By Gertrude Chavez-Dreyfuss
(Reuters) – It may take a little longer for Ether to emerge from Bitcoin's shadow.
Investors are more cautious and divided ahead of the US launch of exchange-traded funds tied to the spot price of ether on Tuesday, contrasting with the general euphoria that preceded the arrival of bitcoin-linked ETFs.
“It's going to be a smaller event than people make it out to be,” said Nathan Gauvin, chief executive of asset manager Gray Digital and $2 billion hedge fund Blackridge Investment Management.
The trading of ETFs issued by nine asset managers led by BlackRock (NYSE:), VanEck and Franklin Templeton on US trading platforms comes six months after the debut of bitcoin ETFs in January.
The consensus forecast is for ether ETFs to attract around 25% of bitcoin flows, although Steven McClurg, head of U.S. asset management at CoinShares, estimated it at just 10%.
A major issue for some investors is the SEC's exclusion of the “staking” mechanism, a key feature of the blockchain that releases ether, the world's second-largest cryptocurrency after bitcoin.
Staking allows Ethereum users to earn rewards by locking up their ether to help secure the network. Rewards or yield come in the form of newly minted ether tokens and portions of the network's transaction fees.
According to StakingRewards.com, the annual percentage yield for Ethereum staking was around 3.12% as of July 22. Staking is attractive because it improves returns.
As currently structured, the SEC will only allow ETFs to hold regular, unstaked ether.
“An institutional investor looking at ether knows there's yield to be had,” said CoinShares' McClurg. “It's like a bond manager saying they'll buy the bond, but they don't want the coupon, which is the opposite of what you do when you buy bonds.”
The SEC believes that staking in exchange for tokens qualifies as an investment contract, which requires disclosures and safeguards under U.S. securities laws.
McClurg believes investors will continue to stake ether outside of an ETF and earn a return rather than paying fees and keeping it in an ETF.
He said CoinShares, which oversees more than $6 billion in assets, is going to wait and see how this all plays out. “We have made a conscious decision not to get involved in this round of an ETF that has no market share.”
Gray Digital's Gauvin believes staking will eventually be included in the ETF sometime next year. “But this is a halfway point to get to that point.” The firm is also not involved in this launch, but will be keeping a close eye on it.
'LIKE A STOCK WITHOUT DIVIDENDS'
Chanchal Smadder, head of product at ETC Group, echoed CoinShares' McClurg's comments, saying that holding the ETF without the staking yield is “like owning a stock and not being entitled to the dividend.”
ETC, with $1.4 billion in assets, is the first German issuer of cryptocurrency exchange-traded products (ETPs), which are similar to ETFs. It has staked and unstaked ether ETPs totaling $150 million.
Smadder said demand for staked ether ETPs is higher than that for unstaked ones, and that the staked fund has received inflows of $51 million so far this year, while unstaked has seen outflows of $95 million.
However, Smadder noted that a lack of liquidity is a risk when staking ether and validators or stakers have to wait in line to withdraw their ether. The processing time to complete the output queue can sometimes take eight to nine days, he said.
“With unstake, ether is unlocked and available at all times.”
Nana Murugesan, president of Matter Labs, a research and development firm helping scale Ethereum, said the launch of ether ETFs was less about staking, and more about a “watershed moment” in cryptocurrencies.
Most importantly, Murugesan said, is investor access to a blockchain that underpins multiple applications. “As Ethereum and its adoption grows, the value of the ETF also grows with all the network effects.”
Overall, investors agree that ether flows are unlikely to come close to matching the bitcoin ETFs captured in the first week of trading, given ether's smaller market cap of $424 billion, compared to bitcoin's $1.4 trillion.
ETFs attracted nearly $7 billion in assets in their first three weeks of trading, according to data from Morningstar Direct. By the end of June, ETFs had attracted a net $33.1 billion in inflows.
