Ethereum ETFs Rejected: Why Aren't Investors Buying?

Ethereum exchange-traded funds (ETFs) have failed to generate the same interest as their Bitcoin ETF counterparts. That's a high bar, given how popular Bitcoin products have been. Contributing factors include the absence of staking rewards within the ETFs and the difficulty of marketing Ethereum to investors.

Spot Ethereum ETFs have been a disappointment for many investors.

By contrast, spot Bitcoin ETFs pulled in nearly $19 billion in inflows over 10 months, while Ethereum ETFs, which began trading in July, have failed to attract the same enthusiasm.

Making matters worse, Grayscale's ETHE — previously an Ethereum trust before converting to an ETF — faced massive outflows during the conversion, and demand for other Ethereum funds has not been enough to offset that trend.

This means Ethereum ETFs have seen net outflows of $556 million since launch. Just this week, these products recorded net outflows of $8 million, according to data from Farside.

So why have Ethereum ETFs performed so differently? There are several possible reasons.

Flow Context

First, it's worth noting that Ethereum ETFs only look bad when compared to Bitcoin ETFs. Bitcoin products have shattered multiple records and could arguably be called the most successful ETF launches of all time.

For example, ETFs issued by BlackRock and Fidelity — IBIT and FBTC — each raised $4.2 billion and $3.5 billion in their first 30 days, breaking the previous record held by BlackRock's Climate Awareness Fund, which raised $2.2 billion in its first month back in August 2023.

While Ethereum ETFs couldn't replicate those impressive results, three of them still rank among the top 25 best-performing ETFs of the year, according to Nate Geraci, president of ETF Store.

BlackRock's ETHA, Fidelity's FETH, and Bitwise's ETHW have absorbed nearly $1 billion, $367 million, and $239 million in assets, respectively — not bad for funds that are only two and a half months old.

"Spot Ethereum ETFs were never expected to challenge spot Bitcoin ETFs in terms of flows," Geraci told CoinDesk.

"If you look at the underlying spot market, Ethereum's market cap is roughly one-quarter that of Bitcoin. That should serve as a reasonable proxy for predicting how demand for spot Ethereum ETFs will compare to spot Bitcoin ETFs over the long term."

The problem is that the performance of these funds has been overshadowed by the massive outflows from Grayscale's ETHE.

ETHE launched as a trust in 2017 and initially, for regulatory reasons, investors were not allowed to redeem their ETF shares — money was locked into the product. That changed on July 23 when Grayscale received approval to convert its trust into a conventional ETF.

At the time of conversion, ETHE held approximately $1 billion in assets, and while some of those assets were transferred by Grayscale itself into their other fund — the mini ether ETF — ETHE still faced net outflows of nearly $3 billion.

It's worth noting that Grayscale's Bitcoin ETF, GBTC, also saw outflows of more than $20 billion since its January conversion. However, the impressive performance of BlackRock's and Fidelity's spot Bitcoin ETFs fully offset those outflows from GBTC.

Missing Staking Rewards

A key difference between Bitcoin and Ethereum is that investors can stake Ethereum — essentially locking it into the Ethereum network to earn rewards, paid out in ETH.

However, Ethereum ETFs in their current form do not give investors exposure to staking. So holding Ethereum through an ETF means missing out on those rewards (currently around 3.5%) — while also paying management fees to the issuer, which range from 0.15% to 2.5%.

While some traditional investors may not mind forgoing those rewards in exchange for the convenience and security of an ETF, for crypto-native participants it makes sense to look for other ways to hold Ethereum.

"If you're a capable fund manager with foundational knowledge of crypto markets and you're managing other people's money, why would you buy an Ethereum ETF right now?" Adam Morgan McCarthy, an analyst at crypto data firm Kaiko Research, told CoinDesk.

"You're paying a fee for exposure to ETH (with the underlying asset custodied at Coinbase), or you just buy the underlying asset yourself and stake it at the same provider and earn some yield," McCarthy said.

The Challenge of Marketing Ethereum to Investors

Another barrier for Ethereum ETFs is that understanding Ethereum's core use cases can be difficult for some investors, since it tries to lead across several different areas of crypto.

Bitcoin has a hard supply cap: the total number of Bitcoin will never exceed 21 million. That makes it easy for investors to view it as "digital gold" and a potential hedge against inflation.

Explaining why a decentralized, open-source smart contract platform matters — and more importantly, why Ethereum would accumulate value — is a different challenge altogether.

"One of the challenges Ethereum ETFs face in reaching the 60/40 boomer crowd is condensing its purpose and value into an easy-to-grasp tagline," Eric Balchunas, ETF analyst at Bloomberg Intelligence, wrote in May.

McCarthy agreed. "Ethereum is just slightly more complex, harder to communicate to people — it's not an elevator pitch," he told CoinDesk.

So it's no surprise that crypto index fund Bitwise recently launched an educational advertising campaign highlighting Ethereum's technological advantages.

"As investors learn more about stablecoins, decentralized finance, tokenization, prediction markets, and the many other applications powered by Ethereum, they will embrace the technology and U.S.-listed Ethereum ETPs," Zach Pandl, head of research at Grayscale, told CoinDesk.

Poor Price Performance

There's also the simple reality that ETH itself has not performed well this year compared to BTC.

The second-largest cryptocurrency by market cap has risen just 4% since January 1, while BTC is up 42% and has been trading near its 2021 all-time highs.

"One of the factors driving the success of Bitcoin ETFs — primarily fueled by retail investors — was investor sentiment and fear of missing out, driven by BTC's 65% run-up before the ETF launch and a further 33% gain afterward," Brian Rudick, head of research at crypto trading firm GSR, told CoinDesk.

"ETH's price has dropped 30% since the ETF launch, which has significantly dampened retail investor enthusiasm for buying these funds," Rudick added. "Sentiment around Ethereum is at a low point, with some arguing it's stuck between Bitcoin as the superior monetary asset and Solana as the highest-performance smart contract blockchain."

Lack of Valuation Appeal

Finally, there's the possibility that traditional investors simply don't find Ethereum's valuation compelling at current levels.

With a market cap of approximately $290 billion, Ethereum's valuation already exceeds that of every bank in the world except JPMorgan and Bank of America, which are valued at $608 billion and $311 billion, respectively.

While this may seem like an apples-to-oranges comparison, Quinn Thompson, founder of crypto hedge fund Lekker Capital, told CoinDesk that Ethereum's valuation also looks stretched relative to tech stocks.

Thompson wrote in September that Ethereum's valuation is "harder to swallow now than other assets because there's no valuation framework that justifies its price." "Either the price needs to come down, or there needs to be broad acceptance of a new asset valuation framework that everyone agrees on."