As the much-anticipated launch date of Ethereum spot ETFs approaches, Matt Hougan, chief investment officer at crypto asset manager Bitwise, highlighted the potential of these ETF inflows to drive the price of Ethereum to a record high.
In a recent client note, Hougan highlighted that ETF flows could have a significant impact on the price of Ethereum, even surpassing the effects seen in the US Bitcoin ETF spot market.
Will Ethereum ETFs outperform Bitcoin?
Hougan for sure predicts that the launch of a spot Ethereum ETF would drive up the value of ETH, potentially reaching record highs above $5,000. However, he warns that the first few weeks after the ETF launch could be volatile as funds could flow out of the existing $11 billion Grayscale Ethereum Trust (ETHE) following its conversion into an ETF.
This may be similar to the case of the Grayscale Bitcoin Trust (GBTC), which saw a significant outflow of over $17 billion in funds following the crisis. Bitcoin ETF The market was approved in January and the first inflows were recorded 5 months later, on May 3.
Regardless, Hougan expects the market to stabilize in the long term, leading to Ethereum reaching record prices by the end of the year, once the initial outflows subside. To understand this thesis, Hougan compares key metrics to Bitcoin.
For example, bitcoin-backed ETFs bought more than twice as many bitcoins as miners produced during the same period, contributing to a 25% enhance Bitcoin price since the ETF’s launch and by 110% since the market began pricing in an October 2023 launch.
Still, Hougan believes the impact on Ethereum could be even greater, and points out three structural reasons why inflows into Ethereum ETFs could have a bigger impact than they did for Bitcoin.
Lower Inflation, Advantage and Shortage
The first reason that Bitwise’s CIO points out is the short-term decline in Ethereum’s value inflationWhile bitcoin inflation was 1.7% when bitcoin ETFs were launched, Ethereum inflation over the past year has been 0%.
The second reason lies in the difference between Bitcoin miners and Ethereum stakers. Due to the costs associated with mining, Bitcoin miners They typically sell a significant portion of the Bitcoins they acquire to cover operating costs.
In contrast, Ethereum relies on a proof-of-stake (PoS) system, where users stake ETH as collateral to accurately process transactions. ETH stakers, not burdened with high upfront costs, are not forced to sell their ETH earnings. As such, Hougan suggests that Ethereum’s daily forced selling pressure is lower than Bitcoin’s.
The third reason stems from the fact that a significant portion of ETH is staked and therefore unavailable for sale. Currently, 28% of all ETH is staked, while 13% is locked in clever contracts, effectively removing it from the market.
As a result, about 40% of all ETH is unavailable for immediate sale, which causes a significant scarcity and ultimately, supporting a potential enhance in the price of the second-largest cryptocurrency on the market, depending on the outflows and inflows recorded. Hougan concluded:
As I mentioned above, I expect the novel Ethereum ETPs to be successful and raise $15 billion in novel assets in their first 18 months on the market… If the ETPs are as successful as I expect — given the above dynamics — it’s challenging to imagine ETH not breaking its aged record.
ETH was priced at $3,460, up 1.5% in the last 24 hours and almost 12% in the last seven days.
Featured image from DALL-E, chart from TradingView.com
