Ethereum ETFs have failed to replicate these astonishing results, according to Nate Geraci, president of ETF Store, three of these funds are still among the top 25 performing ETFs this year.

BlackRock's ETHE, Fidelity's FBTC, and Bitwise's ETHW have attracted nearly $1 billion, $367 million, and $239 million in assets, respectively—quite impressive for funds that are only two and a half months old.

“Spot Ethereum ETFs never expected to challenge spot Bitcoin ETFs in terms of inflows,” Geraci told CoinDesk.

“If you look at the underlying spot market, Ethereum's market cap is about a quarter of Bitcoin's. This should be a reasonable reference for predicting how demand for spot Ethereum ETFs will compare to spot Bitcoin ETFs in the long run.”

The problem is that Grayscale's ETHE has overshadowed the performance of these funds with its massive outflows.

ETHE was established as a trust in 2017 and was initially designed to prevent investors from redeeming their ETF shares due to regulatory reasons—funds were trapped in the product. This situation changed on July 23 when Grayscale received approval to convert its trust into a formal ETF.

At the time of conversion, ETHE had about $1 billion in assets, although some of those assets were transferred by Grayscale to its other fund—the ether mini ETF—but ETHE suffered nearly $3 billion in outflows.

Notably, Grayscale's Bitcoin ETF, GBTC, has also experienced over $20 billion in outflows since its conversion in January. However, the outstanding performance of BlackRock and Fidelity's spot Bitcoin ETFs has completely offset the outflows from GBTC.

Lack of Staking Yields

A significant difference between Bitcoin and Ethereum is that investors can stake Ethereum—essentially locking it in the Ethereum network to earn yields paid in Ethereum.

However, the current form of Ethereum ETFs does not allow investors to gain exposure to staking. Therefore, holding Ethereum through an ETF means missing out on that yield (currently around 3.5%)—and also paying management fees to the issuer, which range from 0.15% to 2.5%.

While some traditional investors may not mind giving up that yield in exchange for the convenience and security of an ETF, it makes sense for crypto natives to seek other ways to hold Ethereum.

“If you are a capable fund manager, even with only a basic understanding of the crypto market, why would you buy an Ethereum ETF now if you are managing other people's money?” Adam Morgan McCarthy, an analyst at crypto data company Kaiko Research, told CoinDesk.

“You pay fees to gain exposure to ETH (the underlying asset is custodied at Coinbase), or you buy the underlying asset yourself and stake it with the same provider for some yield,” McCarthy said.

Difficulty in Marketing Ethereum to Clients

Another barrier for Ethereum ETFs is that for some investors, understanding the core use case of Ethereum can be challenging, as it attempts to lead in multiple different crypto domains.

Bitcoin has a strict supply cap: the total number of Bitcoins 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 is important—more importantly, why Ethereum would accumulate value—is another task.

“One of the challenges for Ethereum ETFs breaking into the 60/40 baby boomer world is distilling their purpose/value into an easily understandable slogan,” Bloomberg Intelligence ETF analyst Eric Balchunas wrote in May.

McCarthy agrees with this view. “Ethereum is just a bit more complex and difficult to convey to people—it doesn't lend itself to an elevator pitch,” he told CoinDesk.

Therefore, it is not surprising that the crypto index fund Bitwise recently launched an educational advertising campaign highlighting Ethereum's technological advantages.

“As investors learn more about stablecoins, decentralized finance, tokenization, prediction markets, and many other applications powered by Ethereum, they will enthusiastically embrace the technology and Ethereum ETPs listed in the U.S.,” Zach Pandl, Grayscale's head of research, told CoinDesk.

Poor Price Performance

There is also the fact that ETH itself has performed poorly this year compared to BTC.

The second-largest cryptocurrency by market cap has only risen 4% since January 1, while BTC has risen 42% and has been hovering around its historical high from 2021.

“One factor in the success of Bitcoin ETFs, which are primarily retail-driven, is the animal spirits of investors and the fear of missing out, which itself was driven by BTC rising 65% before the ETF launch and then rising another 33%,” Brian Rudick, head of research at crypto trading firm GSR, told CoinDesk.

“Since the ETF launch, ETH's price has dropped 30%, which has significantly dampened retail enthusiasm for buying these funds,” Rudick added. “Sentiment around Ethereum is low, with some believing it is caught between Bitcoin as the best monetary asset and Solana as the best high-performance smart contract blockchain.”

Insufficient Valuation Appeal

Finally, it is possible that traditional investors simply find Ethereum's valuation unattractive at these levels.

With a market cap of about $290 billion, Ethereum's valuation is already higher than any bank in the world, except for JPMorgan and Bank of America, which are valued at $608 billion and $311 billion, respectively.

While this may seem like comparing apples to oranges, Quinn Thompson, founder of crypto hedge fund Lekker Capital, told CoinDesk that Ethereum's valuation also appears high compared to tech stocks.

Thompson wrote in September that Ethereum's valuation “looks worse now compared to other assets because there is no valuation framework that can justify its price.” “Either the price must come down, or a new, widely accepted asset valuation framework needs to be broadly adopted.”

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