Low Value for Investors? A Four-Dimensional Analysis of Why the Spot Ethereum ETF Is Underperforming

For many investors, the performance of the spot Ethereum (ETH) exchange-traded fund (ETF) has been disappointing.

Despite the success of spot Bitcoin ETFs, which attracted nearly $19 billion in inflows over a span of 10 months, the Ethereum ETFs launched in July have failed to generate the same level of interest.

What’s worse, Grayscale’s ETHE, which transitioned from an Ethereum trust to an ETF, has faced significant redemptions. The demand from other similar funds has been unable to offset these redemptions. As a result, since its launch, the spot Ethereum ETF has experienced a net outflow of $556 million. According to Farside, the net outflow from these products has reached $8 million just this week alone.

Nate Geraci, president of The ETF Store, remarked that while the Ethereum ETF failed to make a splash, three of the funds are still among the top 25 best-performing ETFs of the year.

BlackRock’s ETHE, Fidelity’s FBTC, and Bitwise’s ETHW have managed to gather nearly $1 billion, $367 million, and $239 million in assets, respectively—an impressive feat for funds that are only two and a half months old.

Geraci noted, “In terms of inflows, the spot Ether ETFs will never be able to challenge spot Bitcoin ETFs.”

“If you look at the underlying spot market, Ethereum’s market cap is roughly one-quarter of Bitcoin’s. This should reasonably reflect the long-term demand for spot Ether ETFs relative to Bitcoin ETFs.”

The issue lies with the significant outflows from Grayscale’s ETHE, which has overshadowed the performance of other funds.

ETHE was established as a trust in 2017, designed in a way that, for regulatory reasons, prevented investors from redeeming their ETF shares—essentially trapping capital in the product. This changed on July 23, when Grayscale received approval to convert its trust into a formal ETF.

At the time of the conversion, ETHE held approximately $1 billion in assets, but a portion of these funds were transferred by Grayscale to another fund—Ethereum Mini ETF. Since then, ETHE has suffered nearly $3 billion in outflows.

It’s important to note that Grayscale’s Bitcoin ETF (GBTC) faced a similar situation. Since its conversion in January, GBTC has processed over $20 billion in outflows. However, the stellar performance of BlackRock and Fidelity’s spot Bitcoin ETFs has been enough to offset GBTC’s losses.

Lack of Staking Yield

One significant difference between Bitcoin and Ethereum is that investors can stake Ethereum, essentially locking it into the network to earn staking rewards paid in ETH.

However, in its current form, Ethereum ETFs do not allow investors to participate in staking. Holding Ethereum through an ETF means missing out on the staking yield (currently around 3.5%) while still paying management fees ranging from 0.15% to 2.5%.

While some traditional investors are willing to forgo staking rewards for the convenience and security of an ETF, crypto-native investors find it more logical to explore other ways to hold Ethereum.

Adam Morgan McCarthy, an analyst at crypto data firm Kaiko Research, explained, “If you’re a competent fund manager with a basic understanding of crypto markets and are managing someone’s capital, why would you buy an Ethereum ETF now?”

McCarthy continued, “You can pay for ETH exposure (with assets custodied at Coinbase) or buy the underlying asset and stake it with the same provider to earn a yield.”

Marketing Dilemma

Another hurdle facing Ethereum ETFs is that some investors might struggle to grasp Ethereum’s core use case, as it seeks to dominate several different sectors within the crypto space.

Bitcoin has a hard cap on supply: there will never be more than 21 million Bitcoin in existence. This makes it relatively easy for investors to view it as “digital gold” and a potential inflation hedge.

Explaining why a decentralized, open-source smart contract platform is important—and more importantly, why ETH’s value will continue to grow—is a different story.

ETF research analyst Eric Balchunas wrote in May, “One of the challenges Ethereum ETFs face in breaking into the 60/40 Boomer world is distilling its purpose/value into something easily understood.”

McCarthy agreed, stating, “The concept of ETH is more complex than other cryptocurrencies and doesn’t lend itself well to a one-liner explanation.”

As a result, crypto index fund provider Bitwise recently launched an educational ad campaign emphasizing Ethereum’s technical advantages, highlighting the need for such efforts.

Grayscale’s head of research, Zach Pandl, said, “As investors learn more about stablecoins, decentralized finance, tokenization, prediction markets, and the many other applications supported by Ethereum, they will enthusiastically embrace both the technology and U.S.-listed Ethereum ETPs.”

Poor Performance

In fact, ETH’s performance this year has been lackluster compared to BTC.

The second-largest cryptocurrency by market cap has only risen 4% since January 1, while BTC has soared 42% and continues to hover near its 2021 all-time high.

Brian Rudick, head of research at crypto trading firm GSR, said, “One factor behind Bitcoin ETF’s success is the risk appetite of investors and the fear of missing out. These ETFs are still primarily retail-driven, which is fueled by BTC’s 65% rally at the time of the ETF launch and a subsequent 33% surge.”

Rudick added, “Since the launch of Ethereum ETFs, ETH prices have dropped 30%, dampening retail enthusiasm to buy these funds. Ethereum is viewed as mediocre, with some considering it to be somewhere between Bitcoin (the best monetary asset) and Solana (the best high-performance smart contract blockchain).”

Valuation Concerns

Finally, traditional investors may simply not find ETH’s valuation attractive at current levels.

With a market cap of about $290 billion, ETH is already valued higher than any global bank, second only to JPMorgan Chase and Bank of America, with market caps of $608 billion and $311 billion, respectively.

While this may seem like an apples-to-oranges comparison, Quinn Thompson, founder of crypto hedge fund Lekker Capital, pointed out that even compared to tech stocks, ETH’s valuation is high.

Thompson wrote in September, “ETH’s valuation has become worse compared to other assets, as no valuation framework can justify its price. Either the price has to come down, or a new universally accepted asset valuation framework needs to emerge.”

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

Inflow Context

Firstly, it’s worth noting that spot Ethereum ETFs have not matched the success of Bitcoin ETFs. Bitcoin products have broken multiple records, arguably becoming some of the most successful ETFs ever.

For example, BlackRock and Fidelity’s Bitcoin ETFs, IBIT and FBTC, raised $4.2 billion and $3.5 billion, respectively, in their first 30 days, breaking the record set by another BlackRock fund—Climate Conscious—which raised $2.2 billion in its first month in August 2023.