Crypto for Advisors: ETH Futures ETFs and What’s Next

Bitcoin has passed the $30,000 mark this week, with many speculating that the trading activity is due to an impending U.S. bitcoin spot ETF approval after the Securities and Exchange Commission announced it would not pursue an appeal in the case against Grayscale.

With our eyes on US ETF approvals, Roxanna Islam from VettaFi provides insights into the recent ETH activity and its “lackluster” performance. She discusses what could be coming in the crypto ETF space.

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It has been several weeks since ether futures ETFs launched with little fanfare in early October. Where do they stand now and what are investors watching for in the crypto ETF market? These are three observations.

Less fanfare than expected … but we already knew that.

When the first U.S. bitcoin futures ETF was launched, it made a huge impact. The ProShares Bitcoin Strategy ETF (BITO) was launched on Oct. 18, 2021, and it was the second-highest traded ETF in existence. Turnover was over $1 billion on the first day, while all seven ether futures ETFs traded only $7 million on Oct. 7. But this was a different time. Bitcoin prices were at their peak at over $69,000, and Ethereum prices were similarly at their peak at over $4,800. Mainstream investors were a lot more excited about crypto, and bitcoin futures ETFs were able to ride that wave. Additionally, ether itself has less popularity than bitcoin; the market share for bitcoin is about 51% vs. 17% for ether. But while ether broadly has less demand than bitcoin, this was still a space in the market that needed to be filled – particularly for investors who want to use ETFs to capture the full crypto market in their portfolio.

Spot bitcoin ETFs spotted ahead—what about spot ether ETFs?

For months, investors have heard about the benefits of spot vs. futures ETFs. The main disadvantage of futures bitcoin ETFs are the roll costs, which can cause a performance lag from the performance of spot bitcoin. So with spot bitcoin ETFs on the horizon, it makes sense that investors would be waiting for spot ether ETFs to launch. Spot bitcoin ETFs may be approved as soon as the end of the year or early 2024 at the latest (Jan. 10 is the final deadline for Ark’s spot bitcoin product, so this is an important date to watch).

A few days ago, the deadline passed for SEC to appeal the Grayscale court decision, which is overall good news for spot bitcoin ETF approval. Since then, several issuers have amended their spot bitcoin applications including Blackrock, Fidelity, and Ark. Most of the updates seem to be standard disclosures or clarifications about the market environment, so there’s not much to read into it with the exact updates given. But it means that this SEC is communicating with these issuers and possibly having back and forth discussions.So while there’s no guarantee of approval, it is still a good sign.

There are around 12 spot bitcoin ETFs awaiting approval, which will likely all be approved around the same time (much like we saw with the ether futures ETF launch). There are also five filings for spot ether ETFs (including a Grayscale conversion) which may potentially be approved after spot bitcoin ETFs are approved in 2024. Once these spot products are launched, we will likely see less overall demand for futures bitcoin and ether ETFs.

What does it mean for the crypto market?

News about crypto ETFs moves the crypto market as we have experienced recently. On Oct. 16, there was a rumor that an iShares spot ETF product was approved. That was later refuted but not before the price of bitcoin spiked 10%, which shows that an approval hasn’t quite yet been priced into the market. While 10% seems relatively small, the market likely didn’t have time to fully react given that the news was debunked quickly. I think when these spot ETFs are actually approved, we could see a much greater, sustained price spike and renewed investor interest in crypto. Much of this demand may come from retail investors who want to invest in bitcoin or ether through their traditional brokerage accounts.

– Roxanna Islam, CFA, CAIA, Head of Sector & Industry Research, VettaFi