US Spot Ethereum Ethereum
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This week saw a contrasting start to the year for exchange traded funds (ETFs), with net inflows into some ETFs being overwhelmed by net outflows from Grayscale’s convertible fund, ETHE.
Nine new spot Ethereum ETFs from eight issuers launched Tuesday, following approval from the SEC in May. BlackRock’s ETHA led the pack with $354.8 million in net inflows in the first few days of trading, followed by Bitwise’s ETHW with $249.9 million and Fidelity’s FETH with $180.1 million.
In fact, almost all ETFs except Grayscale’s ETHE have seen inflows, with Grayscale’s ETHE alone seeing net outflows of $1.16 billion over the past three days.
Grayscale Ethereum Trust was initially launched as a private offering in 2017. In mid-2019, the shares began trading publicly on OTC Markets under the ticker ETHE. This continued until July 23, when ETHE was listed on NYSE Arca as one of the newly approved spot Ethereum ETFs.
ETHE also charges significantly higher fees, charging 2.5% compared to the 0.19% to 0.25% post-waiver fees of other issuers’ spot Ethereum ETFs. However, of the two existing Grayscale strategies, the additional Grayscale Mini Trust Ethereum ETF product (ETH) charges the lowest fee at just 0.15%.
Of the roughly $10 billion worth of assets (2.9 million ether) that the Grayscale Ethereum Trust held prior to the transition, $9.2 billion worth of seed funding was allocated to ETHE and just over $1 billion was allocated to the ETH fund. Grayscale’s ETH has also seen net inflows over the past three days, totaling $119.1 million. However, significant outflows from ETHE and a more than 7% drop in the price of ether since the ETF launched have reduced AUM to roughly $7.5 billion (2.4 million ether), according to the fund page.
Of course, it’s still early days, and given Grayscale’s converted spot Bitcoin ETF, GBTC, net outflows are likely to slow. However, with current net outflows averaging around $385 million per trading day, ETHE’s assets could be depleted in less than a month.
Grayscale’s Bitcoin vs. Ether ETF Funds Outflow
While GBTC’s net outflows have been slower relative to its holdings, a key difference between the two funds is that GBTC was trading at a discount to its net asset value at launch, while ETHE’s discount had already disappeared by the time the spot Ethereum ETF launched. This partly explains why there has been greater incentive to withdraw funds from the fund.
Bitcoin’s price has risen significantly since the spot Bitcoin ETF launched in January, almost doubling in October after expectations of approval were high. Ether, on the other hand, has been on a downward trend in recent months, falling more than 15% since the spot Ethereum ETF was approved on May 23.
“The biggest difference for me is the relatively large outflows on ETHE. I don’t think GBTC had that on day one because it was at a significant discount when it launched,” said Bloomberg ETF analyst James Seyffart, comparing outflows between the two products.
Will Grayscale’s ETHE Continue to Exert Selling Pressure?
According to Rachel Lin, CEO and co-founder of derivatives DEX SynFutures, the Ethereum ETF launch has turned into a classic “news sell” event, with ETH down more than 10% from its short-term highs.
“As we saw with Bitcoin, Grayscale’s ETHE ETF fund has been a net seller in the market. However, unlike Bitcoin, we are seeing less buying pressure from other ETFs to offset the Grayscale sell-off. This is the biggest reason for Ether’s underperformance,” Lin said.
Lin suggested that analyzing the selling patterns of Grayscale’s spot Bitcoin ETFs could help predict what might happen next. GBTC lost 50% of its Bitcoin holdings in its first few months of trading, but then the selling volumes began to taper off.
However, ETHE has already lost or reallocated more than 17% of its assets, and at the current pace of net outflows, it will reach that level much sooner, meaning “there is a greater potential for ether to fall,” Lin said.
According to CryptoQuant analyst Burak Kesmechi, ETH’s on-chain net flow data to custodians could be a leading indicator of whether ETHE will continue to exert selling pressure on ETH’s price.
Six spot Ethereum ETF issuers, including Grayscale, use Coinbase as their custodian, VanEck uses Gemini, and Fidelity holds ETH in its own custody.
Kesmeci said that around 160,930 ethers flowed into Coinbase over the first two trading days, and that Grayscale’s ETHE, which saw $811 million out of the fund during that period, was the “prime suspect” for the massive ether inflows.
“Looking at Ether flow data for the last 48 hours, we see that 47,811 ETH have left Coinbase as well. However, the net inflow of ~113,119 ETH has created significant selling pressure. This has caused the price of ETH to drop 12% to $3,102,” Kesmechi added. “Ether flow data could be a leading indicator as to whether Grayscale’s spot ETF, ETHE, will continue to experience selling pressure in the near term.”
Ether net flow on Coinbase. Image: CryptoQuant.
Another factor is the broader correction in stock markets, with the Nasdaq seeing its biggest drop in two years this week, Lin added. “If there is a further correction in the major stock markets, I don’t think cryptocurrencies will be spared, at least in the short term.”
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