The BTC ETFs opened the door for many new buyers to make bitcoin allocations within their portfolio. The impact of ETH ETFs is a lot less clear-cut.

I was vocally bullish for Bitcoin at $25k when the Blackrock ETF application was submitted and now since then, it has returned 2.6x, with ETH returning 2.1x. From the cycle bottom, BTC has returned 4.0x and ETH has returned a similar 4.0x. So how much upside would an ETH ETF Provide? I would argue not much unless Ethereum develops a compelling pathway to improve its economics

Flow Analysis

In total, Bitcoin ETFs have accumulated $50B AUM - an impressive amount. However, when you break down the net inflows since launch by isolating out pre-existing GBTC AUM and rotations, you have $14.5B net inflows. These are however not true inflows as there have been many delta neutral flows that need to be accounted for - namely Basis trade (sell futures, buy spot ETF) and spot rotation. Looking at CME data and an analysis of the ETF holders, I estimate roughly $4.5b of net flows can be attributed to the basis trade. ETF experts suggest that there is also significant conversion of spot BTC to ETF by large holders such as BlockOne, etc - roughly estimating $5b. Discounting these flows we arrive at true net buying of $5 billion from the bitcoin ETFs

From here we can simply extrapolate to Ethereum.@EricBalchunas""> @EricBalchunas estimates that ETH flows could be 10% of BTC. This puts true net buying flows at $0.5b within 6 months and reported net flows at $1.5b. Even though Balchunas was off on his approval odds, I believe his lack of interest/peccimism on the ETH ETF in his seat is informational and reflective of broader tradfi interest

Personally, my base case is 15%. Starting with the BTC $5B true net, adjusting for ETH market cap which is 33% of BTC and an access factor* of 0.5, we arrive at $0.84b true net buying and $2.52b reported net. There are some reasonable arguments that there is less ETHE overhand than with GBTC, so the optimistic scenario I would put at $1.5b true net and $4.5b reported net. This would be roughly 30% of BTC flows.

In either case, the true net buying is much lower than the derivative flows frontrunning the ETF which accounts to $2.8b and this does not include spot frontrunning. This implies that the ETF is more than priced in.

*Access factor adjusts for the flows that ETFs enable that distinctly benefit BTC more than ETH given the different holder bases. For example, BTC is a macro asset with more appeal to institutions with access issues - macro funds, pensions, endowments, SWFs. Whereas ETH is more of a tech asset that appeals to VCs, Crpyto funds, technologists, retail, etc that are not as restricted in accessing crypto. 50% is derived by comparing the CME OI to Market cap ratios of ETH vs BTC

Looking at CME data, ETH has significantly less OI than BTC before ETF launch. Roughly 0.30% of supply represented in OI vs BTC’s 0.6% of supply. At first I saw this as a sign of “earliness”, but one could also argue that it belies smart tradfi money’s lack of interest in the ETH ETF. Traders on the street had a great trade with BTC and they have tend to have good information so if they are not repeating it for ETH then it must be good reason potentially implying weak flow intel

How did $5b bring BTC from $40k to $65k?

Short answer is that it didn’t. There have been many other buyers in the spot markets. Bitcoin is an asset that has truly become validated globally as a key portfolio asset and has many structural accumulators- Saylor, Tether, family offices, HNWI retail, etc. ETH also has some structural accumulators but I believe at a magnitude less than BTC.

Remember that Bitcoin has gone to $69k / $1.2T+ BTC ownership before an ETF even existed. Market participants/institutions own a huge % of spot crypto. Coinbase has $193B under custody and $100b of that is from their institutional program. In 2021, Bitgo reported $60B in AUC, Binance custodies $100b+. After 6 months, ETFs custody 4% of the total bitcoin supply, it’s meaningful, but only part of the demand equation.

Long term $BTC demand flows this year I approximate to be $40-130B+

One of the most common cardinal sins of crypto investors/traders is underappreciating the amount of wealth/income/liquidity in the world and its spillover into crypto. We hear stats about the market cap of gold, stocks, real estate so often that it likely turns into noise for many. Many in crypto get stuck in their own little crypto bubble, but the more you travel and meet other business owners, HNWI, etc, the more you realize how incomprehensibly massive the amount of $ there is in this world and how much of that can come into $BTC/crypto. Let me put this into perspective with a rough demand sizing exercise.

The avg US Household income is 105k. There are 124m US households in the US which means the aggregate annual income in the US across individuals is $13 TRILLION. US is 25% of GDP, so Global aggregate income is ~$52T.

Global crypto ownership on average is 10%. In the US its ~15% and as high as 25-30% in the UAE. Assuming crypto owners allocate only 1% of their income annually, that works out to $52B buying for BTC annually and $150M daily. Realistically, this buying isn’t linear and has a lot of daily variation depending on seasonality variables. Keep in mind, this is an estimate for non-ETF/pre-ETF flows. People seem to forget that there has been massive consistent demand for Bitcoin even before these ETFs were approved. How do you think Bitcoin got to become a trillion dollar asset and has consistently trended higher over the last 10 years?

These estimates are quite conservative for a few reasons. (1) you probably see more than a 1% allocation. True believers are putting 50%+ in. Average allocation maybe actually 3-5% on average? (2) Allocations from businesses, macro funds, pension funds, sovereign wealth funds, etc are not included here and probably on a similar order of magnitude.

What about Mt Gox? Celsius? USG Selling? Miner Emissions? This has been the bear argument for many but the reality is when you size up the buy flows - they dwarf all of these sell flows put together. Table below shows this selling to amount to ~$17b. And the non mining emissions are also not recurring/cleared after this year. Traders/Investors in this space always overemphasize what they can see. Open your eyes and understand the size of the flows that aren’t publicly stated.

Now add on top of this the ETF inflows. Just the lower bound of estimates covers the sell flows itself. But recently we’ve been seeing many days above the upper bound. Wouldn’t be surprised to see us run at $100-200m+ daily over the next month. Really, what is the bear argument here?

Major respect to guys like @cburniske but I still believe this ETF launch is not comparable to previous events like CME futures, Coinbase IPO, etc and we don’t spend anytime below 40ks. 50-60ks in Febuary and ATH by March.

Between MSTR and Tether, you already have billions of additional buying, but not only that, you also had under positioning going into the ETF. It was quite a popular opinion at that the time that the ETF was a sell the news event/market top. So billions of short to medium to long term momentum had sold and needed to buy back (2x flow impact). On top of that we had shorts that needed to buy back once the ETF flows showed to be significant. Open interest actually went down going into the launch - pretty crazy to see.

The positioning for ETH ETF is very different. ETH is at 4x the lows vs BTC 2.75x before launch. Crypto native CEX OI increased by $2.1B bringing OI to near ATH levels. The market is (semi) efficient. Of course many crypto natives seeing the success of the bitcoin ETF expect the same for ETH and have positioned accordingly.

Personally, I believe that the expectations of crypto natives are overinflated and disconnected from the true preferences of tradfi allocators. It is natural that those deep in the crypto space have a relatively high mind share and buy in of Ethereum. In reality, it has much less buy in as a key portfolio allocation for many large groups of non crypto native capital.

One of the most common pitches to tradfi is Ethereum as a “tech asset”. Global computer, Web3 app store, decentralized financial settlement layer, etc. It’s a decent pitch, and I’ve previously bought into it in previous cycles, but it’s a hard sell when you look at the actual numbers.

In the last cycle you could point to the growth rate of fees and point to DeFi and NFTs that would create more fees, cash flows etc and make a compelling case for this as a tech investment in a similar lens to tech stocks. But this cycle the quantification of fees is counterproductive. Most charts will show you flat or negative growth. Ethereum is a cash machine, but at $1.5B 30d annualized revenue, a 300x PS ratio, negative earnings/PE ratio after inflation, how will analysts justify this price to their daddy’s family office or their macro fund boss?

I even expect the first few weeks of fugazi (delta neutral) flows to be lower for two reasons. The first being that the approval was a surprise and the issuers have much less time to pitch large holders to convert their ETH to ETF form. The second being that it is less attractive for holders to convert given that they will need to give up yield from staking or farming or utilizing the ETH as collateral in DeFi. But note that stake rate is only 25%

Does that mean ETH will go to zero? Of course not, at some price it will be be considered good value and when BTC goes up in the future, it will be dragged up with it to some extent. Before the ETF launch, I expect ETH to trade from $3,000 to $3,800. After the ETF launch my expectation is $2,400 to $3,000. However, If BTC moves to $100k in late Q4/Q1 2025, then that could drag ETH along to ATHs, but with ETHBTC lower. In the very long run, there are developments to be hopeful about and you have to believe that Blackrock/Fink are doing a lot of work to put some financial rails on blockchains & tokenized more assets. How much value this translates into for ETH and on what timeline is uncertain.

I Expect a continued downtrend for ETHBTC with the Ratio over the next year to range between 0.035 to 0.06. Even though we have a small sample size, we do see ETHBTC making lower highs each cycle, so this should be no surprise.

Disclaimer：

1. This article is reprinted from [x.com]. All copyrights belong to the original author [Andrew Kang]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.