Why Are Spot Ethereum ETFs Underperforming?

The much-anticipated launch of spot Ethereum exchange-traded funds (ETFs) in 2024 hasn’t lived up to the explosive success many anticipated, especially when compared to the stellar performance of Bitcoin ETFs. Ethereum's ETFs, despite being among the fastest-growing ETFs this year, have experienced significant outflows since their launch, raising concerns among investors and prompting industry experts to investigate the underlying causes.

According to data from Farside Investors, Ethereum ETFs have seen outflows of $463 million since their inception on July 23. Grayscale’s ETHE fund alone has experienced a staggering $2.996 billion in outflows, while BlackRock’s ETF has seen $1.258 billion in inflows, and Bitwise’s ETF has recorded $321 million in inflows. This stark contrast in performance between Ethereum and Bitcoin ETFs has sparked discussions about what might be causing Ethereum’s underwhelming performance.

ETH price trades below the 20-week EMA , 1-week chart | Source: ETHUSDT on TradingView.com

Timing and Investor Activity
One of the main factors that Bitwise CEO Hunter Horsley identified as contributing to the underperformance of Ethereum ETFs is the timing of their launch. Horsley took to social media platform X to explain that the ETFs were introduced during the summer, a traditionally slow period for investors. “Summer tends to be a slower time for investors who are monitoring but not heavily engaging in new investments,” Horsley noted. This reduced investor engagement may have impacted the growth and attention that Ethereum ETFs would have otherwise received during a more active market period.

In addition, the overall market conditions at the time of the Ethereum ETFs’ launch were less favorable than those during Bitcoin’s ETF debut. The launch of Bitcoin ETFs coincided with a bullish market, which naturally drew more investor interest. In contrast, Ethereum ETFs entered the market during a sideways trend for Ethereum prices, lacking the upward momentum that might have sparked more significant investor enthusiasm. Horsley highlighted this point by stating, “Bull markets always draw focus. Bitcoin ETPs launched amid a rising Bitcoin, while Ether ETPs launched in a sideways market.”

The importance of timing in the cryptocurrency market cannot be overstated. Investors tend to be more willing to engage with new financial products when market sentiment is bullish, as rising prices offer the potential for quicker returns. However, when the market is moving sideways, as it was for Ethereum at the time of the ETFs’ launch, investors may be more cautious and less inclined to adopt new products.

Investor Understanding of Crypto Assets
Another significant factor influencing the underperformance of Ethereum ETFs is the relative novelty of cryptocurrency assets for traditional investors. While Bitcoin has been around for over a decade and is the most widely recognized cryptocurrency, Ethereum, despite its importance in the blockchain ecosystem, is still relatively unfamiliar to many mainstream investors. This lack of familiarity may have contributed to the slower uptake of Ethereum ETFs.

Hunter Horsley addressed this issue in his commentary, explaining that many traditional investors are still acclimating to the idea of including Bitcoin in their portfolios. As a result, the introduction of Ethereum ETFs so soon after the launch of Bitcoin ETFs may have been overwhelming for investors who were still trying to understand how to incorporate Bitcoin into their investment strategies. Horsley elaborated, “For many traditional investors, some time has been and continues to be needed to figure out how to incorporate Bitcoin after the launch of the ETPs. Ethereum arriving before that was solved made it hard to turn attention to it.”

This highlights a critical challenge for Ethereum ETFs: while Bitcoin has become synonymous with the concept of cryptocurrency for many investors, Ethereum represents a more complex and multifaceted asset. Ethereum’s blockchain powers decentralized finance (DeFi), non-fungible tokens (NFTs), and smart contracts, making it a more intricate and less straightforward investment than Bitcoin, which is often viewed primarily as “digital gold.” As investors continue to familiarize themselves with the broader cryptocurrency landscape, it may take more time for Ethereum to gain the same level of acceptance as Bitcoin.

Market Sentiment and Broader Trends in Cryptocurrency ETFs
Despite the early struggles of Ethereum ETFs, they are part of a broader trend of increased interest in cryptocurrency-related ETFs in 2024. According to Nate Geraci, president of The ETF Store and co-founder of the ETF Institute, 13 of the top 25 ETFs launched this year are either Bitcoin or Ethereum-related. This trend underscores the growing importance of cryptocurrencies in the financial markets, even if Ethereum’s ETFs have not yet fully capitalized on this momentum.

Geraci noted that while the top four ETFs in 2024 are all spot Bitcoin ETFs, five of the top seven ETFs are crypto-related, demonstrating the broader success of cryptocurrency ETFs despite Ethereum’s initial underperformance. This success suggests that while Ethereum ETFs may not have experienced the same explosive growth as Bitcoin ETFs, they are still part of a broader movement toward the adoption of cryptocurrency-based financial products.
The question then becomes: what can be done to enhance the appeal of Ethereum ETFs and boost their performance in the market?

The Role of Yield-Generating Products
One potential solution lies in the development of yield-generating Ethereum products. Christopher Perkins, president of CoinFund, suggested that offering products that generate yield could make Ethereum ETFs more attractive to investors. “Yield would help. Total return ETH is the killer product,” Perkins stated, emphasizing the potential for Ethereum-based products that offer returns through staking or other mechanisms.

Staking is a process in which Ethereum holders can earn rewards by participating in the network’s consensus mechanism. With Ethereum’s transition to a proof-of-stake (PoS) consensus model, staking has become a key feature of the Ethereum ecosystem. However, Hunter Horsley downplayed the immediate impact of staking on the performance of Ethereum ETFs. He explained, “I don’t think lack of staking yield is a huge issue. Most ETH today is owned directly so could be staked, yet ~2/3 don’t.”

While staking offers an opportunity for investors to earn yield on their Ethereum holdings, Horsley’s comments suggest that the absence of staking options is not the primary reason for the underperformance of Ethereum ETFs. Instead, other factors, such as market timing and investor familiarity, may be playing a more significant role.

Looking Ahead: Optimism for Ethereum ETFs
Despite the initial challenges, many industry experts remain optimistic about the future of Ethereum ETFs. Dan Tapiero, founder and CEO of 10T Holdings, believes that Ethereum ETFs will ultimately find their footing in the market. “Just wait. They’re gonna do just fine,” Tapiero asserted, reflecting the long-term bullish sentiment held by many in the cryptocurrency space.

Horsley echoed this optimism, suggesting that while Ethereum ETFs may not have experienced immediate success, they are well-positioned for future growth. As more traditional investors become comfortable with the idea of incorporating cryptocurrencies into their portfolios, Ethereum ETFs could see a resurgence in demand.

At the time of writing, Ethereum (ETH) is trading at $2,705, below its 20-week exponential moving average (EMA). While the current market conditions remain challenging, the long-term outlook for Ethereum and its associated financial products remains positive. Ethereum’s role in decentralized finance, smart contracts, and blockchain applications ensures that it will continue to be a significant player in the cryptocurrency ecosystem.

While the launch of Ethereum ETFs may not have delivered the explosive growth that some had anticipated, several factors—market timing, investor acclimation, and broader cryptocurrency trends—suggest that the future of Ethereum ETFs remains bright. As the market continues to evolve, Ethereum ETFs could ultimately follow the path of Bitcoin ETFs, gaining broader acceptance and delivering long-term value to investors.