Ethereum and Bitcoin ETF Performance Trends

*** Activity Surges *** Appetite for bitcoin risk continues to be driven heavily by investor speculation regarding the approval of one or more spot bitcoin exchange-traded funds (ETFs) in the US. This week, CoinDesk reported that the US Securities and Exchange Commission (SEC) has opened a dialogue with investment firm Grayscale regarding the conversion of its Grayscale Bitcoin Trust (GBTC) to an ETF. The progress seems particularly encouraging after a number of ETF applicants amended their prospectuses with updated language in recent weeks, suggesting meaningful interactions between these teams and the SEC. Although this is commonplace for such applications in other asset classes, this is a first for crypto, according to Bloomberg Intelligence. With a US government shutdown still looming on November 17, we think the window is open for the SEC to be proactive ahead of that possible event risk. Consequently, CoinShares has reported six straight weeks of global crypto product inflows totaling a net US$767M as of November 6, contributing to positive YTD flows of $847M – mainly concentrated in bitcoin. Otherwise, ETH-linked investment products attracted $17.5M for the week though these are still net negative for the year. These inflows may continue following headlines indicating that BlackRock registered paperwork for an iShares Ethereum Trust, raising market expectations of an official filing with the SEC. Altcoin momentum appears to be healthy as well, as SOL, LINK and MATIC based vehicles also received fresh capital. Separately, following the drop in bitcoin ordinal activity last month, ordinal transaction counts have since returned to previous highs. This surge in activity corresponds with a spike in transaction fees by more than 500% since November 1 in a pattern similar to that seen during the initial surge of ordinal usage in May 2023. Ordinal trading volumes (averaging $10M daily) over the past week have been comparable to NFT trading volumes on Ethereum (averaging $16M daily). On that note, ether has reasserted its deflationary status alongside increased activity on the Ethereum network recently. Fee burn has been driven primarily by activity on Ethereum mainnet despite the fact that since November 1, the transaction count on layer-2s (including Arbitrum, Optimism, and Base) in aggregate have had 50% more transactions than the settlement layer (1.5M average daily transactions vs 1M average daily transactions). Indeed, the total execution transaction fees paid on these rollups were less than 5% of the fees paid on the mainnet (~1,200 ETH vs. ~25,500 ETH). See full report: https://lnkd.in/e3HMuJCK

With the launch of the spot Bitcoin ETF last Thursday, there was nearly $1.2B of inflows from institutions, easily the highest weekly volume this year and the second most all-time, trailing only the $1.5B seen after the launch of futures-based Bitcoin ETFs back in October 2021. To no surprise the majority of this activity was focused on Bitcoin ($1.14B) and was heavily concentrated within the United States ($1.24B). Yet Ethereum had a relatively modest level of activity during this time, with just $26M of volume. This may begin to shift, however, as users begin to position for the prospect of a spot Ethereum ETF as well as other events including the upcoming Dencun upgrade to Ethereum, the first major upgrade to the network since Shapella in April 2023. Solana also experienced low volumes ($0.5M), but is poised for increased demand too, as stronger protocols continue to build on the network and as we get closer to Firedancer mainnet, a high-performance validator client which will significantly improve the network's efficiency and transaction processing capabilities. h/t CoinShares

Last week, BlackRock filed an application for an ETH spot ETF. Let’s look at: - what a spot ETF means for Ethereum - how a spot ETH ETF is different from a spot Bitcoin ETF - what it means for us as financial advisors. I have long been saying that once a spot Bitcoin ETF is approved by the SEC, an ETH ETF approval won’t be far away. Now that BlackRock has filed for an ETH ETF, there will be a flurry of copy-paste applications from other financial institutions to the SEC for a spot ETH ETF. What does a spot ETH ETF mean for Ethereum? Firstly, an ETH spot ETF means institutional demand for Ethereum. Not only institutional demand, we will see money from IRAs, 401ks, and retirement plans flow into ETH. The approval of a spot ETH ETF could potentially translate to hundreds of millions, or even billions of dollars entering Ethereum. Much like Bitcoin, a spot ETF approval for ETH would also signal a positive stance by regulators and the US government towards Ethereum. What will this do to ETH price? Its particularly interesting to pay attention to the issuance policy of ETH, which is different compared to the issuance policy of Bitcoin. We know that: - Bitcoin has a fixed supply of 21 million. - More than 70% Bitcoin hasn’t moved in over a year. - In a few months, the Bitcoin supply will be cut in half. All these factors will greatly affect the price of Bitcoin when a spot ETF is approved. With ETH, you have no hard cap on the supply. More ETH is being created every 10-15 seconds, and provided to validators for maintaining the network. However, to equalize demand and supply, some ETH is also burned for every block created. Hence, at a given point in time, ETH can either be deflationary or inflationary. Due to this reason, we cannot make as direct a correlation between the price movement of ETH and the money that flows into ETH due to a spot ETH ETF. As financial advisors, we must understand the issuance policy of ETH, and what it means for a spot ETH ETF approval. We must also realize that the fundamental valuation and use case of ETH is different compared to Bitcoin. And the reasons as to why our clients would want to hold ETH would be different from why they want to hold Bitcoin. I will be diving deeper into Ethereum’s investment theses tomorrow, so that you can understand and then help explain your clients why Ethereum is a worthy investment.