Comparison of Bitcoin and Ethereum Spot ETFs

The recent approval of the Bitcoin spot ETF has significantly opened the doors for many new investors to enter the cryptocurrency market, allowing them to allocate Bitcoin within their portfoliosIn contrast, the impact of the Ethereum spot ETF approval has appeared to be less pronouncedWhile the approval of the Bitcoin ETF has led to an impressive return of 2.6 times since its initial application, Ethereum has lagged with a return of only 2.1 timesBoth cryptocurrencies, however, saw a remarkable fourfold increase from their cycle lows.

On June 19, 2023, I expressed high optimism regarding the approval of BlackRock's Bitcoin spot ETF, predicting a staggering 99.8% chance of approvalThis potential announcement was exciting as it could unlock hundreds of billions in fundingHowever, Bitcoin's price only surged by 6%, falling short of expectationsOverall, the Bitcoin spot ETF has accumulated an impressive $50 billion in assets under management

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Nonetheless, when we look closer and exclude the pre-existing GBTC asset management size and consider the aspects of substitutive trading—essentially selling futures and buying the ETF—the net inflow since its launch amounts to $14.5 billionHowever, a closer examination reveals that not all of this represents genuine inflow, as delta-neutral flows and basis trading (selling futures to acquire the ETF) must also be factored in.

Based on an analysis of CME data and a detailed examination of ETF holdings, I estimate about $4.5 billion in net flows could be attributed to basis tradingLarge holders like BlockOne have also transitioned a significant volume of spot Bitcoin into the ETF structure, estimated at around $5 billionAfter accounting for these transactions, the intrinsic net purchasing volume for the Bitcoin spot ETF stands at a modest $5 billion.

This analytical framework can help us infer potential flow dynamics for Ethereum

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Bloomberg's ETF analyst, Eric Balchunas, estimates that Ethereum inflows might only represent about 10% of Bitcoin’s figuresThis suggests that over six months, the actual net buying flows could be around $500 million, with reported net flows reaching approximately $1.5 billionAlthough predictive accuracy remains uncertain, this sentiment echoes that of many traditional financial institutions.

From my point of view, I believe Ethereum's inflow potential could be closer to 15% of Bitcoin'sUsing the previously mentioned net purchasing volume of Bitcoin ($5 billion), and adjusting for Ethereum's market cap (33% of Bitcoin’s) while incorporating a 0.5 access factor, this leads us to a real net purchasing volume of about $840 million, with reported net purchasing volume projected at $2.52 billionReasonable assumptions suggest that ETHE (Grayscale's Ethereum futures ETF) may have a smaller premium compared to GBTC, leading to a more optimistic scenario with a genuine net purchasing volume of $1.5 billion and $4.5 billion in reported net purchasing volume—equating to roughly 30% of Bitcoin's flow.

The access factor plays a vital role and reflects how liquidity varies between these assets

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Bitcoin tends to attract institutional investors facing entry barriers—pension funds, macro funds, and sovereign wealth funds due to its more established standing as a macro assetOn the other hand, Ethereum often represents a more technical asset, appealing to venture capitalists, cryptocurrency funds, tech experts, and retail investors with fewer restrictions in the crypto realmThe access factor of 50% derives from comparing the CME Open Interest (OI) ratios against their respective market caps.

Looking at CME data, Ethereum's OI is noticeably lower than Bitcoin's before the launch of its spot ETFAround 0.3% of Ethereum’s supply correlates to OI, whereas Bitcoin stands at about 0.6%. Initially, I viewed this as a sign of early adopter interest; however, it might also conceal a lack of interest from traditional finance in the Ethereum ETFWall Street traders—those with the most pertinent information—prefer trading Bitcoin ETFs over Ethereum, suggesting there might be sufficient reasoning behind the contrasting strategies given existing liquidity information.

How did $5 billion push Bitcoin from $40,000 to $65,000? The most straightforward and direct answer is that a mere $5 billion alone would not suffice, as various other buyers exist within the spot market

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Bitcoin is an asset universally recognized as a critical addition to investment portfolios and has notable long-term holdings from institutions like MicroStrategy, Tether, family offices, and high-net-worth individual investorsWhile Ethereum enjoys significant institutional ownership, I contend that the magnitude is proportionally less compared to Bitcoin.

It is essential to remember that prior to the Bitcoin ETF, Bitcoin had already peaked at approximately $69,000, boasting a market cap exceeding $1.2 trillionMany market participants and institutions hold substantial amounts of cryptoCoinbase famously retains $193 billion in assets, $100 billion of which is from other institutionsBitgo reported $60 billion in AUC in 2021, and Binance manages over $100 billionJust a mere six months later, the Bitcoin spot ETF managed about 4% of the total supply.

Having articulated my views on the scale of the crypto market on February 12, I estimated that the long-term demand for Bitcoin could surpass $40 billion to $130 billion this year alone

One of the prevalent pitfalls faced by cryptocurrency investors is the underestimation of the wealth present in the world, individual incomes, and liquidity's far-reaching implications on the crypto landscapeOften, we encounter figures related to gold, equity, and real estate valuations, which may easily overshadow the growing dimensions of cryptocurrencies in people's portfolios.

Allow me to illustrate through a rough demand sizing exerciseThe average household income in the United States stands at approximately $105,000. With about 124 million households in America, the total annual income aggregates to about $13 trillionThe United States accounts for 25% of global GDP, suggesting that the worldwide income sum approximates $52 trillionWith an estimated 10% ownership of cryptocurrencies globally, in the United States, this share likely reaches 15%, while in the UAE, it can soar to between 25-30%. Assuming these crypto owners only allocate 1% of their income annually to crypto investments, that translates into $520 billion purchasing Bitcoin per year, which breaks down to $1.5 billion daily.

During the Bitcoin spot ETF launch, major players like MicroStrategy and Tether acquired billions in Bitcoin alongside the influx of investors at a low entry cost

At the time, many posited that the approval of the Bitcoin spot ETF signaled an opportunity for profit-takingThus, billions involving short-term, mid-term, and long-term positions had to be repurchasedImportantly, as soon as a noticeable upward momentum forms in Bitcoin spot ETF flows, short-sellers will be compelled to cover their positionsQuite astonishingly, the open contracts had diminished before the launch of the Bitcoin spot ETF.

The positioning for an Ethereum spot ETF differs substantiallyCurrently, Ethereum’s price is approximately four times the lows observed before the ETF launch, while Bitcoin stands at 2.75 timesThe increase of open interest in crypto-native exchanges has surged by $2.1 billion, merely striding towards historical peaks in open interestThe market demonstrates remarkable efficiencyMany involved in crypto have witnessed the success of the Bitcoin spot ETF, harboring high expectations for the same success to transfer over to Ethereum, leading to tactical positioning.

However, I personally contend that the expectations regarding Ethereum from crypto natives may indeed be exaggerated, potentially misaligned with the genuine preferences in traditional financial markets

This perception may give rise to relatively inflated psychological shares and purchasing volumes for Ethereum among those entrenched in cryptoIn reality, for numerous large capital groups not steeped in crypto, the allocation towards Ethereum as a critical portfolio component is considerably minimal.

A common narrative from traditional finance frames Ethereum as a “technology asset,” prioritizing elements like global computing, Web3 application hosting, and decentralized finance settlement layersWhile the narrative captures attention, I have found it challenging to reconcile with realistic yieldsIn previous cycles, one could highlight rising fee growth and argue for DeFi and NFTs to elicit greater fees and cash flow, justifying Ethereum as a technology investment akin to tech stocksHowever, under the current cycle, quantifiable metrics indicate poor growth, often reflecting flat or negative trajectories

Ethereum resembles a withdrawal mechanism displaying an annualized rate, yielding just $1.5 billion from 30 days of income, with an astronomical P/E ratio of 300, further questioning how analysts can validate this valuation to their family offices or macro fund leaders.

Moreover, I anticipate a generally lower influx of so-called "fugazi" flow—transactions that may appear substantial yet do not derive from true capital inflow—for a couple of reasonsFirst, the approval of the Ethereum spot ETF took many by surprise, leaving issuers with limited time to persuade large holders to exchange their Ethereum assets for the spot ETFSecond, the attractiveness of holder conversion remains minimal as individuals would forfeit staking or the yield derived from decentralized finance (DeFi) participationHowever, it’s noteworthy that the current Ethereum staking rate only stands at 25%.

Does this imply that Ethereum will plummet to zero? Certainly not; at any given point, a price threshold could emerge where Ethereum may be deemed reasonably valued

While Bitcoin is projected to surge in the future, the same fate isn’t guaranteed for EthereumPrior to the ETF's launch, I anticipated Ethereum's pricing would oscillate between $3,000 to $3,800. Post-launch, my expectations adjusted to the range of $2,400 to $3,000. However, a surge in Bitcoin to $100,000 by Q4 2024 or Q1 2025 could potentially elevate Ethereum past its all-time highsNevertheless, it is plausible that Ethereum could experience declines relative to Bitcoin following its peakLong-term developments are promising; one must maintain faith that BlackRock and Fink are actively working on constructing essential financial infrastructure on the blockchain while tokenizing more assetsThe value and specific timeline regarding how this may benefit Ethereum remains uncertain.

Looking ahead, I foresee the Ethereum to Bitcoin ratio continuing a downward trend, with projections of the annual ratio ranging between 0.035 to 0.06. Although our sample size is limited, it is evident that the Ethereum to Bitcoin ratio achieves progressively lower peaks with each cycle, which should come as no surprise.