Ethereum ETF Fails to Impress as ETH Liquidity Plummets
Seasonal factors, decline in network fees, struggling ETF products and relatively low staking rewards likely main cause of Eth price fall
ETH has recently seen a rapid decline in network activity and liquidity due to Ethereum ETF, raising concerns about its long-term sustainability.
This decrease in liquidity has resulted in higher price sensitivity, which means that larger deals can now more readily alter the spot price of Ether, increasing market volatility. The drop in liquidity is a mix of poor market conditions and seasonal factors, particularly the lower trading activity that is common during the summer months.
Despite expectations that the introduction of ETFs would enhance market liquidity—similar to the positive effects observed in the bitcoin market following its ETF debut in January—the outcome for ether has been different.
Struggles with Ethereum ETF
The launch of spot Ether (ETH) ETFs on July 23 saw promising results, with over $100 million in net inflows on the first day. The U.S. Securities and Exchange Commission gave preliminary approval to eight asset managers to launch exchange-traded funds tied to the spot price of ether and begin trading.
The launch was one of the most successful in the ETF market’s history, with the nine new products drawing some $6.6 billion in assets in their first three weeks of trading, Morningstar Direct data showed. However, after over a few months it seems Ethereum is struggling with its spot ETF products.
In the week ending Sept. 3, these instruments saw a net outflow of $47 million, bringing total outflows to $475 million since their US market debut on July 23. The waning investor interest in Ether is concerning because ETH largely depends on institutional demand for appeal.
The recent crypto market downturn, coupled with Wall Street stock sell-offs, has further worsened the situation. As of September 4, US spot Bitcoin ETFs experienced a six-day losing streak, with over $800 million withdrawn during this period, as per data from Farside.
Ethereum Low Staking Rewards
Another factor contributing the the downturn of Ethereum is the relatively low 3.2% staking reward, juxtaposed against a 0.7% annualized inflation rate, as reported by StakingRewards. This yield is lower than that of most US government bonds.
Chanchal Samadder, Head of Product at ETC Group, pointed out that holding an ETF without the staking yield is akin to owning a stock without receiving a dividend. This lack of staking rewards could deter investors, effectively making such ETFs “a bond with no yield.” This relatively low staking yield is most likely contributing to the low demand for Ether.
The Broader Market Context
Ethereum ETFs seems to have arrived at a challenging time. The crypto market has encountered a sharp downturn, significantly impacting Bitcoin and Ethereum ETFs alike. According to TradingView, Ethereum has plunged around 30% since the launch of spot Ethereum ETFs, dropping from approximately $3,500 on their debut date to $2,400 at press time.
Despite the drawbacks, spot Ethereum ETFs offer certain hopes of advantages for the future. They provide a cheaper and more reliable method for investors who cannot buy Ethereum directly, such as those with retirement accounts. Moreover, some experts believe that overall demand for Ethereum will still rise due to the introduction of these ETFs, even without staking rewards. It is hoped that in the long run layer-2 solutions and the introduction of ETFs could offer long-term benefits for the Ethereum Network.
