What investors are overlooking when assessing Ethereum and Bitcoin ETFs
by Tim Lowe
The launch of Ethereum ETFs this summer appears to have been a damp squib with investor interest lukewarm at best.
A recent report from JPMorgan shows spot Ether ETFs have seen net outflows overall since their launch in July. Some have attributed this as being due to the fact that investors in current spot ETH ETFs aren’t able to benefit from staking rewards, others cite lower levels of liquidity relative to Bitcoin and other traditional assets.
Although there’s certainly truth to those claims, there are also a number of overlooked factors that don’t get the attention they deserve.
One of these is the popular misconception that Bitcoin offers a 'harder' more deflationary asset when compared to Ethereum. It’s easy to understand why people think this, after all there will only ever be 21m Bitcoins mined by 2140 and the supply of Ether is limitless.
On closer inspection, however, the truth is somewhat more different. Ethereum supply has gone down since the merge in September 2022 when it transitioned from operating a proof-of-work (PoW) mining network to proof-of-stake (PoS) and its issuance is in fact lower than Bitcoin.
Since the merge, Ethereum’s PoS network supply is determined by two competing factors. The first is rewarding stakers for guaranteeing the integrity of the Ethereum blockchain with Ether, the second is the burning of existing Ether to pay for executing transactions on the blockchain. The burning mechanism reduces the overall supply of Ether and acts as a counterbalance to the issuance of new Ether.
In the 30 days leading up to September 4, around 7,440 ETH had been burned with only 77,615 ETH issued, so a net increase of 70K ETH. Annualised this works out at 0.71% which is 15% less than the BTC issuance over the same period.
Another overlooked consideration is that stakers do not have to pay the large electricity bills needed for Bitcoin mining and may therefore be less likely to immediately sell their staking income, further reducing downward price pressure.
The impact of how Bitcoin and Ethereum’s blockchains have been designed has huge implications on how it grows and is therefore valued. Unlike other assets such as gold that depend on miners digging it out of the ground, digital currencies require people to collectively engage and support the underlying network.
Whether it be miners creating new coins or validators correctly attesting to the consensus chain, investors can’t look to centralised banks or governments for guidance, they have to analyse the network dynamics and underlying architecture to properly understand how value will manifest itself.
As institutional investors start to enter this space, the cryptocurrency community will need to work harder at explaining how traditional economic metrics and investment indicators for assets such as gold are too limited when approaching Bitcoin and Ethereum.
Even people within the industry who consider themselves as more sophisticated investors are vulnerable to simplistic misconceptions such as Bitcoin being a harder asset than Ether.
It remains to be see whether or not staking becomes an option for ETH ETFs, irrespective of what decision is made there’s still a very strong case for holding ETH based on its monetary policy - one that is often overlooked or misunderstood due to misconceptions and generalisations that beset this industry.
Going forward, cryptocurrency advocates will need to both educate and equip institutional investors with the knowledge and tools to properly understand the dynamics underpinning these new and rapidly evolving digital assets.
Tim Lowe, Strategic Advisor, Attestant
