Bitcoin's store-of-value proposition makes its spot ETF more appealing than Ethereum's, as the latter's spot ETF does not capture its primary ecosystem utility.
Analysts predict that the Securities and Exchange Commission (SEC) will approve spot Bitcoin ETF applications in January 2024, following the approval of Bitcoin (BTC) Futures ETFs in October 2021 and Ether (ETH) Futures ETFs in October 2023.
In anticipation, traditional financial institutions also applied to issue spot Ether ETFs. Since applicants like BlackRock have a near-perfect track record in obtaining SEC approval for their ETFs, spot Ether ETFs are likely to be approved, too. However, the SEC might approve them only after their Bitcoin counterparts, which would mean approval of Ether ETFs in late 2024 or early 2025.
If approved, spot Bitcoin and Ether ETFs will attract millions of new investors who were previously unable or unwilling to purchase crypto assets directly. Will Bitcoin and Ether's differing investment theses, alongside issuers' capability to integrate each asset's features into spot ETFs, impact the success of these newly created products?
For Ether in particular, the disparity between the underlying asset’s use cases and the spot ETF product offerings raises doubts about the product's viability. A spot Ether ETF does not allow shareholders to participate in the Ethereum network – the primary reason that an investor would seek to acquire Ether. Meanwhile, Bitcoin, which is widely used as a store of value, makes a spot Bitcoin ETF a more straightforward investment proposition.
Ether ETFs Have No Investment Thesis
The Ether investment thesis revolves around the ability of individuals and institutions to utilize the ETH token on the Ethereum network. Unlike Bitcoin, which is recognized for its monetary qualities as a store of value, as well as a medium of exchange in some geographical regions, the Ether token functions as the "gas" of a technology ecosystem. One way users use ETH is for staking, the process of participating in transaction validation on a proof-of-stake blockchain by locking up an amount (stake) of the network's native token to validate consensus and earn a yield.
River CEO Alexander Leishman stated, “ETH positioned itself as a tech platform and now it is forced to compete as such.” The ETH token’s role as a utility token for the Ethereum platform means its investment thesis is not based on underlying monetary characteristics.
The core value proposition of Ether makes it challenging for firms to market spot ETF products that only provide investors with price exposure. Investors don't hold Ether for its decentralization or monetary qualities. Corporations like MicroStrategy don’t sell stock to buy Ether. Countries like El Salvador haven’t designated Ether as legal tender – in fact, as far as anyone knows, no national governments are even talking about it.
Another obstacle is that applications like BlackRock’s do not even mention staking, which is central to Ether’s investment thesis. The SEC has been strict with crypto exchanges offering staking-as-a-service features, making it even more unlikely for BlackRock or other issuers to get permission to offer staking via an ETF.
Bitcoin ETFs
Based on current applications, spot Bitcoin ETF issuers will not offer in-kind redemptions, which means shareholders cannot take custody of their Bitcoin. Therefore, such products introduce additional counterparty risk. However, shareholders do gain exposure to Bitcoin’s price. This allows them to benefit from price appreciation even if annual management fees cut into their profits.
With a spot Bitcoin ETF, issuers can count on demand from market participants who view Bitcoin as a store of value and seek price exposure for extended periods. The store-of-value investment thesis makes it easy for Wall Street firms to market spot Bitcoin ETF products to financial advisors and retail investors.
Anticipating approval for spot Bitcoin products, traditional financial leaders like BlackRock CEO Larry Fink have changed their rhetoric. They no longer issue sound bites like "an index of money laundering" when it comes to Bitcoin. Instead, Fink now calls it an "international asset" that is "digitizing gold" and represents a "flight to quality" for investors.
Fink's description reflects bitcoin's perceived product market fit in Western markets as a store of value due to its decentralization and the network's monetary policy. Some U.S.-based firms are creating Bitcoin products focused on payments, but most holders of bitcoin store wealth in Bitcoin for long periods.
Looking Forward
The lackluster launch of the Ether futures ETF in October might indicate that a spot Ether ETF will be met with similarly low demand. Bitcoin and Ether’s underlying investment theses will determine the demand for ETFs issued against these assets. Since the utility of Ether comes from its ability to be used within the Ethereum ecosystem, a spot ETH ETF is unlikely to be a valuable product offering.
This is a guest post by David Waugh. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.
