On May 23, the U.S. Securities and Exchange Commission (SEC) surprised the markets by approving eight spot Ethereum ETFs, sparking a wave of positive sentiment. However, the Ether (ETH) price surprisingly did not react much to the news. Prior to the SEC announcement, Ether was priced at $3,742.31. It rose to $3,959.28 on May 27 before falling to $3,859.39 on May 28. The market has yet to see a consistent bull run.
Ether prices have been volatile over the past 7 days. In the days leading up to the approval, Ether’s value had risen by almost one-third. However, concerns about Grayscale’s Ethereum Trust (ETHE), which manages $11 billion in funds, started to influence the price action when indications suggested that the SEC might reverse its decision. This concern stems from months of significant outflows from the Grayscale Bitcoin Trust (GBTC), which mitigated the effects of substantial inflows. Market participants are now worried about a potential recurrence.
In the month following the approval of spot Bitcoin ETFs, GBTC experienced $6.5 billion in outflows, which amounted to 23% of its assets under management (AUM). A report by Kaiko Research estimated that if history repeats itself, average daily outflows from ETHE would reach $110 million.
Industry experts have mixed expectations regarding the outflows from ETHE. Toni Mateos, co-founder of LAOS Network, predicts significant outflows from Grayscale Ethereum Trust to the new ETF due to the ETF’s higher liquidity, narrower spreads, and lower fees. Mateos believes that the ETF will attract a broader market due to lower entry barriers and fees. He points out that while there are similarities between GBTC and ETHE, the importance of these Grayscale products to their respective markets differs. GBTC had nearly $30 billion of Bitcoin (BTC), representing 3.5% of the BTC market cap, whereas ETHE only has $11 billion of Ether, representing 2.2% of the market cap. Mateos suggests that the ETF’s impact on ETHE should be proportionally larger as outflows from ETHE to the new ETFs should be more limited.
Despite potential short-term outflows, experts believe the long-term outlook for Ether is positive. Mateos explains that if the ETH ETF adoption leads to a continuous influx of funds, the resulting increase in demand should drive prices higher. He also notes that the Ethereum network is more appealing to Environmental, Social, and Governance (ESG) focused investors due to its significantly lower carbon emissions compared to Bitcoin’s proof-of-work model.
Kurt Hemecker, CEO of the Mina Foundation, highlights Ethereum’s environmental appeal as a factor in its positive long-term outlook. The added ESG benefits of a spot ETH ETF make it an attractive addition to investment portfolios for mainstream and institutional investors.
Mitigating factors may help reduce the outflows from ETHE. James Toledano, COO at Savl, points out that the low supply of Ethereum on exchanges could limit sell-side liquidity and stabilize prices. Manthan Dave, co-founder of Palisade, believes that the historic low supply of Ethereum on exchanges could even lead to price increases despite outflows. He suggests that this scenario reflects a long-term investment sentiment as investors move ETH to private wallets or staking, indicating a bullish market outlook.
It’s important to consider various factors that influence Ethereum’s market dynamics beyond exchange supply levels. Ethereum’s transaction fee-burning mechanism reduces the circulating supply over time, offsetting some of the selling pressure from ETHE outflows. The upcoming Ethereum 2.0 upgrade, which involves staking ETH and making it unavailable for sale, further reduces the available supply and mitigates potential price impacts.
Kris Kay from the DeFi Donut YouTube channel points out that Ethereum’s slow issuance rate often leads to deflationary behavior, resulting in price appreciation multiple times that of BTC ETFs.
The approval of a spot Ethereum ETF has created a positive mood in the market. Industry figures believe that it boosts confidence in the industry and opens up Ethereum to a wider range of potential buyers. Oleg Fomenko, co-founder of Sweat Economy, predicts that the influx of institutional money through the approved ETFs will pump the price of ETH. He forecasts that ETH’s price could potentially increase up to $7,000 in the next three months.