Title: Analysis of the Impact of Bitcoin and Ethereum Spot ETF Approval
The approval of the Bitcoin spot ETF has opened the doors for many new buyers to enter the cryptocurrency market, allowing them to allocate Bitcoin in their portfolios. However, the impact of the Ethereum spot ETF approval is not as evident.
When BlackRock filed for the Bitcoin spot ETF, I was strongly bullish on the price of Bitcoin. At that time, the price of Bitcoin was $25,000, and now it has returned 2.6 times, while Ethereum has returned 2.1 times. From the bottom of the cycle, the return rate for both Bitcoin and Ethereum is 4 times. Therefore, how much upside potential can the Ethereum ETF provide? I believe that unless Ethereum develops new models to improve its economic situation, there won’t be much upside potential.
I stated on June 19, 2023: BlackRock’s approval rate for the Bitcoin spot ETF is as high as 99.8%, which is the most positive news we have heard recently, potentially opening the floodgates for billions of dollars in funds. However, the price of Bitcoin has only risen by 6%, and the performance has not met expectations.
Overall, although the Bitcoin spot ETF has accumulated $50 billion in assets under management, the net inflow after excluding the existing GBTC assets under management and swaps is $14.5 billion. However, this is not true inflow due to the delta-neutral flow that needs to be considered. By looking at CME data and analyzing ETF holders, I estimate that approximately $5 billion in net flow can be attributed to delta-neutral flows. ETF experts indicate that large holders such as BlockOne have also converted significant amounts of spot Bitcoin to spot ETF, estimated at around $5 billion. Deducting these flows, we get the true net purchase amount for the Bitcoin spot ETF as $5 billion.
Based on this, we can infer the situation of Ethereum’s fund flow. Bloomberg’s ETF analyst, @EricBalchunas, estimates that Ethereum’s flow may be 10% of Bitcoin’s. This means that the true net purchase flow within 6 months is $5 billion, while the reported net flow is $15 billion. Although @EricBalchunas’ accuracy is not high, I believe he represents the attitude of many traditional financial institutions.
Personally, I believe that Ethereum’s flow may be 15% of Bitcoin’s. Starting from the $5 billion true net purchase amount for Bitcoin (as mentioned above), by adjusting Ethereum’s market value (33% of Bitcoin’s) and a coefficient of 0.5, we can arrive at a true net purchase amount of $8.4 billion and a reported net purchase amount of $25.2 billion. There are reasonable arguments that the premium of ETHE (Grayscale Ethereum Futures ETF) is less than that of GBTC, so I believe the optimistic scenario is a true net purchase amount of $15 billion and a reported net purchase amount of $45 billion, which is approximately 30% of Bitcoin’s flow.
Regardless of the scenario, the estimated $15 billion true net purchase amount for the Ethereum spot ETF is much lower than the current $28 billion in derivatives inflows for Ethereum, not including the spot front-running. This means that the pre-estimated fund inflow for the Ethereum spot ETF has already exceeded the actual fund inflow, and therefore the price of the Ethereum spot ETF has largely been priced by the market.
The access coefficient: Adjusted based on the liquidity achieved by the ETF, Bitcoin clearly benefits more than Ethereum from different holder bases. For example, Bitcoin is a macro asset and is more attractive to institutions with access issues (macro funds, pension funds, endowments, sovereign wealth funds). In contrast, Ethereum is more like a tech asset and is more attractive to institutions with less strict access requirements in the cryptocurrency field, such as VCs, crypto funds, tech experts, and individual investors. The 50% is derived from comparing Ethereum’s CME OI (Open Interest, derivatives open position) to market value ratio with Bitcoin’s.
Looking at CME data, Ethereum’s OI was significantly lower than Bitcoin’s before the launch of the Ethereum spot ETF. Ethereum’s OI accounted for approximately 0.3% of the supply, while Bitcoin’s accounted for 0.6%. Initially, I thought this was an early sign, but it could also be said that this masked the lack of interest from traditional financial capital in the Ethereum ETF. Wall Street traders tend to trade Bitcoin spot ETFs and often have first-hand information, so if they are not using the same approach for Ethereum, there must be good reasons, possibly indicating insufficient information about Ethereum’s liquidity.
The question arises: how did $50 billion push Bitcoin from $40,000 to $65,000? The most direct answer is that $50 billion alone cannot achieve this, as there are many other buyers in the spot market. Bitcoin is a globally recognized key investment portfolio asset and has long been held by many large institutions such as Saylor, Tether, family offices, and high net worth individual investors. While Ethereum also has large institutional holdings, I believe their magnitude is lower than Bitcoin’s.
Before the launch of the Bitcoin spot ETF, the highest price of Bitcoin had already reached $69,000, with a market value exceeding $1.2 trillion. Market participants and institutions hold a large amount of spot cryptocurrencies. Coinbase holds $193 billion, of which $100 billion comes from other institutions. In 2021, Bitgo reported AUC of $60 billion, while Binance holds over $100 billion. Six months later, the Bitcoin spot ETF held 4% of the total Bitcoin supply.
I tweeted on February 12 about the size of the cryptocurrency market: I estimate that the long-term demand for Bitcoin this year will exceed $400-1300 billion. One of the most common mistakes made by cryptocurrency investors is to underestimate the wealth of the world, people’s income, the liquidity of funds, and their impact on cryptocurrencies. We often hear statistics about the market value of gold, stocks, and real estate, so much so that cryptocurrencies may be overlooked by many people. Many cryptocurrency practitioners fall into their own mindset, but the more you travel and meet other business owners, high net worth individuals, etc., the more you realize how unimaginable the amount of dollars in the world is, and how much of it can enter Bitcoin or other cryptocurrencies.
Let me explain this point through rough demand scale exercises. The average household income in the United States is $105,000. There are 124 million households in the US, meaning the annual total income of individuals in the US is $13 trillion. The US accounts for 25% of GDP, so the global total income is approximately $52 trillion. The global average ownership rate of cryptocurrencies is 10%. In the US, this ratio is about 15%, while in the UAE it is as high as 25-30%. Assuming cryptocurrency owners allocate only 1% of their income each year, the annual cost of buying BTC is $520 billion, or $1.5 billion per day.
When the Bitcoin spot ETF was launched, MSTR (Microstrategy) and Tether purchased billions of dollars of Bitcoin, as well as investors who entered at that time, and their holding costs were also at a low level. At that time, many people believed that the approval of the Bitcoin spot ETF was a signal to sell. Therefore, billions of dollars of short-term, medium-term, and long-term positions have been sold and need to be repurchased. Most importantly, once the flow of the Bitcoin spot ETF forms a significant upward trend, the shorts need to cover. Before the Bitcoin spot ETF was launched, the open interest contracts actually decreased, which was crazy.
The positioning of the Ethereum spot ETF is very different. The Ethereum price is now 4 times the low point before the spot ETF was launched, while Bitcoin is 2.75 times. The native CEX OI of cryptocurrencies has increased by $21 billion, bringing the OI close to ATH (all-time high) levels. The market is efficient. Of course, many cryptocurrency natives have seen the success of the Bitcoin spot ETF and have similar expectations for Ethereum, positioning it accordingly.
Personally, I believe that the expectations of cryptocurrency natives have been exaggerated and are out of touch with the real preferences of the traditional financial market. This leads to a relatively higher psychological share and purchase volume of Ethereum for those deeply involved in the cryptocurrency field. In fact, the purchase volume of Ethereum as a key investment portfolio allocation is much lower for many large non-crypto native capital groups.
One of the most common marketing slogans in traditional finance is that Ethereum is a tech asset. It’s a good slogan, and I bought it in the last cycle, but it’s hard to accept when you look at actual returns. In the last cycle, you could point out the growth rate of fees and argue that DeFi and NFTs would generate more fees, cash flow, etc., and present it as a tech investment from a perspective similar to that of tech stocks. However, in this cycle, the quantification of fees is the opposite. Most charts show flat or negative growth. Ethereum is an ATM, and based on its annualized rate, it takes only 30 days of income to generate $1.5 billion, resulting in a P/E ratio of 300 times, and a negative P/E ratio after adjusting for inflation. How will analysts prove to their family offices or macro fund bosses that this price is reasonable?
I even expect that the traffic in the first few weeks will be lower, for two reasons. First, the approval of the Ethereum spot ETF was unexpected, and the issuer did not have much time to convince large holders to convert their Ethereum into the spot ETF form. Second, the appeal of the conversion is small because they need to give up staking or the income from Ethereum in DeFi. However, please note that the current Ethereum staking rate is only 25%.
Does this mean that Ethereum will go to zero? Of course not. At some price, it will be considered worthwhile, and it doesn’t necessarily follow Bitcoin’s rise in the future. Before the spot ETF was launched, I expected Ethereum’s trading price to be between $3,000 and $3,800. After the spot ETF was launched, my expectation is $2,400 to $3,000. However, if Bitcoin rises to $100,000 in Q4 2024 or Q1 2025, it may push Ethereum’s price above ATH, but Ethereum may fall after Bitcoin. In the long run, there are some developments to look forward to, and you have to believe that BlackRock and Fink are doing a lot of related work to build some financial infrastructure on the blockchain and tokenize more assets. How much value this will bring to Ethereum and the specific timing is still uncertain.
I expect that the Ethereum-to-Bitcoin ratio will continue to decline, with a ratio between 0.035 and 0.06 in the next year. Although our sample size is small, we do see that the Ethereum-to-Bitcoin ratio sets lower highs in each cycle, so this should not be surprising.