The implications of the Ethereum ETF and beyond

Disclosure: The views and opinions expressed herein belong solely to the author and do not necessarily represent the views and opinions of crypto.news editorial.

After launching our own Ethereum exchange-traded funds in Hong Kong, we experienced firsthand the unlock that comes with greater visibility among investors. We saw an immediate shift in the enthusiasm, tone and mood of our conversations with both institutional and retail investors who saw this moment as a shift in legitimacy for the asset class.

So when Ethereum (ETH) ETFs began trading on one of the world’s largest markets this week, we see it as another milestone on the path to the full integration of digital assets into traditional finance. This move paves the way for a wider variety of financial products, including cryptocurrency basket ETFs, staking option ETFs, tokenized securities, and other financial innovations.

So what will be the real impact of expanding access to ETH as an investment class? Will we see ATHs in the coming months? How can we overcome the complexity of Ethereum as an infrastructure compared to Bitcoin’s reputation as digital gold? Let’s examine these questions and how they could lead to a more gradual adoption curve among investors.

BTC effect

When spot Bitcoin (BTC) ETFs launched, they saw over $25 billion in trades in the first month. Given that Ethereum’s average 24-hour trading volume is currently at a 70% discount to Bitcoin, it is unlikely that Ethereum ETFs will reach this volume initially. We expect spot Ethereum ETFs to see $15 billion to $20 billion in trades in the first month.

Of course, it is possible that the inflows were larger than we expected. This could indicate a bullish reversal that could increase momentum and provide positive psychological support for Ethereum as an accepted asset class for all types of investors.

But many investors will compare ETH directly to BTC, and that’s a big messaging challenge. If BTC is digital gold, then what is ETH? How do investors fit it into their diversified portfolios? The success of an ETH ETF depends on its marketing, which should focus on ETH as a utility layer for the crypto industry.

Potential for price recovery

We forecast a price between $6,000 and $10,000 for Ethereum by the end of this year, representing 1.6 to 2.5 times its 52-week high. Our relatively bullish outlook on Ethereum is driven by increasing demand from ETF introductions, increasing interest in Ethereum-related calls, and increasing adoption of ERC-20 tokens and the broader Ethereum ecosystem.

While initial ETF launches could push Ethereum higher, there could be short-term outflows similar to what was observed with Bitcoin ETFs from Grayscale’s Ethereum Trust. Investors could shift funds to lower-fee options, temporarily affecting market sentiment.

The launch of an Ethereum ETF could trigger a modest price rally for ETH driven by increased demand. This increase could positively impact other cryptocurrencies via a spillover effect. However, the macroeconomic environment will significantly impact the long-term trajectory of digital assets. If the bearish tailwinds subside and optimism increases with the arrival of new funds, Ethereum could see larger price swings.

The sustainability of these gains will depend on external factors such as stock prices, interest rates, emerging sectors, and institutional adoption rates. It is also an election year in the US, which adds some uncertainty to the medium-term appetite for risky assets like crypto.

Staking rewards: Retail and institutional

One potential limitation of Ethereum ETFs is the lack of staking rewards, which is a significant incentive for holding Ethereum directly. Staking allows investors to earn rewards, making it attractive to those comfortable with self-storage. This could limit the appeal for crypto natives who may not consider adding ETH to their brokerage accounts.

Unlike retail investors, ETFs provide a regulated and convenient way for institutional investors to gain exposure to Ethereum without having to deal with direct ownership. The strong institutional interest in ETH suggests that ETFs are increasingly being accepted as exposure vehicles, even without the returns of staking. There are ongoing efforts with regulators to potentially offer an ETH ETF with staking in the future, which could increase market competition.

Still, staking isn’t a deal-breaker. And income isn’t the main reason many investors are looking to add ETH ETFs to their portfolios. Instead, they’re looking for price appreciation and exposure to the digital asset vertical.

Institutional adoption

Institutional interest in Ethereum may differ from Bitcoin ETFs due to Ethereum’s potential as an infrastructure layer for decentralized applications across a variety of sectors, including finance, supply chain, and technology. These sectors present significant opportunities, making Ethereum attractive beyond being a mere store of value like Bitcoin. And as regulatory frameworks evolve and provide greater clarity and certainty, institutions may see Ethereum as a valuable addition to their portfolio diversification.

Staking is a major attraction for institutional investors considering Ethereum ETFs. Institutional staking within crypto ETFs is a sophisticated tool for generating returns by leveraging the intrinsic value of staked assets.

This can potentially outperform traditional fixed-income instruments by providing consistent returns that buffer against market volatility. Incorporating staking into crypto ETFs allows institutions to maximize asset utilization, capture price appreciation, and generate additional returns through staking rewards. This dual-purpose approach can optimize overall investment strategies and stabilize fund performance in bearish markets.

Additionally, institutional participation in staking can improve governance within the ecosystem, encourage more robust regulatory guidelines from relevant authorities, and create a safer, more transparent environment that everyone can benefit from. This is most evident when it comes to liquidity, as institutions tend to provide more reliable support over time as they become more comfortable with an asset class that is prone to volatility and instability.

An upward catalyst

The approval of Ethereum ETFs promises to be a catalyst for market growth by attracting significant capital inflows from investors who prefer the regulated environment of traditional financial markets. As each new jurisdiction approves crypto-related financial products, it expands the market by attracting new investors who were previously wary of regulatory uncertainty.

More importantly, this visibility will give Ethereum legitimacy in the public eye and benefit the broader digital asset ecosystem. We will see more people consider investing not only in other digital assets, but also in companies that are innovating within the broader blockchain ecosystem.

We see the potential for a rotation into utilities as investors look to projects that address real-world solutions and have the potential to disrupt industries on a global scale. We could also see a surge in defi as investors become more comfortable with digital assets and financial products that bridge the gap between traditional and decentralized finance become more attractive.

While its initial trading volumes may not match those of Bitcoin ETFs, its long-term impact on Ethereum and the broader crypto ecosystem will be significant, paving the way for greater awareness and innovation that enables the future of finance.

Vivien Wong

Vivien Wong leads the licensed asset management business at HashKey Capital, a global leader in digital assets and blockchain technologies. Vivien was instrumental in launching crypto spot ETFs in Hong Kong. Prior to HashKey Capital, she served as Managing Director of Huobi Asset Management in Asia. Vivien also held positions at Fosun Group and Deutsche Bank, where she focused on investment and research in new economy sectors such as artificial intelligence, cloud computing and healthcare. Vivien began her career at Barclays Global Investors. She holds an MBA from Warwick Business School and a BA from the University of Hong Kong.