Unpacking ETH’s Wall Street Debut

Dear Bankless Nation,

Yesterday, several Ethereum Futures ETFs made their public market debut. It was a big day for crypto, and yet things didn’t go entirely as expected.

Today, Jack unpacks what these ETFs mean for crypto investing broadly and for the future of Ethereum.

-Bankless team

Yesterday, nine exchange-traded funds (ETFs) backed by ETH futures began trading on US stock exchanges, and it’s now easier than ever for Americans to get Ether exposure, but do investors even want it?

Hot money indeed attempted to front-run the narrative late last week with longs as the impending launch of these products became increasingly apparent. The rotation spiked CEX open interest on ETH futures by $500M (10%) and sent Ether above $1.7k.

Despite traders’ high expectations, demand for ETH futures ETFs failed to materialize, with cumulative issuances processing under $2M in volume by noon, leading markets to sell off on the Monday open.

While respectable volumes for a normal ETF launch, they pale in comparison to those of BITO, the first BTC futures ETF many used as a basis for their ETH futures trading volume projections, which launched near peak bull market froth with Bitcoin at $60k on October 19, 2021, and proceeded to do $200M of volume within the first 15 minutes of trading 🤯

Undoubtedly, bull market mania significantly contributed to BITO’s success, and aiming to replicate the ETF’s success should have been seen as unrealistic. However, it’s clear that issuers had high hopes for their ETH futures products.

VanEck, for example, undertook an “EnterTheEther” marketing campaign on Twitter to prop up its EFUT offering and promised to donate 10% of the profits back to the Protocol Guild, a public goods funding mechanism that supports Ethereum core contributors. 

Thanks to VanEck’s marketing efforts, EFUT was indeed one of the most active ETH-only funds trading, but with under $400k in volumes during the first day of trading, the launch likely came as a disappointment.

The lack of interest in this new crop of ETFs can partially be attributed to the fact that they are futures-based products.

Unlike a spot ETF, which would hold the underlying shares of the asset it tracked, futures ETFs purchase futures contracts that expire every 30 days. Rolling these contracts exposes investors to contango and backwardation effects (i.e., that the price of the following month’s contract may be respectively higher or lower than that of the expiring contract), meaning that futures ETFs are a suboptimal way to track the price of an asset in comparison to spot products.

Concerningly, however, the limited demand for ETH futures products appears to be indicative of the broader market’s apathy for crypto, a discovery that has some rethinking how impactful the eventual launch of a Bitcoin spot ETF product could be.

🐂 Still Bullish

Despite disappointing inflows and a lack of interest from investors, the listing of these ETH futures ETFs is a major bullish unlock for crypto!

The SEC has long resisted giving any regulatory clarity on the status of Ether, and its chair, Gary Gensler, has even refused to answer the question for Congress, but the approval of these ETFs appears to solidify the asset’s status as a non-security 🥳

US Courts recently ordered the SEC to vacate an order denying Grayscale’s application to convert its trust-based BTC product into an exchange-traded fund (ETF), finding that a spot product would be sufficiently similar to approved futures products and should, therefore, receive similar treatment.

In the aftermath of this decision, some feared that the SEC could move to delist BTC futures ETFs to block the listing of a spot ETF; however, the agency’s approval of a new crypto futures ETF product would appear to make this move untenable!

At the same time, the SEC is finally engaging with BTC spot applicants – a welcome shift from their typical application pattern – and ETF insiders have been getting increasingly bulled up on the probability of a BTC spot ETF; the same should now hold for Ethereum. Reaffirmed by this news, Grayscale has even filed to convert its Ethereum Trust (ETHE) into a spot ETF.

Futures ETFs were not the products investors desired, but with Ethereum’s regulatory status now on par with Bitcoin’s, a futures ETF for both assets approved, and positive shifts in sentiment, spot ETF approval for Bitcoin and Ethereum seems almost inevitable!

Action steps