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At this rate, Grayscale's ETHE could run out of ether within weeks

The BlockThe Block2024/07/26 12:10
By:The Block

Quick Take Grayscale’s converted ETHE spot Ethereum ETF has experienced substantial net outflows in the first few days of trading — totaling $1.2 billion. ETHE’s outflows have overwhelmed net inflows into the other spot Ethereum ETFs, but its assets under management could be depleted in a matter of weeks at this rate. Until ETHE’s net outflows subside, it is likely to continue exerting selling pressure on the price of ether, analysts said.

The U.S. spot Ethereum ETH +2.13% exchange-traded funds have gotten off to a contrasting start this week, with net inflows into some ETFs currently overwhelmed by net outflows from Grayscale’s converted fund, ETHE.

Nine new spot Ethereum ETFs from eight issuers launched on Tuesday after initially gaining approval from the Securities and Exchange Commission in May. In the first few days of trading, BlackRock's ETHA has led the pack, generating $354.8 million worth of net inflows, followed by Bitwise’s ETHW with $249.9 million and Fidelity’s FETH with $180.1 million. 

In fact, almost all of the ETFs have generated inflows, with the exception of Grayscale’s ETHE, witnessing $1.16 billion worth of net outflows in the last three days alone. 

The Grayscale Ethereum Trust first launched as a private placement in 2017. In mid-2019, its shares began trading publicly on OTC Markets under the ticker ETHE. This continued until July 23, when ETHE was uplisted to NYSE Arca as one of the newly-approved spot Ethereum ETFs.

ETHE also has a much higher fee , charging 2.5% compared to the 0.19% to 0.25% post-waiver fees of the other issuers’ spot Ethereum ETFs. However, in a two-pronged strategy from the incumbent Grayscale, its additional Grayscale Mini Trust Ethereum ETF product (ETH) charges the lowest fee of all at just 0.15%.

From the roughly $10 billion worth of assets (2.9 million ether) the Grayscale Ethereum Trust held prior to conversion, $9.2 billion worth of seed funding was allocated to ETHE and just over $1 billion to its ETH fund. Grayscale's ETH has also witnessed net inflows over the past three days, totaling $119.1 million. However, ETHE’s substantial outflows, combined with a more than 7% drop in ether’s price since the ETFs launched, has seen its assets under management drop to around $7.5 billion (2.4 million ether), according to its fund page .

It’s early days of course, and if Grayscale’s converted spot Bitcoin ETF, GBTC, is anything to go by, the net outflows are likely to slow down. However, at a current average net outflow of around $385 million per trading day, ETHE’s assets could be exhausted in less than a month.

Grayscale’s Bitcoin vs. Ether ETF outflows

While GBTC’s net outflows have been slower as a proportion of the assets held, a key difference between the two funds is that GBTC was still trading at a discount to net asset value upon launch, whereas ETHE’s discount had already been closed by the time the spot Ethereum ETFs went live, partially explaining the increased incentive to exit the fund.

Bitcoin’s price had also run up considerably ahead of the spot Bitcoin ETFs launch in January, nearly doubling after approval expectations ramped up in October. On the other hand, ether has been on a downtrend in recent months, falling more than 15% since the spot Ethereum ETFs were approved on May 23.

“The major difference to me is the comparatively massive ETHE outflow. I think GBTC didn't have that on day one because it was still at a meaningful discount when it launched,” Bloomberg ETF analyst James Seyffart said , comparing the outflows of the two products.

Will Grayscale’s ETHE continue to exert selling pressure?

Ethereum's ETF launch turned into a classic "sell the news" event, according to Rachel Lin, CEO and co-founder of derivatives DEX SynFutures, with ether retracing more than 10% from its near-term high. 

“As we saw with Bitcoin, Grayscale's ETHE ETF fund is becoming a net seller on the market. But unlike Bitcoin, we are witnessing less buying pressure from other ETFs to offset Grayscale's selling. This is the biggest reason behind ether's underperformance,” Lin said.

Lin suggested analyzing Grayscale’s spot Bitcoin ETF selling patterns could provide an estimate of what might happen next, with GBTC losing 50% of its assets in bitcoin terms in the first few months of trading, though the volume of selling has subsequently subsided. 

However, ETHE has already lost or reallocated more than 17% of its assets, and at the current rate of net outflows, it would reach that mark much sooner, meaning “more downside for ether,” Lin said.

On-chain net flow data for ether to custodians could also be a leading indicator of whether ETHE will continue to exert selling pressure on the price of ether, according to CryptoQuant analyst Burak Kesmeci.

Six of the spot Ethereum ETF issuers, including Grayscale, use Coinbase as a custodian, VanEck is using Gemini, and Fidelity is self-custodying its ether.

Some 160,930 ether entered Coinbase in the first two trading days, with Grayscale’s ETHE, which saw $811 million exit the fund in that period, the “usual suspect” behind the large ether flows, Kesmeci said.

“When we examine the ether net flow data of the last 48 hours, we can see that 47,811 ether also exited the Coinbase exchange. However, the net inflows of approximately 113,119 ether created significant selling pressure. Following this situation, the price of ether dropped by 12% to $3,102,” Kesmeci added. “The ether net flow data may be a leading indicator of whether Grayscale's spot ETF, ETHE, will continue to exert selling pressure for a while longer.”

Ether net flow on Coinbase. Image: CryptoQuant .

Another factor is the broader correction in the equities market, with the Nasdaq witnessing its biggest red day in over two years this week, Lin added. “If the larger equities market corrects further, crypto is unlikely to be spared, at least in the short term.”


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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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