Market View
There’s been no shortage of headlines driving crypto markets in recent weeks, although the themes haven’t necessarily shifted over that time. For example, US politics continue to have a dizzying effect on crypto performance, as many market players parse the regulatory, fiscal and monetary policy implications of different electoral outcomes. With the margins in the US presidential race narrowing based on official polling data, this supports our outlook for a choppy 3Q24 before crypto prices likely stabilize and ultimately improve in 4Q24. One of the major events to watch in the next few days is Former President Donald Trump’s speech at the Bitcoin 2024 Conference scheduled for July 27 at 2pm CST (3pm ET). Whether this materializes as a large BTC or crypto market catalyst still remains to be seen.
Nevertheless, we think flows have been more important than fundamentals for crypto performance in the short term. Spot ETH ETFs launched in the US on July 23 with nine issuers including BlackRock, Fidelity and Franklin Templeton. (Coinbase is the custodian partner for eight of the nine approved ETH ETFs.) The large 8% ETH depreciation on July 25 was attributed to the $133M outflow in these ETFs with liquidations of more than $125M over the preceding 24 hours.
That said, by volume these ETFs have performed in line with the upper range of expectations, with its first trading day seeing $1.1B in aggregate turnover and $107M in total net inflows. On the same day, spot bitcoin ETFs traded $2.3B, approximately double that of spot ether ETFs. This ratio (0.48 ETH to BTC volume) is in line with the average volume ratios between ETH and BTC across other instrument types. On centralized exchanges, spot ETH traded an average of $6.24B per weekday YTD, while spot BTC traded an average of $13.2B (0.47 ratio). Likewise ETH and BTC perp futures traded an average of $26.2B and $54.7B (0.46 ratio) YTD over the same periods.
Although early spot ether ETF inflows are notably less than that of US spot bitcoin ETFs (which traded $4.7B in aggregate and saw $655M in inflows on January 11), the initial outflows from the Grayscale Ethereum Trust (ETHE) have been heavier than those from the Grayscale Bitcoin Trust (GBTC). On its first two trading days, ETHE saw outflows of -$484M and -$327M respectively. In contrast, GBTC saw outflows of -$95M and -$484M, while having nearly three times the AUM ($28B vs $8.6B).
This suggests that the outflows from ETHE could be more short lived compared to the outflows from GTBC, the latter of which saw daily outflows for nearly three months post launch. GBTC held approximately 292k BTC on its first positive inflow day, down 53% from 617k BTC at conversion. If ETH price remains constant and ETHE outflows continue to average $400M, ETHE would reach 53% of its July 24 AUM in approximately two weeks due to its smaller size.
Ultimately, we remain constructive on ETH and ETH ETF flows. In our view, it’s still too early to draw any firm conclusions about market participants’ interest in spot ETH ETF products based on their performance in the first few days. Determining their ultimate success will require a longer term horizon, akin to what we saw with the US spot bitcoin ETFs in January. Notably, BTC weakened by 17% in the weeks after launch before breaking to a new all-time-high in March. We believe there’s still latent demand for spot ETH ETFs stemming from market players who want exposure to smart contract enabled blockchains, but either prefer or are required to have a regulated product in their brokerage account rather than holding ETH in a native crypto wallet.
Meanwhile, Mt. Gox’s bitcoin distributions continued with the trustee now holding around 80k BTC, based on Arkham Intelligence data. Many of the participating exchanges have started to distribute their bitcoin to creditors this week, though tracing that to any particular selling pressure is still a mostly speculative exercise. That said, markets have been digesting these developments well, considering we have seen a steep decline in the bitcoin supply owned by long-term holders by over 750k BTC in 1H24. Removing this supply overhang should be bitcoin supportive over the medium-to-long-term, in our view, particularly as we expect the liquidity situation to improve in late 3Q24.
