Six months after the overwhelming launch of spot bitcoin ETFs, similar products for Ethereum (ETH) have received the green light from the SEC. However, like the bitcoin products, outflows from the grayscale trusts are weighing heavily on the cryptocurrency's price.
Since November 2023, BlackRock, Fidelity and other fund providers have been in a race to offer the first spot-based Ethereum ETF. In May, the SEC initiated the first steps for their approval, and two months later, the products were launched. But without any positive surprises. The billion-dollar outflows from the Grayscale Trust had a major impact on the launch - since their debut two weeks ago, the Ethereum ETFs have seen net outflows of nearly $500 million.
History of the Grayscale Trust
The trusts, managed by crypto asset manager Grayscale, are investment vehicles that have allowed investors to easily invest in crypto without self-custody since 2013. This was very early for the crypto space, as the SEC did not approve the first tradable futures bitcoin ETF until 2021. As a result, Grayscale has accumulated over $30 billion in assets through its trusts. However, as trusts, Grayscale's products are closed-end investment vehicles. Shares cannot be freely created or redeemed by purchasers. Only accredited investors have access to the primary market, which includes a six-month lock-up period before shares can be released to the secondary market. In the past, this has led to significant price deviations of the trusts compared to the spot prices of the respective cryptocurrencies.
Various players tried to take advantage of this quasi-arbitrage trade. However, what started as a high double-digit premium before 2020 turned into a deep discount to the spot price over the years. The flagship product, GBTC, as well as ETHE, turned into ticking time bombs. Several players who financed the trade with leverage collapsed. The first to fall was crypto hedge fund Three Arrows Capital, followed by Celsius, BlockFi, Silvergate and indirectly FTX. The "widowmaker" caused billions in financial losses.
Two billion USD in outflows
The only salvation for trust holders remained the prospect of the approval of a spot ETF. This would turn the closed-end funds into freely tradable ETFs. Traders with remaining capital bought in at a discount of nearly 50%. As the Grayscale ETFs are by far the most expensive with an annual management fee of 1.5%, many holders are exiting. To date, over $2 billion has flowed out of the Grayscale Ethereum Trust. These redemptions are undoubtedly impacting the price of Ethereum, although some of the outflows will likely end up in cheaper ETFs.
| Date | ETHA | FETH | CETH | ETHE | ETH | Others | Total (USDm) |
|---|---|---|---|---|---|---|---|
Breakdown of US Spot Ethereum ETF flows (USDm) / Source: CVJ.CH Ethereum ETF Overview
About 20% of the grayscale trust has been liquidated so far. Redemptions have been much faster than the bitcoin ETFs in January. The massive outflows are expected to stop next week. If history repeats itself, then we should see strong inflows into the products.
Have a look at the two ETF launches side by side
BTC ETF (0 on x-axis = Jan 10th):
-bottomed on Day 12 (Trading Day 7)
-bottom occurred at ~21.5% off local peak
-bottom occurred at cumulative Grayscale outflows of ~13.2%
-proceeded to rip ~92% in 50 daysETH ETF (0 on x-axis =… pic.twitter.com/jsmcYu0UD0
— Evanss6 (@Evan_ss6) July 29, 2024
