Key Points
- A potential lack of staking yield in Ethereum ETFs could lessen their attractiveness, according to BitMEX Research analysts.
- Regulatory issues and the complexity of Ethereum’s staking system could further hinder the appeal of spot ether ETFs.
The success of a potential Ethereum ETF in the U.S. may hinge on whether it offers yield from staking on the Ethereum network, according to analysts at BitMEX Research.
Staking rewards on Ethereum, currently around 3.7%, are incentives for locking up ether to support the operation and security of the blockchain network. This sets Ethereum apart from Bitcoin.
Ethereum Staking Yield and Institutional Investors
While not all ether holders may find the yield significant, it's a crucial factor for institutional investors and ETF buyers, the analysts noted.
They suggested that Ethereum stakers, with the benefit of the staking yield, could potentially earn higher returns than Bitcoin holders, even if the raw ether price underperforms Bitcoin in the long run.
However, the intricacy of Ethereum’s staking system could lessen the appeal of spot ether ETFs if the funds are unable to offer a staking yield.
Staking vs Non-Staking Ethereum ETFs
If spot ether ETFs in the U.S. are launched without staking yields, existing ether holders and stakers may be less inclined to switch their holdings to an ETF. New investors might also hesitate to invest in a spot ether ETF if they perceive they're getting a worse deal.
The complexity of managing ETF redemptions under Ethereum’s staking exit queue system and regulatory issues make staking ETFs more difficult to launch and operate.
Exiting from Ethereum’s staking system involves passing through two queues. The standard exit queue limits the daily number of stakers allowed to exit. At current prices, this stands at around 100,000 ETH per day or nearly $400 million.
From an ETF perspective, daily outflows could potentially exceed this in certain economic conditions. While the wait is currently around 12 hours, in periods of market volatility, this could extend to months, posing a challenge for prospective Ethereum staking ETFs.
Ethereum’s staking entry queues could also cause a temporary reduction in the yield. However, if staking directly or purchasing liquid staking tokens like stETH is not possible for some institutional investors, the significance of the yield remains uncertain.
Potential Solutions
BitMEX Research suggests potential solutions such as staking only part of the holdings and leaving the rest available for redemptions. This strategy is already employed by Ethereum staking exchange-traded products in Europe, with around 50% of assets utilized for staking, though it does reduce yields.
Institutional staking services provider Figment Europe and Apex Group are also set to launch one on the SIX Swiss Exchange next week via Issuance.Swiss AG.
Alternatively, issuers could bypass Ethereum staking ETPs altogether and issue a stETH ETF instead, transferring the redemption issue to liquid staking platform Lido.
However, with the Securities and Exchange Commission intent on creating obstacles for ETF providers, issuers are eager to get the products approved, meaning staking yield inclusion may be too ambitious at this stage.
The analysts believe that this staking ETF problem could actually be positive for Ethereum from a security and decentralization perspective. They argue that Ethereum doesn't need BlackRock to be the largest validator as it could potentially be more detrimental for Ethereum than if BlackRock became the largest Bitcoin holder.
Speculation on Spot Ether ETF
Following the successful launch of spot Bitcoin ETFs in January, attention has shifted to the prospect of a spot ether ETF in the U.S. Big-name firms, including Fidelity, BlackRock, and Franklin Templeton have applied for a spot ether ETF over the last few months.
Speculation over the potential approval of such products has seen the price of ether outperform that of Bitcoin in 2024. Bloomberg ETF analyst Eric Balchunas suggested a 70% possibility for approval by May 23.
However, investment bank TD Cowen said the SEC is unlikely to approve spot ether ETFs any time soon, and JPMorgan doesn't see more than a 50% chance of a spot ether ETF approval by May.
Variant Fund Chief Legal Officer Jake Chervinsky also recently said the SEC’s denial of spot ether ETFs by the May deadline is more likely than people think due to legal issues and the policy environment in Washington D.C.
Despite many in the crypto community citing BlackRock’s record of just one ETF denial in its history as a positive indicator of a spot ether ETF approval, Chervinsky seemingly disagrees.
The analysts argue that ETF approval is a less critical factor for Ethereum than Bitcoin as Bitcoin ETFs are already first out of the gate. They also contend that Ethereum culture is more aligned with technology than investing, and the staking issue makes ether ETFs less attractive.
