Lack of stake returns in Ethereum ETFs could potentially reduce their appeal, BitMEX analysts say

Amid ongoing speculation around the prospect of an ether spot ETF launching in the US this year, whether it will offer a return by betting on the market. Ethereum ETH

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The network is a crucial factor in its success, according to analysts at BitMEX Research note.

Staking rewards on Ethereum – currently yielding around 3.7% – are incentives received for blocking ether to support the operation and security of the blockchain network – a key differentiator from Bitcoin.

While yield may not be important to all ether holders, it is a more important factor for institutional investors and ETF buyers, analysts say. “It is certainly possible that the price of raw ether underperforms bitcoin in the long term, but Ethereum investors, benefiting from the yield of staking, could achieve higher returns than bitcoin holders,” they said. they declared.

However, the complexity of Ethereum’s staking system could diminish the appeal of ether spot ETFs if the funds are unable to offer a staking return, the analysts added.

Ethereum ETF with staking and without staking

If spot ether ETFs are launched in the United States without banking on returns, existing holders and shareholders may be less willing to move their holdings to an ETF, BitMEX Research analysts further claimed. New entrants may also be reluctant to invest in a spot ether ETF if they know their offering is lower, they added.

Regulatory issues and the complexity of managing ETF redemptions under the Ethereum staking exit queue system make launching and operating staking ETFs more difficult. To exit Ethereum’s staking system, stakers must go through two queues.

The standard exit queue limits the number of players allowed to exit daily. Currently, this stands at around 100,000 ETH per day, or almost $400 million at current prices. From an ETF perspective, it’s possible that daily outflows could be higher than that under certain economic conditions, analysts said, citing Grayscale’s GBTC outflows.

Although the wait is currently only around 12 hours, in times of market volatility this could become much longer – potentially months – hence the challenge for future Ethereum staking ETFs, they noted . The second queue, the validator scan delay, applies an additional random wait, currently nine days, they added, much longer than a normal ETF’s redemption process of one to two days .

Similarly, Ethereum staking entry queues can also cause delay, but only temporarily reduce yield. However, if direct staking or purchasing liquid staking tokens like stETH is not possible for some institutional investors, the significance of the return remains uncertain, analysts noted.

Can the problem be solved?

According to BitMEX Research, there are ways around the problem, such as staking only a portion of the holdings and leaving the rest available for redemptions. Indeed, this is a strategy already used by Ethereum staking exchange-traded products in Europe, with a benchmark of around 50% of assets used for staking. However, this of course reduces yields.

Ark Invest/21Shares and CoinShares currently offer such Ethereum staking ETPs in Europe. Institutional staking service provider Figment Europe and Apex Group are also expected to launch one on the SIX Swiss Exchange next week via Issuance.Swiss AG.

Alternatively, issuers could avoid Ethereum staking ETPs altogether and issue a stETH ETF instead, shifting redemption issuance to liquid staking platform Lido, analysts suggested.

However, with the Securities and Exchange Commission “eager to put every possible obstacle in the way of ETF providers,” issuers are “desperate to get the products through,” they added, meaning that inclusion performance could be a step too far. at this stage.

“This ETF staking issue is probably actually quite positive for Ethereum from a security and decentralization perspective,” the analysts said. “The last thing Ethereum needs is BlackRock being the largest validator. This would potentially be much worse for Ethereum than if BlackRock became the largest holder of Bitcoin, since Bitcoin holders have no role in block production or selection between competing valid chains.

Is a spot ether ETF coming this year?

With the successful launch of spot bitcoin ETFs in January, attention has turned to another narrative for crypto markets: the prospect of a spot ether ETF in the United States. Large companies, including Fidelity, BlackRock and Franklin Templeton, have requested a spot ether ETF in recent months.

Growing 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 recently suggested a 70% chance of approval by May 23 – final deadline for the SEC to rule on an Ether spot ETF application from Ark and 21Shares, the first filed.

However, investment bank TD Cowen said the SEC is unlikely to approve ether spot ETFs “in the near future,” and JPMorgan sees no more than a 50% chance of getting approval of ether spot ETFs by May.

Variant Fund General Counsel Jake Chervinsky also recently said that the SEC’s refusal to grant ether spot ETFs before the May deadline was more likely than people think – in due to legal issues and the political environment in Washington DC.

While many in the crypto community have cited BlackRock’s record of just a refusal from the ETF in its history as a positive indicator of the approval of an ether spot ETF, Chervinsky appears to disagree. “‘BlackRock always wins’ is a lazy position,” said the former general counsel of Compound Labs.

“The SEC appears willing to deny or delay applications, to the extent it is able,” BitMEX Research analysts added. “As with bitcoin, the courts could eventually force the SEC’s hand and, again, as with bitcoin, the SEC could be accused of hypocrisy for allowing Ethereum Futures ETFs. In our opinion, it seems like an Ethereum ETF is inevitable at some point, it’s just a matter of timing.

In January, SEC Chairman Gary Gensler said the agency’s approval of spot bitcoin ETFs was limited to the cryptocurrency only and “should not be construed to be anything else.” Further uncertainties remain regarding spot ETF approvals, given Gensler’s position that cryptocurrencies other than bitcoin are securities.

“Some argue that since staking Ethereum generates a yield or stakers offer blocks, this makes Ethereum a ‘security’ and therefore provides justification for the SEC to reject Ethereum ETFs,” BitMEX Research said.

Ultimately, analysts argued that ETF approval was a less critical factor for Ethereum than for Bitcoin, because bitcoin ETFs are already the first to launch, Ethereum culture is more aligned with technology than with investment and staking issue makes ether ETFs less attractive.

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