Politics, the ETH Spot ETF, and Current Sentiment
With Trump’s assassination attempt, Biden’s presidential race dropout announcement, and Kamala Harris’ push for the democrat presidential ticket, the US has seen a huge change in the political landscape of the country. Come what may in November, it is certain that crypto is here to stay and grow. In this newsletter, let’s look at what the Ethereum ETF means for the industry and where we are headed.
In a move that seemed improbable just a few months ago, the U.S. SEC approved the first-ever spot Ethereum ETF in May 2024. On July 23, the 9 new ETH ETFs started trading, marking a groundbreaking development that opens the door for institutional and retail investors to buy the second-largest cryptocurrency by market capitalization directly on U.S. exchanges. Let that sink in! But, if we rewind a bit, the approval came as a surprise to most. The Wall Street analysts were putting the odds of approval at about 25%, until May 20, 3 days before the deadline, when things dramatically changed with the odds jumping to 75%, with some saying that the approval was more politically motivated.
So what does it mean for the market to have another crypto ETF? The launch of Ethereum ETFs is a significant milestone, legitimizing Ethereum as an investment-grade asset for the institutions. Kraken’s head of strategy, Thomas Perfumo, forecasts net inflows of $750 million to $1 billion per month for the first five to six months. Citigroup projects between $4.7 billion and $5.4 billion in the initial six months, while Bitwise predicts a substantial $15 billion by May 2025. Our estimation is more in line with Bitwise’s as we estimate major demand coming in by Q1 2025. Moreover, the ETFs’ launch is definitely seen as a positive step toward regulatory clarity, attracting retail investors and potentially new ETF approvals, leading to increasing liquidity and network adoption for blockchain ecosystems.
Comparing Ethereum ETFs to Bitcoin ETFs has been a common exercise. The success of Bitcoin spot ETFs, which launched in January and reached a nearly $60 billion market cap across 11 funds, has set a high bar for Ethereum. However, the different nature of the assets (non-yielding vs yielding) influences the dynamics significantly. The one thing that is common though across both ETF assets are the fees. Various firms like ARK & 21 Shares, BlackRock, Fidelity, and others, have triggered a fee war with management fees ranging from 0.15% to 0.25%. Grayscale is the only one that stands out with a high 2.5% ETF fee. Initially, many firms proposed staking the underlying ETH (the yield component of the asset), but SEC comments have led issuers to remove the staking component for the time being. This absence complicates the product’s attractiveness, but the expectation is that by the end of the year, we will likely see staking included in the ETFs. Whether that is because of a regime change (Trump’s Republican) or a change in stance by the new democrat president, remains to be seen.
Another key comparison to watch out for is with the Gold ETFs. The United States’ first gold ETF — SPDR Gold Shares (GLD) that launched in Nov. 2004, over 20 years ago — took more than two years to reach an AUM of $10 billion. BlackRock’s iShares Bitcoin Trust accumulated the same in just 7 weeks! Now, it is not a fair comparison since the money supply is different compared to two decades ago. But even accounting for inflation, $10 billion then is approximately $17 billion now. And as of Aug 2, 2024, Blackrock’s BTC ETF has an AUM of $21.5 billion! If Ethereum ETF inflows are even a third of what Bitcoin ETF flows have been, we are looking at a massive ETH supply crunch.
Looking at the initial performance of the ETH ETFs, we can notice some interesting things. The first few days of trading saw a mixed start, with just 3 positive flow days so far. As of Aug 2, 2024, BlackRock’s ETHA led with $713 million in net inflows, followed by Fidelity’s FETH with $297 million and Bitwise’s ETHW with $288 million. Grayscale’s ETHE stood out, negatively unfortunately, with substantial net outflows totalling $2.1 billion, resulting in a total net outflow of $511 million for the combined U.S. spot Ethereum ETFs. Despite ETHE’s outflows, the launch saw healthy trading volumes, with $4.05 billion in the first week, or 34% of Bitcoin ETFs’ volume during their launch period. Excluding ETHE, Ethereum ETFs captured around 40% of the net inflows seen by Bitcoin ETFs, indicating a strong debut with more than $1.55 billion in inflows.
So, what’s the Grayscale story, you might ask. Grayscale’s ETHE’s higher fee structure (2.5%) compared to other ETFs (0.19% to 0.25%) has contributed to the sell-off. With current net outflows averaging $235 million per trading day, ETHE’s assets could be depleted within 6-8 weeks if the trend continues. For day traders, on-chain net flow data for ETH to custodians like Coinbase could indicate whether ETHE will continue to exert selling pressure on a given day.
The future of crypto is exciting as we begin our ascend towards the vertical portion of the ‘J adoption curve’. We now have bipartisan support in the US, global support in many nations, several institutions building on blockchain, thousands of companies buying digital assets for their balance sheet, many popular applications that solve real-world problems (logistics, payments, etc.), the lindy effect of Bitcoin surviving 16 years, and so much more. It is only a matter of time before crypto becomes more prevalent than it currently is. Looking ahead, the market’s excitement is already building for the potential launch of Solana ETFs, signalling a promising long-term outlook for ETH ETFs and the broader crypto market. Strap in!
Sentiment Watch
Bitcoin’s price dropped significantly over the weekend, touching a low of $49,000, its lowest since February, before bouncing back over $50,000. The selloff was driven by a combination of a) large sales from entities such as Jump over the weekend when there is low liquidity, b) poor unemployment data from the US that triggered calls for a recession, c) increasing uncertainty in the Middle East around Israel and Iran, and d) the unwinding of the Yen carry trade. The “Yen Carry Trade” is when institutions borrow Yen (at low interest rates) to invest in high-return assets. Japan has had a low interest rate policy for a long time which led to alot of borrowing to invest in other markets like US equities. Last week, the Bank of Japan increased the interest rate to 0.25%, which may appear small but it is the first such increase in 15 years! This resulted in an unwinding of certain assets in the carry trade (as it is now less profitable), causing a market-wide panic.
On the back of the activity in the last week, the odds of a September rate cut of 25bps is almost 100%, and the odds of a 50bps rate cut is at 70%. As the next FOMC meeting is on 17 September the market is also anticipating a potential emergency rate cut from the Fed, especially if markets continue to sell-off and/or macro data continues to disappoint. One can argue that the Fed may be late to cutting rates, however the Fed was reluctant to do so without inflation within its target, as the unemployment rate was low and the stock market was at or close to all time highs.
The crypto market sell-off is mostly due to factors outside of its ecosystem, however, it is not immune to a global sell off and any squeezing of liquidity. We will be monitoring macroeconomic changes and volatility indicators this month as the market navigates these turbulent conditions.
Project Spotlight
BLOCKLORDS
BLOCKLORDS has had an action-packed July with several exciting developments and the launch of its $LRDS token. The soft launch of Dynasty has commenced, attracting 900 users and 15k transactions in the first week of the closed beta (July 1st week). Game data highlights include a new peak of 28k daily active users and 15k Battlepass sales. Community growth has been impressive, with Twitter followers increasing to 340k+ and Discord members to 40k+.
The $LRDS token plays a crucial role in the gaming ecosystem, enhancing gameplay and player engagement. The token launched on July 24 on several top crypto exchanges such as Coinbase, Kucoin, HTX, and Gate, among others. Players can earn $LRDS through strategic decisions, which can be used to gain influence, unlock in-game items, and accelerate progress. Additionally, $LRDS tokens enable players to participate in community voting, influencing game development and narrative decisions. Beyond gaming, $LRDS extends into the broader web3 space via LORDCHAIN, allowing players to secure nodes and participate in validation and treasury voting.
Upcoming plans for the team include Season 3, Gamedrop III, LORDCHAIN, and Stronghold battles. We are excited to see what BLOCKLORDS achieves as it is touted as one of the top web3 games of this year.
Market News
- The German Government sold its Bitcoin holdings, totalling ~50k BTC (~$2 billion), contributing to a significant sell-off that kept Bitcoin’s price at a low of $54,000 on July 5. Bitcoin rebounded to $69k later in July, showing high demand in the $60k region. However, after Germany’s exit from Bitcoin, market pressures continued to persist due to the Mt. Gox reimbursement plan. Mt. Gox has already sent out $6 billion to the creditors, with only $3 billion left in its wallets, nearing the end of its $9 billion distribution. From a psychological perspective, the events represent the final chapter in a major market overhang over the industry.
- During the Bitcoin 2024 conference, Trump announced a plan to make the U.S. government “hodl” all of its Bitcoin holdings and build a Bitcoin reserve if he gets elected. Following the announcement, the US Government moved almost $2 billion worth of Bitcoin into two new addresses. Theories suggest that this was a planned move to custody BTC with Coinbase, whereas the conspiracy theorists said it appears as if the current administration was “trying to counter” Trump’s “hodl” campaign. “If there’s no Bitcoin left when he gets to office then it’s a moot point.”
- The US Federal Reserve left key interest rate unchanged in its end-of-July meeting, signalling a possible rate cut in September amid easing inflation and a cooling job market.
- Ethereum Team Lead Péter Szilágyi criticized the PeerDAS proposal, which would increase Ethereum blob sizes to 32 MB, arguing it would exclude home stakers and undermine the network’s decentralized ethos. Szilágyi expressed concerns that the Ethereum research team is moving towards centralization, contradicting the core principles of a global decentralized network.
- Fundraising volume increased 22.5% QoQ, continuing an upward trend. However, June’s fundraising volume decreased by 33.8% from May’s, reflecting a possible slowdown in funding as markets cooled. The most notable deals included Monad ($225 million), Farcaster ($150 million), Berachain ($100 million), Polymarket ($70 million), Babylon ($70 million).
- Sony is set to launch a cryptocurrency exchange subsidiary named S.BLOX Co. by revamping the acquired local trading platform WhaleFin, enhancing it with a redesigned user interface and a new mobile app. The date for the launch is not finalized yet.
- Hacks and outages were common this past month. AT&T reported a data breach exposing millions of phone numbers and call logs. LiFi Protocol was exploited for ~$10 million due to a call injection attack. WazirX was hacked for ~$230 million due to a multi-sig wallet compromise. Compound Finance got hit by a $24 million “governance attack”. Lastly, the CrowdStrike update caused a massive global IT outage, disrupting institutions, airlines, users, and more.
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Warm Regards,
Woodstock Team
