Ether futures ETFs fizzle on US debut

The hotly anticipated rollout of exchange traded funds linked to ether, the world’s second-largest cryptocurrency, in the US has turned into a damp squib, with modest investor interest.

Nine ETFs holding futures contracts based on ether — the token of the Ethereum blockchain on which most “smart contracts” are written — debuted on the same day after regulators expedited the approval process to sidestep a potential US government shutdown, now averted.

However the funds saw combined trading volume of just $6.6mn on Monday, according to data from AB Bernstein. This was a pale shadow of the $1bn of assets that the ProShares Bitcoin Strategy ETF (BITO) garnered on its first two days of trading in October 2021 when it became the first US ETF trading in futures contracts linked to bitcoin, the largest cryptocurrency.

“The ether futures ETFs opened to a rather tame start on Monday. Total trading volume was $6.6mn which was a disappointing start,” said Gautam Chhugani, senior analyst, global digital assets at Bernstein, who believed media attention was focused on the impending trial of FTX founder Sam Bankman-Fried in New York.

Chhugani believed the lacklustre launch was “not surprising, given the continued weak retail sentiment” towards cryptocurrencies, whereas BITO launched at the peak of a digital bull market.

“Like any listed security, success or failure cannot be measured on the first days of trading with market sentiment and the macro environment all having a bearing on performance,” said Bradley Duke, chief strategist at ETC Group, a provider of crypto exchange traded products.

Despite rallying 10 per cent last week in anticipation of the wave of launches, the price of ether is still down 64 per cent from its peak in November 2021.

It fell 4 per cent to $1,663 on Monday as the launches underwhelmed — although as the ETFs are futures products, rather than investing in the “physical” spot cryptocurrency, purchases do not have any direct impact on the price.  

Bitcoin is also down by 57 per cent from the highs it briefly touched in November 2021 as cryptocurrencies have proved to be procyclical “high beta” assets.

The bulk of the trading that did take place was in the pre-existing Valkyrie Bitcoin Strategy ETF (BTF), which changed its name to add “and Ether” on Tuesday, when it broadened out to incorporate both cryptocurrencies.

BTF traded $4.6mn, according to Bernstein. The liveliest of the newly launched ETFs was the ProShares Ether Strategy ETF (EETH), which saw turnover of $879,000, ahead of the VanEck Ethereum Strategy ETF (EFUT), at $516,000.

Nevertheless, Chhugani argued that, if and when more retail investors do return to crypto there will be “wide availability of fair, secure and regulated products that help them attain crypto exposure without worrying about losing their savings from fraudulent exchanges”.

Dave Weisberger, chief executive and co-founder of CoinRoutes, an algorithmic trading platform for the digital asset industry, believed the funds would be popular with financial advisers, who cannot invest client money in crypto itself, but can do so via ETFs.

Ether is reasonably popular in Europe, where ETPs investing in both crypto futures and the physical spot currencies are permitted in many jurisdictions. The 13 pure ether ETPs available on the continent have combined assets of €1.1bn, according to data from TrackInsight, compared to €2.6bn in 20 bitcoin ETPs.

Overall, ether has a market capitalisation of $200bn, compared to $535bn for bitcoin and $83bn for tether, the third-largest cryptocurrency.

The launches come as the US ETF industry remains barred from what is sees as the crown jewel of the crypto firmament — spot bitcoin funds.

The Securities and Exchange Commission has refused to allow the launch of spot bitcoin ETFs, citing fears of fraud and manipulation on the unregulated exchanges on which the digital tokens trade, concerns that it does not have about futures contracts listed on the Chicago Mercantile Exchange, a regulated venue.

The SEC has thus far maintained this stance despite losing a court case to crypto manager Grayscale, which sued over the regulator’s refusal to let it convert its $17.4bn Bitcoin Trust (GBTC), a private fund, into an ETF, in August.

After that defeat, one school of thought was that the SEC might satisfy the court’s ruling — and equalise its treatment of spot and futures bitcoin ETFs — by retroactively axing BITO and its sister bitcoin futures ETFs.

The regulator’s willingness to allow ether futures ETFs would appear to have put that idea to bed.

Alongside Grayscale, 10 other managers, including BlackRock, Fidelity, Ark Invest, WisdomTree, VanEck and Valkyrie, have outstanding filings in place to launch spot bitcoin ETFs.

Chhugani believed a “distinct shift” was now evident in the SEC’s stance towards crypto ETFs, with applicants “seeing a more engaged SEC being responsive, unlike the past”.

He believed the first such bitcoin ETFs would be approved sometime around early January.

Spot ether ETFs may follow not long after, with Ark and VanEck among the groups to have filed to launch products. Grayscale has also filed to convert its existing $5bn Ethereum Trust (ETHE) into an ETF.

“What is clear is that, like bitcoin, the listing of these ethereum futures ETFs is ultimately paving the way for a spot ethereum ETF in the US,” said Duke.