Ethereum ETPs and the Path to a New All-Time High

ETP flows could have an even bigger impact on Ethereum than they did on Bitcoin.

Everyone wants to know what will happen to the price of ETH after the spot ETPs launch. Here’s my prediction: ETP inflows will push prices to all-time highs, above $5,000.

Not immediately—in fact, I think the first few weeks could be choppy, as money may flow out of the $11 billion Grayscale Ethereum Trust (ETHE) after it converts to an ETP. But by year-end, I’m confident the new highs will be in. And if flows are stronger than many market commentators expect, the price could be much higher still.

Here’s why.

It’s All About Supply and Demand

The best way to model the potential impact of an ETP launch on a commodity’s price is to think about supply and demand. ETPs do not change the fundamentals of an underlying commodity like ETH, but they do bring new sources of demand.

Consider what happened to Bitcoin’s price after the launch of spot Bitcoin ETPs in January. Since that day, Bitcoin ETPs have bought more than twice as much Bitcoin as miners have been able to produce:

• BTC Purchased by ETPs: 263,965 BTC

• BTC Produced by Miners: 129,181 BTC

Not surprisingly, prices are up. BTC has risen ~25% since the launch of Bitcoin ETPs on January 11, and more than 110% since the market started pricing in a launch in October 2023.

Bitcoin’s Returns Since January 2023

Source: Bitwise Asset Management. Data from December 31, 2022 to July 11, 2024.

Will we see the same sort of impact with ETH? Actually, I think it might be bigger.

As I’ve written previously, I think the new Ethereum ETPs will attract billions. And I think the money flowing into these new ETPs will have a bigger impact than it did with Bitcoin, for three structural reasons.

Reason #1: ETH’s Lower Short-Term Inflation Rate¹

When the Bitcoin ETPs launched, the Bitcoin network’s inflation rate was 1.7%. Put differently, the Bitcoin network was producing roughly 328,500 BTC each year, or ~$16 billion at then-current prices.² That meant we needed $16 billion of Bitcoin buying per year just to tread water.

By comparison, Ethereum’s inflation rate over the past year is exactly 0%: There were 120 million ETH in existence a year ago, and there are 120 million ETH in existence today. That’s because, while a small amount of ETH gets created each day (as with Bitcoin), people using Ethereum-based applications—everything from stablecoins to tokenized funds—consume ETH as well. Over the past year, these two forces have balanced out.  

Significant new demand meets 0% new supply? I like that math. And if activity on Ethereum ticks up, so does the amount of ETH being consumed. That's another lever of organic demand working in investors' favor.

Reason #2: Unlike BTC Miners, ETH Stakers Don’t Need To Sell

A second key difference: Bitcoin miners generally have to sell the new supply they receive, while ETH stakers do not.

Bitcoin mining—the process by which new BTC is created and Bitcoin transactions are settled—is expensive, requiring high-end computer chips and loads of energy. As a result, miners typically sell much of the BTC they mine in order to cover their operating costs.

Ethereum doesn’t rely on mining; instead, it uses a system called “proof of stake.” In a proof-of-stake system, users post (or “stake”) ETH as collateral to ensure they process transactions accurately and truthfully. In return for properly processing transactions, stakers are rewarded with new ETH.

A key difference between Bitcoin mining and Ethereum staking is that staking does not have significant direct costs. As a result, Ethereum stakers are not forced to sell the ETH they produce. Even if Ethereum’s inflation rate rises above 0%, I do not expect significant selling pressure from stakers.

In the short term, there is simply less forced selling each day in Ethereum than in Bitcoin.

Reason #3: 28% of ETH Is Staked and Therefore Off the Market

Staking has one other impact: When you stake ETH, you commit it to a locked contract for a set period of time. During this time, you cannot withdraw your ETH and sell it. Currently, 28% of all ETH is staked, meaning it is effectively off the market.

Adding to this, another 13% of all ETH is locked in decentralized-finance smart contracts—for instance, as collateral in lending markets. That takes even more ETH off the market.

Add them together and ~40% of all ETH is somewhat or completely unavailable for sale. That’s a big chunk!

What Does This All Mean?

As I mentioned above, I expect the new Ethereum ETPs to be a success, gathering $15 billion in new assets over their first 18 months on the market. ETH is currently trading at ~$3,400, just 29% below its all-time high. If the ETPs are as successful as I expect—and given the dynamics above—it’s hard to imagine ETH not challenging its old record.

Notes

(1) It is worth noting that Bitcoin’s long-term supply is capped at 21 million, while Ethereum’s long-term supply is unlimited. I’m focusing here on short-term inflation rates because I think that is what matters during launch periods.

(2) BTC’s inflation rate fell in half in April thanks to the Bitcoin halving.

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