Andrew Kang’s new article: Why I don’t think Ethereum can replicate the success of Bitcoin ETFs?

Original title: "The Impact of the Ethereum ETF ETF - An analysis"

Author: Andrew Kang

Compiled by: Deep Wave TechFlow

BTC ETF Opening the door for many new buyers to allocate Bitcoin in their portfolios. The impact of the ETH ETF is less clear.

When the Blackrock ETF application was filed, Bitcoin was priced at $25,000 and I was heavily bullish on Bitcoin, which has now returned 2.6x and ETH has returned 2.1x. From the bottom of the cycle, BTC has returned 4.0x, and ETH has returned 4.0x as well. So, how much upside can the ETH ETF bring? I don't think it will be too big unless Ethereum develops compelling ways to improve its economics.

(see tweet for details)

Flow Analysis

Bitcoin ETFs have accumulated a total of $50 billion in AUM, which is a staggering number. However, if you break down the net inflows since the launch of the Bitcoin ETF, excluding pre-existing GBTC AUM and rotations, the net inflows are $14.5 billion. However, this is not really an inflow, as there are a number of delta neutral flows that need to be accounted for, namely the underlying trades (sell futures, buy spot ETF) and spot rotations. Based on CME data and analysis of ETF holders, I estimate that approximately $4.5 billion of net inflows can be attributed to basis trading. ETF experts suggest that large holders such as BlockOne are also converting large amounts of spot BTC into ETFs - a rough estimate of $5 billion. Subtracting these flows, we arrive at true net buying of the Bitcoin ETF at $5 billion.

From here we can simply deduce Ethereum. @EricBalchunas estimates that Ethereum traffic may be 10% of BTC. This puts true net purchase flow at $500 million over the six-month period, compared with reported net flow at $1.5 billion. Although Balchunas is biased in his approval odds, I believe his lack of interest/pessimism in the ETH ETF is informative and reflects broader traditional finance interest.

Personally, my benchmark is 15%. Starting from BTC's real net value of $5 billion, adjusting for ETH market cap (33% of BTC) and an access factor* of 0.5, we arrive at $840 million of real net buying and a reported net value of $2.52 billion. There is some reasonable argument that ETHE has less volume than GBTC, so in an optimistic case I would put the true net buying volume at $1.5 billion and the reported net buying volume at $4.5 billion. This is approximately 30% of BTC traffic.

In either case, the true net buying is far less than the derivatives flows on the ETF front end ($2.8 billion), not including the spot front-end flows. This means that the ETF has been priced in excess of its actual price.

*The access factor adjusts the flow to the ETF as the ETF could benefit BTC significantly more than ETH due to a different holder base. For example, BTC is a macro asset that is more attractive to institutions with access issues - macro funds, pension funds, endowments, sovereign wealth funds. ETH is more of a technical asset, attractive to venture capital firms, Crpyto funds, technical experts, retail investors and other people who do not have so many restrictions on exposure to cryptocurrencies. By comparing the CME OI to market cap ratio of ETH to BTC, 50% can be derived.

Judging from CME data, before the launch of the ETF, ETH’s OI was significantly less than BTC. OI accounts for approximately 0.30% of supply, while BTC accounts for 0.6% of supply. At first, I thought this was a sign of "prematurity," but it could also be argued that it was masking a lack of interest from smart trading money in the ETH ETF. A trader on the street made a good trade on BTC and they tend to have good information, so if they don't repeat the trade on ETH there must be a good reason, which could mean weak liquidity intelligence .

How did $5 billion bring BTC from $40,000 to $65,000?

The short answer is no. There are many other buyers in the spot market. Bitcoin is a truly globally proven asset, an important portfolio asset, and has many structural accumulators - Saylor, Tether, family offices, high net worth retail investors, etc. ETH also has some structural accumulators, but I think there are fewer than BTC.

Remember, before ETFs came along, Bitcoin holdings were already at $69k/1.2T+ BTC. Market participants/institutions own large amounts of spot cryptocurrencies. Coinbase has $193 billion in custody volume, $100 billion of which comes from its institutional program. In 2021, Bitgo reported an AUC of $60 billion and Binance had over $100 billion in custody. 6 months later, ETFs hold 4% of total Bitcoin supply, which makes sense, but is only part of the demand equation.

(see tweet for details)

Between MSTR and Tether, there have been billions of dollars in additional buying, but more than that, insufficient positions going into the ETFs. There was a popular belief at the time that ETFs were selling news events/market tops. So billions short, medium and long term momentum sold, needed to be bought back (2x flow impact). Additionally, shorts will also need to buy back once there is a big swing in ETF flows. Going into the release phase, open interest actually dropped -- that's incredible.

The positioning of the ETH ETF is completely different. ETH is trading at 4x its lows, while BTC is trading at 2.75x its pre-launch price. Crypto native CEX OI increased by $2.1 billion, bringing OI close to ATH levels. Markets are (semi-) efficient. Of course, many cryptocurrency natives saw the success of the Bitcoin ETF, had the same expectations for ETH, and positioned themselves accordingly.

I personally believe that the expectations of cryptocurrency natives are exaggerated and disconnected from the true preferences of transaction allocators. People who are deeply involved in the field of cryptocurrency will naturally have relatively high awareness and purchasing power of Ethereum. In fact, Ethereum, which serves as a major portfolio allocation for many non-crypto native capitals, has a much lower purchase rate.

One of the most common promotions to traders is Ethereum as a "tech asset". Global computer, Web3 application store, decentralized financial settlement layer, etc. It's a good pitch and I've bought it in previous cycles, but it's a hard sell when you see the actual numbers.

In the last cycle, you can point out the growth rate of handling fees, point out that DeFi and NFTs will create more handling fees and cash flow, etc., and make a convincing case from a perspective similar to technology stocks technology investment cases. But in this cycle, the quantification of fees can backfire. Most charts will show you flat or negative growth. Ethereum is a "cash machine", but its 30d annualized revenue is US$1.5 billion, its PS ratio is 300 times, and its post-inflation earnings/PE ratio is negative. How can analysts tell their dad's family office or Their macro fund bosses justifying that price?

I even expected the first few weeks of fugazi (delta neutral) traffic to be lower for two reasons. First, the approval was a surprise and issuers didn’t have that much time to convince large holders to convert their ETH into ETF form. The second reason is that switching is less attractive for holders because they would need to give up the benefits of marking to market, farming, or leveraging ETH as collateral in DeFi. But please note that the staking ratio is only 25.

Does this mean ETH will go to zero? Of course not, at a certain price it will be considered good value for money and when BTC rises in the future it will also be dragged down to a certain extent. Before the ETF launch, I expected ETH to trade between $3,000 and $3,800. When the ETF launches, my expectation is $2,400 to $3,000. However, if BTC rises to $100,000 by the end of Q4/Q1 of 2025, then this could drag ETH to ATH, but the ETHBTC trading pair would be lower. Long term the development is promising and you have to believe that Blackrock/Fink are doing a lot of work putting some of the financial trajectories on the blockchain and tokenizing more assets. How much value this will bring to ETH, and what the timing will be, is currently uncertain.

I expect the ETHBTC trading pair to continue falling and will be between 0.035 and 0.06 next year. Although our sample size is small, we do see ETHBTC making lower highs every cycle, so this is not surprising.

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