Why Ethereum ETFs have failed to attract demand?

Transcript

[Music] Hey everyone, thanks for thanks for being here. Considering it's one of the last talks of the conference, I appreciate uh you all coming here. Uh must be a tiring week, but um it's an it's a very controversial topic. Hopefully um this will excite some of you. Why Ethereum ETFs have actually failed to attract demand. Uh very controversial, but should spark some good debates and questions. Uh my name is Louie. I'm the senior corporate development associate at Kao and this is my colleague Adam. Yeah, thanks for coming along. Yeah, thanks for coming along and uh appreciate your time. I work on the research team at Kao. So

I've covered the ETF launch since inception uh over the last year and a half. So uh looking forward to sharing some insights. So let's first start off uh by giving a brief overview of the crypto ETFs before uh explaining how their performance actually went and how they compare between the Ethereum ETFs, Bitcoin ETFs and uh and many more to come actually. So people usually tend to think that the US ETFs were the first to launch. Uh but realistically when you look at it uh actually back in 2015 in Sweden, NASDAQ had already launched some ETPs on crypto. And then you even had um Brazil in 2021 with uh actual Bitcoin and Ethereum ETFs. So it wasn't just the US,

but to be honest, uh volumes and aums weren't that strong uh back then. And um it really started off and there was a very before and after moment when the US ETFs actually came live with uh Bitcoin in uh early 2024. And that really started a wave and a kind of a snowball effect with many many ETF filings actually happening all over the world in uh the London Stock Exchange and in AP pack various regions. Um so that really set a precedent um with its resounding success. And now to look a bit more at its actual success. Um I like to show this chart from from Bloomberg. Um in orange you can see Black Rockck's Bitcoin ETF and how its performance was

well out of this world to uh put it mildly. Um it was the best ETF launch of with any asset class. Um and this chart shows it reached in barely a sing barely a year in just under a year a $70 billion aum which is a huge feat once you look at other ETFs and their past performance. On this chart you have uh four other ETFs which are some of the biggest ones in the world. Some will recognize for example the one in green which is Vanguard's S&P 500 uh very classic. These ETFs managed to reach the $70 billion AUM threshold but only after four or six years for some of them. So this really shows how Bitcoin was a resounding success from its start and

how the demand was so intense. What's interesting is that in the even in the previous uh here when you look at the ETFs half of these are actually from Black Rockck and they're really a dominant player and that's also seen in crypto for Bitcoin at least where you see that Black Rockck here the dark blue line at the top has actually been the by far the dominant player. they've they've grasped most of the market share within the issuers for Bitcoin ETFs and they have up to three to four times the AUM their respective issuers. So that's been a strong narrative and that's been maintained from traditional financial capital markets. But now when we look at Ethereum ETFs, it's um unfortunately a bit of a different story so far. Uh more

is yet to come. Um, but Bitcoin ETF currently is at $130 billion in AUM and when you look at Ethereum, it's closer to 10 billion. So, not exactly the same performance. Um, and you can even see that Ethereum has had a very I'm going to call it a very tranquil uh growth. Um, and this been very sadly constant. Um and relative to earlier, what's interesting is that the um competitiveness in terms of the Ethereum ETFs hasn't been the same for the issuers. Black Rockck actually struggled to become the dominant player at first and it took much longer for them to grasp that market share. And now, even though they're ahead, it's not as as explicit as with the Bitcoin ETFs. Uh

they're above but not as much. And this could also be explained by simply the persona of the investors behind those Ethereum ETFs are actually a bit different than the Bitcoin one. In traditional financial markets, people blindly trust uh Black Rockck and understandably so. Um and they it's easy to invest in Black Rockck ETFs, but with Ethereum, it's been a bit different. It's a different type of persona. It's a more I'm going to call it cryptonative um persona. And as such, that's seen in this uh distribution. But now let's dive really in and why do Ethereum ETFs actually struggle. So I I highlighted three arguments and the first one which is uh fairly simple is the unclear narrative. So when you look at Bitcoin, Bitcoin is very easy to

understand and to sell people. You can just say it's digital gold. So the the pitch is very easy. It's a clear narrative. Now when you look at Ethereum, it's a different story once again. Um it's it's not as easy to sell. It's not just a simple one-s sentence pitch. It's much more complex and it requires a lot more blockchain understanding knowledge and capabilities. And so from an institutional investment point of view, that hasn't helped it. Now, a second argument is Bitcoin doesn't have much competition within the crypto ecosystem. Um, some say gold could be the the competition, but when you look at digital assets, Bitcoin is in a league of its own, uh, to be honest. And when you look at Ethereum, it's very different. Ethereum

has a bunch of layer ones competing with it. Uh Solana, for example, is is grabbing a lot of liquidity from Ethereum. So there's a lot of competition outside of the Ethereum ecosystem, but also within within ecosystem. You have thousands of ERC20s, a bunch of coins that rely on Ethereum. You have all the layer 2s and I'm and so many other layers. Um and that's actually grabbing liquidity from Ethereum. Um people invest in those tokens thinking they have exposure to Ethereum, but they're actually not contributing to the actual liquidity. and aum as such of the Ethereum ETFs. And the last argument is Bitcoin is seen as a proxy as a as an index of its own to represent crypto investing. When you have um any traditional uh financial investor,

they're going to want to have exposure to crypto, they might just simply invest in a Bitcoin ETF. Um and Ethereum is more complex and it it just adds more risk for them. Um more even um complicated risk. And so Bitcoin kind of steals the spotlight in that sense because it's it's just an index of its own for crypto at least for now and hopefully that will change. But there could be a solution. Um some say staking and adding staking components to Ethereum ETFs could actually help its performance and help much more and improve its demand. uh because staking is actually so and it provides an additional yield to all the Ethereum holders and it's widely considered as crypto's equivalent to a

risk-free rate and so enabling it and adding it to crypto ETFs could potentially unlock those extra returns and thus easily enhance the value proposition of Ethereum based products. So it could be a solution. But one thing to keep in mind is that Ethereum does have a rather so far low uh staking rate. It remains around 3% for the time being. And relative to other assets, it's well much lower. Uh typically Sona which we were mentioning earlier which is one of its biggest competitors is around 7%. It was even around 15% a few months ago. So we're not talking about the same thing here. And even just to keep as a a reference point uh for example in the US if you want to invest

in government bonds or the T bills I think the rate is around 4.3% 4.5%. So once again it's a higher rates than the Ethereum staking rate. So that's to keep in mind but hopefully it's not all negative. Um Adam here will provide a bit more information on why this could not be the end of the world having a low staking rate. Yeah thanks Louis the intro. I think I'll move over here so that we're not just standing next to each other like a school presentation. But um yeah, if you can go to the next slide, I've got a little bit on some of the regulatory clarity that's come in. So obviously we had Mika last year come true in Europe. We've seen some of that already for stable coins. Uh it's sort of just a rebranding of methid wherever, but for digital assets, but it creates a

sort of framework and precedent for the US now that there's a new administration that wants to work with crypto. Uh also as Louis pointed out, there's already these staking products in other parts of the world and a first soul staking product went live in the US yesterday. uh Rex shares are doing swaps on a Salana ETP staking ETP in Europe. So there's already seeing these things come in. But the really important stuff I think for the broader invest like getting more investors in and getting growing the kind of pie in the whole is coming next. If you go to the next slide, Lou. So this is a little breakdown of US regulatory clarity and uh it's probably not the greatest audience because we're in the south of France here, but I'll I'll get to the point of why it matters for Ethereum and

to to the fund flows. So last year we had the Financial Innovation and Technology Act to pass through the Senate. It stalled in Congress, but it it creates a framework and it's a bipartisan bill with the Democrats and the Republicans working together. And so these these are kind of signs that we weren't getting two three years ago. So then this year it's been followed up by the Clarity Act which brings in some much needed kind of understanding of what staking is, who's what staking provides. And actually after the clarity act was kind of first introduced staking the SEC changed its tone on staking entirely and said that it's no it's not doesn't consider it uh staking as a kind of sale sale of securities or offering securities. So also the genius act which went through uh the house which went through the senate and it's going to go

through congress next provides like very similar to mika in that it's helping what where reserves go what the reserve standards needs to be for stable coins and these are just these are all just names of acts and bills that are happening in America so it's probably not that interesting but I think the main thing about these are is that these are the things that create a framework for the end user to know that they can transact and get involved in crypto without having to worry so crypto as Louis said is just a kind uh it's Bitcoin to most people out there that aren't in this room or at this conference. It's seen as Bitcoin. But if you can build these frameworks and have clear regulation, then more people can discover the other parts of crypto that we know are so beneficial in terms of onchain lending and borrowing and other

things and see the value of assets like Ethereum. So I think these providers really kind of crucial tailwind to any kind of increased investment in flow into these Ethereum ETFs and as well as the new task force at the SEC which is now meeting with crypto firms and not regulating by enforcement but regulating through discourse and and creating kind of relationships with key actors in the in the community and in the industry to make sure that they're not getting things wrong or that they're not just going in kind of head first and saying you can't do this, you can't do that. And it's it's really encouraging and it's the end user who's going to benefit and then they can see crypto as more than just Bitcoin or more than just you know the headlines that happen in 2022 and so on

and that regulatory clarity has we we see in the ETFs uh it's been a very positive um output. This is a chart showing all the ETF filings in the US. Um and it's I mean if we look at this chart just uh two years ago I think this was completely non-existent. So it just comes to show that regulatory clarity and the framework that Adam presented earlier um has really boosted all these ETF filings which is good because more investment vehicles enable more liquidity to be included in the market and more and in in the end momentum for digital assets in general. So this is all very positive for us. Good regulation has really helped uh shape the industry.

Yeah. And I'm going to run through quickly. We did a report a few weeks ago on uh Kaio Indices on this on top potential of the staking market and why it matters. I know I I have a back and forth with a colleague who's in the audience who doesn't see the value of staking and doesn't understand uh maybe doesn't understand crypto, but uh we'll get to that later. I think if you go to the next slide, I've got something just everyone probably knows this, but you know the total amount of ET staked over time since he switched from proof of work to proof of stake. Uh so you can see it's like 50 billion uh dollars if you convert it around 35 million ETH or so on the beacon chain right now. And like just to put that in context in the next slide. So, you know, when when ETH

moved from proof of stake from proof of work to proof of stake, it became cash like cash generating and became like a yield bearing asset, which kind of changes the narrative completely. But as Louis touched on, it's difficult for asset managers and issuers and advisers to get that like story across because it's not in there. It's not built into these ETFs. So, like even we talk and we meet with issuers, we meet with these these these fund providers in the US and and they say Bitcoin's easy. It's digital gold and it can exist alongside gold and everyone gets that. But ETH is a little trickier and the narrative can change from time to time. The pitch can change but I think that when you bring in this kind of staking element and it has a yield bearing has the kind of cash generating impact then it's kind of

becomes easier to sell and you've get a total return index where you know it's been moving sideways over the last year. There's only 10 billion in the fund and yeah the yields only 2.9%. But it helps us soften the blow of the kind of mundane price action we've seen over the last 12 months. And this is like, you know, a 50 billion staked on ETH already. It's a huge opportunity. And I think it's going to open up that cryptonative bases. What we've seen with the Bitcoin ETFs is a lot of people offramped from crypto into these ETFs because they don't have to worry about security. They don't have to worry about their keys. And maybe they're at a point now where they want to have a tax efficient vehicle that they can have their investments in if they've been early. and that that hasn't been the

same with ET. And maybe maybe it says something else about the ET community and that they might not trust that structure, but I think if you bring in the staking and the native yield, then you're going to open up that opportunity to bring in more of that that money into the ETF. And I mean, heading off any questions later, if it's only 3%, you know, the Fed is the Treasury yields 4.75% right now, but I mean, these things don't have to exist in silos. It's not a zero- sum game. can hold Ethereum and get your 3% and you can have your T bills and your cash um as a lot of people do now because we've got tokenized money markets on onchain and it's not just you know a kind of pipe dream that we're going to have staking we already have it but there's also some

issues to figure out about how that will work how it's going to be tax efficient how it works in the structure of these funds launches granter trust there's other things to figure out but there's other you know these things exist in traditional finance and it's not a security but securities lending is a very similar format or you can have a proportion of the fund uh allocated to lend out to short sellers or market makers and this provides a dividend to the investor. So there's there's this is something that traditional investors understand and know they kind of can get to grips with okay I've got a total return index. I'm getting this quarterly return that's baked in. Then they can start learning about ETH. So as well as the regulation stuff protects the end user and make sure that people can kind of play around and get involved in

crypto without worrying they're going to lose all their money. This makes it so that the fund is, the custodians, the major banks, the pension funds can say, "Okay, this fits within our risk framework. We understand this more now." And they can actually start getting involved in these ETFs more like we've seen with the Bitcoin ETFs. I think that's and that's it. Yeah. Do we have any questions? Okay. Um, regarding the narrative, what do you think about the narrative of digital oil for Ethereum? Do you think this this is better than the current confusions

around Ethereum? And also um I think if we look like the difference between Ethereum and Bitcoin in in terms of like ETF uh in terms of TVL for the ETF is like something like 50 billion and the current amount of of Ethereum stake is like also 50 billion. So if we had that extra 50 billion like the rate is not going to be 30% anymore. It's going to be much lower. So is that an issue? Does it cause concerns for the investors? like do we get back to the problem that the Ethereum ETF staking doesn't actually generate returns at the end of the day? Yeah. Uh I think I can take those. I'll take the first one at least.

Um I don't see it like oil. I don't I know we like to make the kind of comparisons and it's easier to kind of explain to people if we draw them back and it does help. But I think I see it Ethereum more as maybe like a NASDAQ composite and all the layer 2 are the kind of constituents of that ecosystem. That's how I would view it. It's kind of like, you know, it's a tech it's a tech index of what we're doing in crypto in Web 3 and then, you know, the layer twos are the constituents of that is if that makes sense. That's more how I would see it. Um, and on the staking point, I don't think it's an immediate concern that this is 3%. I don't think it's how much is staked on chain. It's it will be a case of narrative and how

those issuers go about then pitching this to people. But I think, you know, they've been able to do it easily with with Bitcoin. And this is adds that like, you know, regardless of where this is going, you've got exposure to the growth of this on like onchain web 3. You've got 3% yield like that you're getting. You're committing to the security of the network and you're actually involving yourself in in uh in the growth of kind of crypto. So, there's a few narratives there that you can kind of use that I think will be pretty pretty easy to entice more investors. Yeah. And one thing to add on the the staking yellow very interesting um question the day where we have $50 billion of AUM that comes to the ETFs, the ones that's currently staked. Um I think this will make a bunch of Ethereum holders also

think about their staking positions. Uh this might be also a time for them to actually exit their investments. Um, so it's not because you have $50 billion of Ethereum that's going to instantly be staked um through ETFs uh that you're going to remain with the exact same number of Ethereum that staked because people might potentially exit their position at this point. So this is not a fixed uh of course number uh you have a few redemption I think is around two three days. Um and so this is of course a variable rate uh variable uh number then of Ethereum that is staked and so it's going to be a free flowing I think the market is also going to find its its its demand um and it's the supply and demand will hopefully cross at one point

um so this is a variable so I'm not too worried about it um and hopefully if if it ever becomes an issue the Ethereum Foundation will will uh will tweak it so that the the mechanism still makes sense and the incentives are still in place and aligned correctly. Hi. Uh, two little questions if I may. First, uh, you're right that the staking rate for it is quite low and the more availators are coming online is even getting lower. But some of the staking rewards advertised by Al L1's are high but their inflation rate is also high. So is this considered together in any way by investors or is it also possible to make it part of the story is it's difficult to understand also for the investors and the second one is you referred I think to sting as risk-f free

rate but it's obviously not completely risk-f free so there's always some risks uh associated with slashing underperforming and are the investors in ST ETFs willing to take this risk and if not who's going to take this risk yeah the very good question I can take um the first one I think on the alternative assets like you know we've got the filings here. I don't think we have the exact assets but yeah if you're like on avalanche you're getting 11% or something but there's a lot of inflation. Salana is getting seven I think in January was getting like 12% around the memecoin stuff when the inauguration happened. So I think it will be a case of smaller issuers might stay out of the Ethereum like people who haven't obviously there's less Ethereum ETFs. So if you're maybe a an issuer with, you know, somewhere in the 10 to

50 billion AUM over all your products, you'll probably maybe go for a Salana or an Aptos or maybe a Polka Dot and you'll go with that we're getting generating more yields because it's easier. So you might not have like, you know, I think Black Rocks will continue to dominate in those in the Ethereum, but in the smaller issuers will go in with these funds and they'll do more interesting things where you can have maybe a leverage return on that other other stuff. So that's how they'll kind of combat that. I don't see it being a problem. I think there's enough space in the ETF, like the ETF industry is growing massively, so it's not going to be an issue. And on the risk-free rate, yeah, I agree. It's not it's not a risk-free rate. I think it's a thing.

Crypto, it's it's kind of a using crypto a bit to say to kind of say it, but yeah, it's not totally risk- free. Um, and sorry, what was the rest? Are the ETFs are okay to underperform getting slashed 24% or if not going to take? Well, yeah, this creates I think the there's interesting questions and it's why it's not happen straight away with ETH, you know, because there's some imperfect solutions out there like Caesar and stuff that don't kind of protect for that perfectly. So, I think if you're looking at um you have to be quite dynamic in in that in in the yield and where like where the rates coming from. So, it's going to be the issuers working conjunction with you know providers like I get node operators and people like uh you know figments and and aluvials and other people and then I

guess there's other ways that thing can be done. There might even be other products like you know we've got liquid staking tokens might end up doing ETFs on these and these might be an alternative. Um so yeah we'll see how that but I think it's the issue in the end of the day and that's why it's taking so long. And one thing to add um once the issuers will potentially work with the custodians uh re your slashing uh issue um the criteria I I hope at least will probably be really respected strongly in terms of uptime for example. um it's very different from running your own node personally at a with your 32 state um whereas if it's an institution with your you have billions of dollars worth of of staked assets um the SLA is in place and all the criteria should be

maintained and slashing I think should be an extreme uh co not coincidence but should be an extreme rarity um for at least for ETFs and liquid staking also would potentially solve even the redemption uh potential problem um so there there's a lot of innovation going in that space and which would help the Ethereum ETFs with staking for sure. I think I think that's it. I think we've Yeah, thank you very much. But yeah, feel free to Yeah, feel free to come to us for any questions. [Music]