Market View
Macro: ETH futures ETFs
The collective approval and release of a number of ETH futures ETFs in the US encountered a lukewarm reception this week, compared to the launch of the first BTC futures ETF (ProShares’ BITO) back in October 2021. The top pure ETH futures ETFs had an aggregate volume of less than US$1.5M traded on their first day. Comparatively, BITO’s BTC futures-linked ETF had over $1B traded on its first day, according to Bloomberg data. The net flow on these ETH futures ETFs represented less than 2% of the fund flow on BITO. See Table 1.
Table 1. ETH futures ETFs first day volume (Source: Bloomberg)
Issuer | Volume (first 24h, US$) | AUM (as of Oct 5) |
VanEck (EFUT) | $516,468 | $8.23M |
ProShares (EETH) | $878,758 | $5.92M |
Bitwise (AETH) | $74,598 | $614,150 |
We believe there were several reasons contributing to this disparity:
- ProShares Bitcoin Strategy ETF was launched at the peak of the 2021 crypto bull market, whereas these ETH-futures linked ETFs were launched in a late cycle environment.
- We believe that the investment advisor community has a better understanding of bitcoin and how it fits into their clients’ portfolios, while ether is more esoteric and further down the learning curve.
- Judge Katherine Polk Failla’s ruling in the Risely vs Uniswap case in late August referred to ETH as a crypto commodity, which may also have bolstered expectation of a ETH spot ETF at some point in the future. In our view, this may also have contained interest in an ETH futures ETF given the relative roll costs.
- Finally, throughout the course of Monday (October 2) and early Tuesday morning, a number of large transactions moved ETH onto exchange wallets, potentially compounding the downwards move. While BTC likewise saw upwards of US$300M flow onto various exchanges in large transaction sizes, ETH was hit particularly hard (Source: Whale Alert). In fact, the ETH/BTC ratio declined to its lowest level in more than a year.
Meanwhile, there’s been growing concern about the effect that rising long-end US Treasury yields (or global sovereign bond yields more broadly) are having on long duration assets like equities and crypto. In our view, this is less about the absolute yield levels themselves and more about how erratically yields have risen. (Note that the surprise jump in September US nonfarm payrolls makes a November Fed hike more likely, but that decision could still be offset by higher front end rates contributing to tighter financial conditions.) Although we think the high rate environment could persist in 4Q23, yields have already overshot relative to corresponding activity-vs-risk indicators like the copper-to-gold ratio, which has been trending lower in the last week.
BTC returns remain uncorrelated with US equity returns (proxied by the S&P 500) but the coefficient has been rising since mid-September from 0.16 to 0.32 based on a 60-day rolling window. We think market anticipation over spot bitcoin ETFs in 4Q23 is currently putting a floor on BTC prices supported by crypto-friendly regulatory headlines like the court's denial of the SEC’s motion for an interlocutory appeal in the Ripple case. But ultimately, there’s still a non-zero risk of greater near-term volatility for digital assets alongside the pressure on equities.
Onchain: Mercenary Liquidity
Ethereum ’s onchain transaction count and total value locked (TVL) has reflected some sustained depression in activity over the past month. This has led to a ~25k increase in the supply of ETH over the last 30 days. At the same time, however, more than 2 million ETH has been staked, reducing staking yields from 4.1% in late August down to 3.7%. The linear growth of staked ETH, coupled with muted activity has seen the annualized inflation rate of ETH more than triple from 0.1% in early September to 0.36% at the time of writing. However, we expect this trend to slow down over the next week as the entry queue in validator staking has dropped from more than 50,000 in early September to less than 8,000 as of October 5. If no more new validators join the entry queue, it will be cleared out within 3 days.
Activity on Ethereum rollups has also remained generally flat relative to previous months. Interestingly, over the last month, the most used bridge on Ethereum was the zkSync Era bridge with more than US$1.3B in total bidirectional volume. During the same timeframe, the zkSync Era rollup has had the highest daily active address count, most transactions, and the greatest sequencer revenue of all the Ethereum rollups. While this may lead one to conclude that droves of users are flocking to use the much-anticipated zero-knowledge rollup, other metrics tell a different story.
During this same timeframe, the TVL in zkSync Era smart contracts remained flat at a level far below some of its competitors. At the start of this week, the TVL in zkSync sat at $120M, roughly one-third that of Base’s, one-fifth that of Optimism’s, and one-fifteenth that of Arbitrum’s.
The early mover advantage in rollups for attracting long-term liquidity is exceedingly clear. The top 6 Ethereum EVM-compatible rollups by TVL account for more than 95% of TVL across the dozens of EVM-compatible rollups, in order of their mainnet launch date.
In our view, TVL is a stronger early metric for sustained user activity as it signifies a flow of liquidity and capital locked into smart contracts. Meanwhile, we are wary of the possible transient nature of disproportionately high levels of transactions, user counts, and bridging volumes that may be geared solely towards earning “points” for maximizing future airdrop benefits. Previously, we saw Optimism’s daily transaction count drop by more than 50% following the cutoff period for Airdrop 2, while Arbitrum activity doubled between its airdrop announcement and collection before dropping immediately post issuance. On the other hand, Optimism’s Airdrop 3, which was based only on governance participation, showed no meaningful impact on Optimism transaction counts. This pattern of enhanced activity for protocols in anticipation of an airdrop is ingrained into its activity-based incentive structure and should be taken into account when looking at metrics for sustainable adoption.
