(Bloomberg) -- US regulators have approved the first US exchange-traded funds investing directly in Ether, the world’s second-largest cryptocurrency — a step that seemed like a virtual impossibility at the start of 2024.
Eight issuers including BlackRock Inc., Invesco Ltd. and Fidelity Investments were among those that received the green light from the US Securities and Exchange Commission in July. Many of them were players during the debut of spot Bitcoin ETFs in January.
While crypto faithfuls celebrated the milestone, many did not expect to see blockbuster flows similar to that cohort of Bitcoin funds. Citigroup strategists had estimated that the Ether funds as a group could see inflows between $4.7 billion to $5.4 billion in the six months after they debut.
In the first three weeks of trading, the nine Ether ETFs now available have recorded $405 million in net outflows — thanks largely to the Grayscale Ethereum Trust, which was converted into an ETF from an existing fund that investors have been steadily cashing out of. BlackRock’s Ethereum product has seen the largest net inflows of the group at $900 million so far, but that still pales in contrast to its Bitcoin ETF, which crossed the $1 billion threshold less than a week into trading.
What is Ether?
Ether is the native token of Ethereum, the most commercially used blockchain. Blockchains are decentralized electronic ledgers that record transactions and provide proof of ownership using tokens, often touted as the crypto world’s main innovation.
Investors can earn passive income by temporarily making their tokens available to the Ethereum network to use in helping validate transactions, a process called staking. For technical reasons, taking that payout can be much simpler when staking through an ETF than directly.
What led to the approval?
The approval of spot Ether ETFs highlights a softening in the US regulatory climate for the digital-asset sector. A watershed legal victory for the industry in 2023 helped pave the way for the products.
The decision also offers more clarity on the status of Ether in the eyes of the SEC. Until now, the agency had often moved to block crypto’s expansion on the ground that many offerings constituted a security, meaning they should be regulated the way stocks and bonds and many other tradable assets are.
While SEC Chair Gary Gensler has argued that many digital assets are unregistered securities, he’s refused to say if Ether is part of that group. Bitcoin, the world’s largest digital asset, is the only cryptocurrency that Gensler has definitively said isn’t a security in his view. He regards it as a commodity.
The difference between Bitcoin and Ether in the eyes of the SEC lay in Ethereum’s staking mechanism. Putting money into a common pool and earning a return strikes many regulators as meeting the definition of a security. That meant that the applications for spot Ether ETFs that proposed to allow staking were seen as unlikely to be approved.
Issuers subsequently vowed to keep the Ether they buy for the ETFs out of staking programs, adding that they wouldn’t invest in Ether-related derivatives either. The SEC has not said what led to its approval, but these kinds of concessions likely played a role.
What happened when spot Ether ETFs were approved?
When the spot Bitcoin ETFs first launched, it was considered a huge success based on key trading measures such as flows and trading volume. The cryptocurrency’s price surged to a record level, and Bitcoin ETFs issued by BlackRock and Fidelity became the only two funds across the ETF universe to attract more than $3 billion in their first 20 days of trading, according to Bloomberg Intelligence.
Conversely, the launch of spot Ether ETFs were a decidedly quiet affair. As of mid-August, BlackRock remains the standout performer, with Fidelity in a distant second at $342 million in net inflows since launch. Investment began to pick up, with the group of nine funds recording their first week of net positive inflows at market close on August 9.
What are we expecting?
BlackRock and Fidelity were likely to attract the most volume and assets overall, wrote Bloomberg Intelligence strategists James Seyffart and Eric Balchunas in July. They expected the Ether ETF flows over the next year to be around 20% of the Bitcoin ETF flows, which would correlate to earlier expectations of $5 billion to $6 billion of Ether ETF inflows.
Similar products have done better outside the US in places including Hong Kong, Canada, Sweden and Switzerland, where spot Ether and Bitcoin ETFs recently launched. A key reason for the difference could be that other jurisdictions have ETFs that permit staking. Some regions, like the European Union, have offered exchange-traded products tied to cryptocurrencies for many years.
Why do spot Ether ETFs matter?
ETFs have become an enormously popular way for Americans to invest their money in equities, bonds, commodities, currencies and real estate, because they make doing so easy. That’s true in the context of crypto, as well: Instead of having to go through the technical machinations of buying crypto coins directly on crypto exchanges or from other traders, investors buy shares of the associated ETF on a public exchange to receive the same exposure.
The arrival of spot Bitcoin ETFs in January was considered a breakthrough because they held actual Bitcoin, in contrast with previously available products that invested in Bitcoin futures — derivative contracts to buy or sell an asset at a specified price at a later date. The same is presumably true for spot Ether ETFs, and there’s every reason to believe they’re popular among retail investors.
Who’s buying these ETFs?
The data’s yet to arrive for the Ether crowd, but we can see who’s been interested in Bitcoin ETFs so far. While retail investors make up most of the buyers, the most recent 13F reports filed with the SEC in May revealed that hedge funds, pension funds and banks have sprinkled capital into spot Bitcoin ETFs.
Among the most well-known buyers are hedge funds like Millennium Management, which held around $2 billion worth of shares in at least four Bitcoin ETFs, as well as Steven Cohen’s Point72 Asset Management and Elliott Investment Management.
--With assistance from Emily Graffeo, Vildana Hajric and Emily Nicolle.
©2024 Bloomberg L.P.