Key Insights: 

• The SEC approved the 19b-4 filing on May 23 for Ethereum spot ETFs, and they are expected to start trading in July 2024 

• Like Bitcoin ETFs, the primary net new accessible market will be independent investment advisors associated with banks or brokers/dealers 

• Different research outfits are expecting Ethereum ETFs to attract 20-50% of the net inflow recorded by Bitcoin ETFs in the first six months 

• Ethereum ETFs could be more sensitive to price as a significant portion of Ether is locked in staking, bridges, and smart contracts, and thus less amount is available on centralised exchanges 

Introduction:  

The Grayscale Ethereum Investment Trust (ETHE) was launched in 2017. It was the first vehicle that allowed professional investors to gain exposure to the second largest crypto asset, Ethereum. Now, after six years, US investors will finally have a more efficient way to participate in Ethereum’s performance. 

The SEC was sceptical about approving Ethereum spot ETFs, as the regulator was reluctant to declare Ether a commodity. But as the deadline to approve or decline prospective issuers approached in May, all applications for the Ethereum spot ETFs were approved. The actual launch of these investment vehicles is still awaited and is expected to happen sometime in July 2024. 

Taking clues from the net inflow in Bitcoin spot ETFs since their approval in January, different entities are estimating anywhere between 20-50% net inflow in the Ethereum spot ETFs. In the first six months, Bitcoin spot ETFs have witnessed a net inflow of $15.27 billion, so Ethereum spot ETFs are expected to get approximately $3-7.5 billion in the first couple of months.  

Nine issuers have received approval on their 19b-4 filings: VanEck, 21Shares, Grayscale, Invesco Galaxy, Fidelity, iShares, Franklin, and Bitwise. All of them have already filed their updated S-1s with the SEC and are waiting for the final approval before these instruments start trading.  

Expected Inflows: 

Multiple market participants have come up with estimates on how much net inflows Ethereum spot ETFs will get once they start trading. Gemini says they expect to see up to $5 billion of net inflows in the first six months, and total assets under management could reach $13-15 billion, including the existing Grayscale trust. They also mentioned that Ethereum’s market value relative to Bitcoin is close to multiyear lows, and strong inflows could spark a catch-up trade. If the inflows are below $3 billion, it could be a disappointment and anything close to $7.5 billion would be a significant upside surprise.  

Galaxy Digital also mentioned a similar number, about $1 billion monthly in the first six months. Asset manager Bitwise predicted a figure of $15 billion in the first 18 months of the launch, based on the relative market capitalisation to Bitcoin, international ETP data and the role of the carry trade. 

Another crypto investment firm, MV Global, suggested that Ethereum ETFs could hit $10 billion in the first few months and suggested that Ether’s spot price be more responsive to ETF flows than it did for Bitcoin. JP Morgan Bank estimates modest net inflows at $1-3 billion for the rest of the year and adds that this number could reach $3-6 billion if staking is included. Grayscale Research mentioned that the launch of Ethereum spot ETFs will introduce more investors to the concept of smart contracts and decentralised applications, and they expect to see 25%-30% of the demand of the Bitcoin spot ETFs.  

Potential Price Impact: 

Bitcoin surged over 60% to $73,803 in March, two months after the first Bitcoin spot ETFs launched, from $45,947. In contrast, Ether peaked at $4,093 in the same period but remained below its all-time high. 

As the Ethereum ETF inflows are roughly equal to Bitcoin ETF flows relative to market capitalisation, the price impact is also considered the same. However, there are different supply and demand dynamics at play that could cause the Ether price to be more sensitive to ETF inflows. The supply of Ether is tight, with 30% staked to secure the network and generate yield and about 11% locked in smart contracts. So, given that the Ether available on the market/exchanges is low and has lower net emissions, the price impact could be greater as the market is more reflective of supply and liquidity. 

Steno Research predicts that Ether will hit $6,500 because of ETFs going live. Short-term predictions by Standard Chartered forecast that Ether could reach $8,000 by year-end, while VanEck raised its long-term 2030 price target to $22,000. However, some warn that the potential ETF impact might already be priced in, with Ether up over 29% this year despite staying below its peak. 

Overall, the launch of Ethereum spot ETFs will largely have a positive impact on the market adoption of Ethereum and other cryptocurrencies. Given formal recognition by regulators and trusted financial services brands, it will be more accessible across wealth segments. It will create a greater understanding of Ethereum for retail and institutional investors and help accelerate the technology's adoption.