Why Haven't the Ethereum Spot ETFs Experienced a Significant Price Surge after the Launch?

[TL；DR]:

The launch of Ethereum ETFs did not immediately trigger a positive market reaction but instead led to a significant sell-off in the market. This phenomenon is similar to the market reaction pattern when Bitcoin ETFs were launched in the past, indicating that there are complex expectations and reactions in the market towards the launch of such products.

The public’s awareness of Ethereum is much lower than that of Bitcoin. Due to the high management fees for grayscale ETHE and users’ inability to obtain profits through staking, the public’s willingness to configure Ethereum is relatively low.

In the long run, the launch of spot Ethereum ETFs is expected to further promote mainstream acceptance and adoption of Ethereum and the entire crypto market.

Introduction

The spot Ethereum ETFs were launched in late July, with initial trading volume indicating its success. However, amidst the market hype, it was the weak decline in ETH prices.

In this article, we will explore the reasons behind this anomalous phenomenon and investigate the future trend of ETH prices.

Spot ETF Listed, Ethereum Not Rising But Falling

Since listing the US spot Ethereum ETFs on July 23, product trading has been active, but the long-awaited rise has not occurred, and Ethereum’s performance has been weak and declining.

Source: Gate.io

According to the latest monitoring data, in addition to a net inflow of over $100 million on the first day of ETF listing, there has been a significant outflow trend in the following trading days.

Source: coinglass

Although Ethereum’s trend partially replicates Bitcoin’s volatility characteristics before and after ETF approval and listing, in terms of fund flow, Ethereum is not as widely accepted by the market as Bitcoin, and its price performance is relatively weak.

Meanwhile, some tokens in the Ethereum eco have not shown outstanding overall performance and even have lower returns than ETH itself. The latest report shows that no L2 token has outperformed ETH this year, with the best-performing GNO rising by 34% but still losing to ETH’s 44%. In the top-tier Altcoin L1, except for AVAX, other tokens have better returns than ETH.

Source: Thor

From this perspective, the view that ETH will trigger a diversion of funds to the eco token after its launch in spot ETFs seems untenable.

Limited Buying Power and Tight Market Liquidity Background

Due to the fact that the public’s awareness of Ethereum is much lower than that of Bitcoin, coupled with the high management fees for grayscale ETHE and the inability of users to obtain returns through staking, the public’s willingness to invest and allocate funds is relatively low.

ETH investment logic is complex, consensus is lower than BTC
As the gold of the digital world, Bitcoin has a clear scarcity, limited total quantity, and was issued earliest. This simple and easy to understand concept is deeply loved by the general public and perfectly fits their investment framework. In contrast, Ethereum, as a leading foundational public chain, has a complex mining mechanism that is influenced by multiple eco forces. Its supply as an investment product involves complex inflation and deflation mechanisms, making it difficult for ordinary investors to intuitively grasp.

Especially after Ethereum switched to PoS, the development of the eco on the chain has not been smooth, and there is occasional inflation in token output, resulting in investors lacking patience and faith in such high threshold products.

In fact, public data further confirms the significant difference in popularity between Ethereum ETFs and Bitcoin ETFs. According to Google search results, the popularity of Ethereum is only about one sixth of that of Bitcoin, and after the launch of the Ethereum ETFs, its popularity is even lower than that of Bitcoin.

Source: trends.google

Similar to the early conversion selling pressure of Bitcoin ETFs
Similar to the early days of Bitcoin ETF listing, the original holders of Grayscale Ethereum Trust (ETHE) were able to sell and monetize in large quantities in an environment of increased liquidity. At the same time, the management fee difference between ETHE and competitors was as high as 10 times, which also led to selling pressure in the early stages of transferring assets (moving) due to high fees.

As shown in the figure below, after the listing of the Bitcoin ETF on January 11 this year, Grayscale also experienced continuous selling pressure due to high management fees, resulting in a weak downward trend in Bitcoin prices during this period.

Source: Gate.io

Of course, in order to avoid the commercial pressure caused by the continuous outflow of Bitcoin funds in the past, Grayscale has simultaneously split 10% of its net assets to establish a low fee Ethereum mini ETF during the conversion to ETF. Grayscale will have two Ethereum ETFs under its umbrella, with 2.5% and 0.15% management fees, espectively. Moreover, due to the early convergence of ETH on the current price of ETH, the outflow pressure of arbitrage and unlocking orders is relatively small. However, early conversion and selling orders will still cause short-term pressure.

The lack of staking lowered investors’ demand for risk-free returns
Due to regulatory restrictions, Ethereum ETFs cannot obtain a basic staking yield of 3% -5% on the chain, which makes professional investors more inclined to hold Ethereum spot rather than purchase ETFs directly.

Of course, according to SEC commissioners, Ethereum ETFs staking “can always be reconsidered. This will naturally release some buyer demand, and we are optimistic about it.

When Will ETH Stop Falling and Turn Strong?

Based solely on the limited market response and crypto price performance, the previous views that spot ETFs will improve the poor performance and negative prospects of the Ethereum eco still need to be considered, which reflects investors’ hesitation and the market instability associated with these ETFs.

In sharp contrast, we have yet to see any discussion from the Ethereum Foundation about the impact of spot ETFs on Ethereum prices, and still focus on the underlying theoretical architecture.

Source: @VitalikButerin

On the other hand, Ethereum’s success lies not only in its technological leadership and network effects but also in its ability to continue attracting developers, maintaining eco vitality, and effectively managing market sentiment and narrative to maintain its long-term competitive advantage.

Ethereum has demonstrated significant advantages in terms of anti-manipulation, liquidity, and pricing transparency. It also meets the SEC’s approval standards, laying the foundation for more crypto assets (such as SOL) to enter the public eye through spot ETFs in the future.

Although the market performance of Ethereum ETFs is relatively flat compared to Bitcoin ETFs, their long-term impact on Ethereum prices may be reflected in improving price stability and reducing volatility, providing investors with more robust investment options.

In the long run, the launch of Ethereum ETFs marks a new stage of integration between the crypto eco and the mainstream world. Although this process is accompanied by cognitive adjustment and market fluctuations, these fluctuations create new opportunities for investors. It can be foreseen that as the early conversion selling pressure of ETFs gradually ends, ETH prices will also return to an upward trend.

Therefore, despite facing challenges, Ethereum still has a great opportunity to become the dominant crypto platform in the future due to its first-mover advantage, strong network effects, and clear long-term development goals. In the context of the increasing integration of the crypto world and the mainstream world, the development of Ethereum and its ETFs will continue to receive attention and may become a key factor driving the progress of the entire industry.