ETH ETF launches staking
As widely predicted in the ETF industry, Thursday’s Ethereum ETF debuts in the US were underwhelming.
On day one, Ethereum ETFs saw $101M in inflows—just 14% of the $633M bitcoin ETFs achieved. The price of ETH has also flatlined since Thursday. By contrast, bitcoin ETFs drove a 50% rally in the bitcoin price after launch.
The ETF industry blamed this in advance on the lack of staking, citing the clear preference in Europe for staked Ethereum ETFs. In Europe, both staked and unstaked Ethereum ETFs are available—and the market has made up its mind on which it prefers.
But how accurate was that judgment? Was the muted arrival of Ethereum ETFs was because of staking?
Looking at staking yields themselves, you’d think it is wrong. Staking yields on Ethereum have fallen from 5% at the end of 2022 to 3.2% now, according to Compass FT. This is below the yields on cash in today’s high-interest rate regime. Ironically, one reason for the decline is the growth of staked Ethereum ETFs themselves. Their growth has meant staking pools get diluted, creating lower yields.
These two factors—staking yields of 3.2%, yields being inversely proportional to the size of staked Ethereum ETFs—might argue against the significance of staking.
Adding to this, staking creates extra risks for ETFs. By and large, ETFs do best when they only hold assets that can be sold within two business days. This allows an ETF to quickly generate the cash needed to for redemptions. But here, staking can create problem. When you stake your Ethereum, sometimes it needs to be locked up for a week. Meaning Ethereum ETFs cannot always sell assets quickly enough.
That said, there is reason to think the ETF industry is right that staking wins the day for Ethereum ETFs. Why?
Firstly, staked ETH is reinvested daily or most days, creating continuous compounding. Over the long term, this means the return uplift is greater than a simple annualised yield index might suggest.
Secondly, the tech sector—of which Ethereum is part and to which it should be benchmarked—is famous for low dividends and bond yields. QQQ has yielded 0.50–0.95% over the past five years. Microsoft and Apple’s bonds trade on the thinnest of credit spreads. In this setting, the yields on Ethereum need to be understood as generous.
Thirdly, staking rewards are an important lever for lowering management fees. One model seen in Europe involves the issuer removing their management fee altogether and opting instead to take a share of the staking returns. This is especially significant given that crypto exchanges like Coinbase and Kraken do not charge management fees at all.
Fourthly, the growth of “restaking” since April (also called the EigenLayer) means that staking yields are growing in significance. Not coincidentally, the EigenLayer is where we’re seeing the most VC interest in crypto right now.
ETF issuers wanted to stake, but the SEC said they couldn’t, claiming it constitutes an unregistered securities offering. Whether the current ban on staking will survive a likely Trump second term remains to be seen. Trump, after receiving large campaign donations from the crypto industry, promised to fire the politically appointed SEC chair Gary Gensler on day one.
But for now, it looks like the lack of staking is muting Ethereum ETF growth in the US. And the ETF industry’s predictions of a damp squib launch on Thursday due to staking were correct.
