Original title: "Our Thoughts on the ETH ETF"

Original author: Kairos Research

Original translation: Ladyfinger, BlockBeats

Editor's note:

This article deeply analyzes the potential market impact of the ETH ETF, explores Grayscale's concerns about premium burden, listing conditions that are different from BTC ETFs, US market demand agents, and long-term impacts on the DeFi ecosystem, while emphasizing the interaction between price, usage, and narrative.

Introduction

Our views on the expectations of the ETH ETF are briefly summarized as follows:

Based on most measurable data points, the BTC ETF has been a huge success. To date, we have seen approximately $15 billion in net inflows across approximately 260,000 BTC. The volume of these ETFs has also been phenomenal, with 11 ETF products seeing cumulative volume of $300 billion since they began trading in early January. Now, the second largest crypto asset is having its moment in the spotlight. We don’t predict flows, but here’s our take on how they will impact the ecosystem more broadly.

In this post, we will cover:

· Grayscale’s Concerns About Premium Burden

· Different Listing Conditions Than BTC

· Demand Proxies

· Impact on DeFi

Grayscale’s Concerns About Premium Burden

This has been covered by others before, and for good reason. We believe there are several reasons that would make one a seller when an ETH ETF is listed. When looking at the discount to Net Asset Value (NAV) of ETHE until its final approval and conversion, ETHE traded as low as -56%. Additionally, if a similar pattern continues from ETHE to GBTC, we will likely see management fees translate into higher expense ratios than the closest competitors. Currently, ETHE has a 2.5% management fee, while Van Eck and Franklin Templeton have fees around 20 basis points. We expect other issuers to have fees around these levels as well. If sellers are purely motivated by achieving lower management fees, it will likely only be offset by net inflows into different products. To summarize, the two main types of sellers we expect are:

· Selling due to high fees relative to other issuers

· Selling to realize profits from purchasing products at a discount

Despite the heavy selling from Grayscale, we still see net inflows into ETFs overall, both in USD and BTC.

Different listing conditions than BTC

The Bitcoin ETF was perhaps the most anticipated ETF listing of all time, perhaps ever. But despite the gossip and discussion from Bloomberg analysts, the bottom line is Grayscale’s major breakout with the SEC, announced on August 29th, followed by a 30% rally in GBTC and the beginning of a slow return to its true net asset value. Despite the fake news released by Cointelegraph interns, the SEC’s Twitter account being hacked, etc., the ETF was finally approved on January 10. All this means: all potential stakeholders had plenty of time to prepare for this event.

However, when we look at the preparations for the Ethereum ETF, we find that the situation is almost the opposite. There was almost no market discussion until March 20, and on that day, Bloomberg analysts increased their odds from 25% to 75%. On the same day, the news that the SEC required exchanges to prepare for the spot Ethereum ETF was confirmed. Subsequently, the ETHE price soared, and three days later, the listing was officially approved. Since then, ETHE has returned to a level close to its net asset value.

So, what’s the big deal here? Obviously, many people were caught off guard by this. From the perspective of ETF issuers, they did not have enough time to educate their customers about Bitcoin. However, this may vary from case to case, but it is clear that the Bitcoin ETF has received a lot of media attention. In the end, for some capital allocators, launching such a high-profile product at the beginning of the year as a kickoff to their annual performance is obviously a smart strategy. This may mean that inflows are slower than Bitcoin because more education time is needed, or vice versa; people may rush in madly because of the huge success of the Bitcoin ETF. In either case, I think investors will find Ethereum to be a more attractive digital asset.

Demand Proxy

There are some who claim that there is little to no interest in an ETH ETF. While there is little data to support this claim, there is a lot of data to suggest that the West, and specifically Americans, have shown a huge appetite for ETH to date. For example, while Binance is the largest centralized exchange by user base and trading volume, Coinbase owns more than 1.4 million ETH (over $4.75 billion). To further illustrate this point, Kraken, Robinhood, and Gemini (all US exchanges) own more ETH than OKX, UpBit, Bybit, BitThumb, and Crypto.com combined, with a surplus of 1.2 million ETH. According to ethernodes.org, 34% of Ethereum nodes are run in the United States. What we are really saying is that Americans love ETH, they have for some time, and we expect this trend to continue and strengthen with the launch of a spot ETH ETF.

Impact on DeFi

You can have your own opinion about what the flow of funds will look like in the short term, but in the medium to long term, we believe that the flow of funds will have a significant impact on the entire Ethereum supply. In @rewkang's article, he points out that Ethereum does not have "structural buyers" like Bitcoin (Saylor, Tether, whales), however, Ethereum does have important structural supply differences.

For example, when looking at the supply of ETH, it shows that the percentage of total supply held on exchanges continues to decline, even lower than Bitcoin. Even more interesting is that the downward trend in supply on exchanges almost perfectly aligns with the launch of Uniswap v2 in May 2020.

This trend seems to hold despite Ethereum's wild price swings

Additionally, staking alone accounts for 27.57% of the entire ETH supply, more than any single entity in BTC in terms of percentage. Add to that all the ETH locked in the canonical L2 bridge, and the ETH in the wrapped ETH contract, and you have over 32.33% of the entire ETH supply. This is all part of a larger trend.

DeFi has only been around for 5 years, and as liquid staking tokens and liquid re-staking tokens become the preferred tokens for DeFi users, this will take more ETH off exchanges and lock it in staking contracts, further decentralizing ETH's spot liquidity. Play for another ten or twenty years and ask yourself what will eventually happen. In addition, the more ETH is liquid staked or liquid re-staking, the more reflective the on-chain economy will be.

Overall, we don't think we have an advantage in predicting the dollar amount of funds flowing, but we think the reasons above can give us a rough idea of the impact of ETH spot ETFs on the general supply pool of ETH assets, as well as the impact on attracting more investor interest in tokens and on-chain economies. Finally, remember that price drives usage, usage drives narrative, and then narrative drives price. We continue to closely monitor the broad impact of these structured products on ETH.

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