Analysis of Ether Spot Exchange-Traded Funds Performance

Since their launch on July 23, 2023, ether spot exchange-traded funds (ETFs) have faced significant challenges in attracting investment, resulting in net outflows totaling approximately $500 million within the first five weeks. This contrasts starkly with the successful launch of spot bitcoin ETFs earlier in the year, which experienced net inflows exceeding $5 billion during the same period. The disparity in performance raises questions about the factors influencing investor behavior and market dynamics surrounding these two cryptocurrencies.

According to a research report by JPMorgan, several key factors contribute to the weaker demand for ether ETFs compared to their bitcoin counterparts. Firstly, bitcoin’s established position as the first cryptocurrency gives it a substantial “first mover advantage.” This advantage is compounded by bitcoin’s reputation as a digital store of value, which has garnered significant interest from both institutional and retail investors alike. In contrast, ether, while innovative and versatile due to its smart contract capabilities, lacks the same level of market awareness and established perception among investors.

Another critical element impacting the performance of ether ETFs is the absence of staking opportunities associated with ether. Staking has gained popularity among investors as a means to earn passive income, particularly in the context of decentralized finance (DeFi) platforms. However, the complexities and risks associated with staking ether in comparison to holding bitcoin have made it less appealing for institutional investors, who often prioritize security and predictability in their investment strategies.

Additionally, liquidity plays a pivotal role in the attractiveness of any asset to investors, particularly institutional players. The lower liquidity of ether compared to bitcoin limits the ability of large investors to enter and exit positions without significantly impacting the market price, thereby reducing the overall appeal of ether ETFs. This lack of liquidity can deter institutional investors who are often looking for assets that can handle large trades without substantial price fluctuations.

One unexpected development noted by JPMorgan was the outflow of $2.5 billion from Grayscale’s Ethereum Trust (ETHE), which was far greater than the bank’s initial forecast of $1 billion. This significant outflow occurred as Grayscale transitioned from a closed-end fund structure to that of a spot ETF. The shift aimed to enhance the attractiveness of the product, but the response from investors indicates ongoing concerns about ether’s market positioning and fundamentals.

In an attempt to address the challenges faced by ETHE, Grayscale has launched a mini ether exchange-traded fund. However, this new product has only managed to attract $200 million in inflows, highlighting the uphill battle that ether investments face in the current market climate. The relatively low interest in this mini ETF suggests that investors remain cautious and selective about their exposure to ether.

In light of the observed trends, JPMorgan’s research team, led by analyst Nikolaos Panigirtzoglou, noted a growing interest among asset managers to file for combined ETFs that offer exposure to both bitcoin and ether. This approach may help mitigate some of the risks associated with ether by pairing it with the more established bitcoin, potentially appealing to a broader range of investors.

Overall, the landscape for spot bitcoin and ether ETFs remains dynamic. Institutional and retail ownership of spot bitcoin ETFs has remained relatively stable since the first quarter of 2023, with retail investors holding approximately 80% of these assets. The data suggests that most of the new spot bitcoin ETFs have likely been purchased by retail investors, either directly or through investment advisors. The disparity in performance and investor interest between bitcoin and ether highlights the need for continued innovation and effective marketing strategies to foster growth in the ether ETF market.