Crypto ETFs: What’s Next?

It has been several weeks since ether futures ETFs have launched with little fanfare in early October. But since then, the crypto ETF market has seen several significant events which has caused the price of bitcoin to rise to near $35,000. Where do ether futures ETFs stand now and what are investors watching for in the crypto ETF market? These are three observations.

Less fanfare than expected…but we already knew that.

When the first U.S. bitcoin futures ETF was launched, it made a huge impact. The ProShares Bitcoin Strategy ETF (BITO) was launched on October 18, 2021, and it was the second-highest traded ETF in existence. Turnover was over $1 billion on the first day. In comparison, all 7 ether futures ETFs traded only $7 million on October 7. But this was a different time. Bitcoin prices were about to hit their peak at over $69,000, and Ethereum prices were similarly going to hit their peak at over $4,800. Mainstream investors were a lot more excited about crypto, and bitcoin futures ETFs were able to ride that wave. While ether broadly has less demand than bitcoin, this was still a space in the market that needed to be filled—particularly for investors who want to use ETFs to capture the full crypto market in their portfolio. For more thoughts on the initial ether futures ETF launch, see this previous research note.

Ether Future ETFs

Spot bitcoin ETFs spotted ahead—what about spot ether ETFs?

For months, investors have heard about the benefits of spot vs. futures ETFs. The main disadvantage of futures bitcoin ETFs are the roll costs, which can cause a lag from the performance of spot bitcoin. So with spot bitcoin ETFs on the horizon, it makes sense that investors would also be waiting for spot ether ETFs to launch. Spot bitcoin ETFs may be approved as soon as the end of the year or early 2024 at the latest (January 10 is the final deadline for Ark’s spot bitcoin product, so this is an important date to watch).

A few days ago, the deadline passed for SEC to appeal the Grayscale court decision which is overall good news for spot bitcoin ETF approval. Since then, there have also been several issuers that have amended their spot bitcoin applications including Blackrock, Fidelity, Ark, Vaneck, and Valkyrie. Most of the updates seems to be standard disclosures or clarifications about the market environment, so there is not much to read into with the exact updates given. But it is still significant because it means that this SEC is communicating with these issuers and possibly having back and forth discussions—so while that is not something that guarantees approval, it is still a good sign.

Currently, there are around 12 spot bitcoin ETFs awaiting approval, which will likely all be approved around the same time (much like we saw with the ether futures ETF launch). There are also five filings for spot ether ETFs (including a Grayscale conversion) which may potentially be approved after spot bitcoin ETFs are approved in 2024. Once these spot products are launched, we will likely see less overall demand for futures bitcoin and ether ETFs except for cases where investors are looking specifically for inverse or leveraged exposure (Proshares actually just launched its Short Ether Strategy ETF [SETH] in early November). We have seen this trend this year with thematic crypto ETFs which have been up close to 100% YTD but have received only a small amount of flows as investors remain reluctant to add exposure to anything outside of spot products.