Ethereum ETFs’ Lack of Staking Income May Make Them Less Appealing

Analysts at BitMEX Research pointed out that whether or not a spot ether exchange-traded fund (ETF) generates yield from staking on the Ethereum blockchain network is a critical aspect in its success, given the persistent rumours surrounding the possibility of one debuting in the United States this year.

Ethereum’s staking rewards, which presently yield about 3.7%, are incentives for staking ether to support the blockchain network’s security and functioning. This is a significant distinction from Bitcoin.

The researchers claimed that although yield may not be significant to every ether bearer, institutional investors and ETF purchasers place a higher value on it. They stated, “It is very possible that in the long run, the price of raw ether will underperform the price of bitcoin, but Ethereum holders may benefit from higher returns due to the staking yield.”

The analysts noted that if spot ether ETFs are unable to provide a staking yield, the intricacy of Ethereum’s staking mechanism may make them less appealing.

Ethereum ETFs: Staking versus Non-Staking

The BitMEX Research researchers further asserted that current holders and stakers could be less inclined to convert their holdings to an ETF if spot ether ETFs are introduced in the US without offering staking yields. They also mentioned that if new investors know they are getting a worse bargain, they might be hesitant to invest in a spot ether ETF.

Launching and running staking ETFs is more difficult due to regulatory concerns and the intricacy of handling ETF redemptions under the Ethereum staking exit queue infrastructure. Staker access to Ethereum’s staking system requires navigating two queues in order to leave.

The amount of stakers who can leave each day is restricted by the regular exit queue. This amounts to approximately $100,000 ETH every day at the moment, or close to $400 million at current exchange rates. The analysts cited Grayscale’s GBTC outflows to support their claim that, from an ETF standpoint, daily outflows might be greater than this on their own under specific economic circumstances.

Although the delay is now only about 12 hours, they pointed out that during times of market turbulence, it may go up to many months, which presents a problem for potential Ethereum staking ETFs. They stated that the second queue, the validator sweeping delay, introduces an extra random wait that is now nine days long, which is significantly longer than the one to two-day redemption process for a typical ETF.

Ethereum’s staking entry queues might also result in a delay, but they would only shorten the yield momentarily. The experts pointed out that it is unclear how big the yield is if some institutional investors are unable to purchase liquid staking tokens like stETH or engage in direct staking.

Is it possible to resolve the problem?

BitMEX Research claims that there are workarounds for the issue, such as staking a portion of the holdings and keeping the remainder open for redemption. In fact, Ethereum staking exchange-traded funds already use this tactic in Europe; as a benchmark, about half of the assets are used for staking. Yields are naturally decreased by this, though.

Such Ethereum staking ETPs are presently available in Europe through Ark Invest/21 Shares and CoinShares. Next week, Apex Group and Figment Europe, providers of institutional staking services, are scheduled to introduce one on the SIX Swiss Exchange through Issuance.Swiss AG.

The analysts also recommended that instead of issuing Ethereum staking ETPs, issuers may instead issue a stETH ETF and move the redemption issue to the liquid staking platform Lido.

Staking yield inclusion, however, might be a step too far at this point because issuers are “desperate to get the products over the queue” and the Securities and Exchange Commission is “keen to put every possible obstacle in the way of the ETF providers,” they noted.

“This staking ETF problem is probably actually pretty positive for Ethereum from a security and decentralisation perspective,” the analysts said. “The last thing Ethereum needs is for BlackRock to be the largest validator. This would potentially be much worse for Ethereum, than if BlackRock became the largest bitcoin holder, since bitcoin holders have no role in block production or selecting between competing valid chains.”

Is this the year we see a spot ether ETF?

Following the successful launch of spot bitcoin exchange-traded funds (ETFs) in January, focus has shifted to another storyline pertaining to cryptocurrency markets: the potential introduction of a spot ether ETF in the United States. Notable companies such as Fidelity, BlackRock, and Franklin Templeton have submitted applications for a spot ether ETF in recent months.

As rumours about the possible acceptance of these items have grown, ether’s price has surpassed that of bitcoin by 2024. As of May 23, when the SEC is supposed to make a decision on the first-ever spot ether ETF application from Ark and 21 Shares, Bloomberg ETF analyst Eric Balchunas has projected a 70% chance of approval.

The SEC is not expected to approve spot ether ETFs “anytime soon,” according to investment bank TD Cowen, while JPMorgan believes there is no greater than a 50% probability that a spot ether ETF will be approved by May.

Chief Legal Officer of Variant Fund Jake Chervinsky recently stated that because of legal concerns and the policy climate in Washington, D.C., it is more likely than many believe that the SEC will reject spot ether ETFs by the deadline in May.

Chervinsky appears to disagree with the crypto community’s assertion that BlackRock’s track record of only one ETF denial in its history is indicative of a spot ether ETF acceptance. “BlackRock always wins” is a sloppy and misguided statement made by the former General Counsel of Compound Labs.

“The SEC appears keen to reject or delay the applications, as much as it is able to do so,” the BitMEX Research analysts added. “As with bitcoin, the courts may eventually force the SEC’s hands and again as with bitcoin, the SEC may be accused of hypocrisy for allowing Ethereum Futures ETFs. In our view, it looks like an Ethereum ETF is inevitable at some point, it is just a matter of timing.”

SEC Chair Gary Gensler said in January that the agency was only approving spot bitcoin ETFs and that they “shouldn’t be read to be anything more than that.” Considering Gensler’s position that cryptocurrencies other than bitcoin are securities, there are still further questions regarding the approval of spot ether ETFs.

According to BitMEX Research, “some argue that Ethereum makes a security’ because stakers propose blocks or because staking produces a yield, and this provides a rationale for the SEC to reject Ethereum ETFs.”

In the end, the experts contended that Ethereum’s success was less dependent on ETF approval than Bitcoin’s since the latter is already the market leader, Ethereum’s culture is more focused on technology than investing, and Ethereum ETFs are less appealing due to the staking problem.