“Investors Divided on Ether ETFs: Is It Like a Bond with No Yield?” By Reuters

By Gertrude Chavez-Dreyfuss

Investors may find it takes longer for ether to emerge from bitcoin’s shadow as they approach the U.S. launch of exchange-traded funds (ETFs) linked to ether’s spot price this Tuesday. This launch reflects a more cautious and divided sentiment compared to the excitement surrounding the introduction of bitcoin ETFs earlier this year.

Nathan Gauvin, CEO of Gray Digital and the $2 billion hedge fund Blackridge Investment Management, remarked, “It will be less of an event than people are making it seem to be.”

The rise of ETFs from nine asset managers, including major firms like BlackRock, VanEck, and Franklin Templeton, follows the introduction of bitcoin ETFs six months prior. Predictions suggest that ether ETFs could capture approximately 25% of the flows seen in bitcoin ETFs, although Steven McClurg from CoinShares believes that figure may be closer to just 10%.

A significant concern for some investors lies in the SEC’s decision to exclude the “staking” mechanism, which is essential for releasing ether, the second-largest cryptocurrency. Staking permits Ethereum users to earn rewards by locking up their ether, securing the network in the process, and yielding freshly minted ether and portions of transaction fees. As of July 22, the annual percentage yield on staking Ethereum was around 3.12%, attracting those drawn to enhanced returns.

However, under the current structure, the SEC has permitted ETFs to hold only regular, unstaked ether. McClurg noted that an institutional investor aware of the staking yields may liken it to a bond manager who opts to buy a bond but refuses the coupon, which contradicts the fundamental purpose of purchasing bonds.

The SEC views staking for tokens as an investment contract, necessitating specific disclosures and protections under U.S. securities laws. This has led McClurg to believe investors will likely continue to stake ether outside of the ETF framework to earn yields instead of paying fees to hold it within an ETF. CoinShares, managing over $6 billion in assets, actively decided not to participate in this ETF launch due to the lack of staking integration.

Gauvin expressed optimism that staking might eventually be included in ETF structures by next year, describing the current situation as a midpoint in the evolution. Even though Gray Digital is also not partaking in this launch, they will monitor it closely.

Chanchal Samadder, head of product at ETC Group, shared similar sentiments, stating that holding an ETF sans staking yields could feel akin to owning a stock without the right to dividends. ETC Group, Germany’s first issuer of crypto exchange-traded products, has seen demand for staked ether ETPs surpass that for unstaked versions, with the staked product raising $51 million and the unstaked facing $95 million in outflows this year.

While noting that staking offers higher returns, Samadder cautioned about liquidity risks. Ether stakers must often wait in a queue to withdraw their staked ether, with processing times reaching eight to nine days. Conversely, unstaked ether remains immediately accessible.

Nana Murugesan, president of Matter Labs—focused on scaling Ethereum—views the ether ETF launch as a pivotal moment in the crypto landscape, emphasizing the importance of investor access to the underlying blockchain and its numerous applications. He believes as Ethereum gains traction, so too will the value of the ETF.

Ultimately, investors are not expecting ether flows to rival the significant interest seen with bitcoin ETFs in their initial trading week, given ether’s smaller market capitalization of $424 billion compared to bitcoin’s $1.4 trillion. Reports indicate that ETFs gathered nearly $7 billion in assets within their first three weeks of trading, totaling $33.1 billion in net inflows by the end of June.