Why Spot Ethereum ETPs Will Attract Billions

We don’t need to guess about the potential demand for spot Ethereum ETPs. We can just look at the data.

Everyone wants to know how much spot ether exchange-traded products (ETPs¹) will attract in net flows. My answer: $15 billion in their first 18 months. 

That’s not a casual guess. It’s what the data suggests.

Here’s how I get to those numbers.

A Starting Point: Relative Market Capitalization

A good starting point for estimating inflows is to look at the relative size of BTC and ETH. After all, absent any other information, I’d expect investors to allocate to Bitcoin and Ethereum ETPs roughly in proportion to their market capitalizations.

Here’s how their market caps compare today:

• Bitcoin: $1,266 billion (74% of the combined market)

• Ethereum: $432 billion (26% of the combined market)

U.S. investors currently have $56 billion invested in spot Bitcoin ETPs. I suspect this will reach $100 billion or more by the end of 2025, as these ETFs mature and are approved on platforms like Morgan Stanley and Merrill Lynch.

Using this $100 billion figure as a reference, spot Ethereum ETPs would need to attract $35 billion in assets to reach parity, a process I expect will take about 18 months.

Does that mean we should expect $35 billion in inflows to Ethereum ETPs when they launch? No. For starters, the Grayscale Ethereum Trust (NYSE: ETHE) is expected to convert to an ETP on launch day, bringing $10 billion in assets with it.

Net that out and we’re left with $25 billion in inflows to reach parity.

Is that a reasonable estimate? Let’s look abroad to validate the data.

Lessons From International ETP Markets

Foreign ETP markets are not the same as U.S. ETP markets, but they are instructive.

For instance, Europe and Canada already have both Bitcoin and Ethereum ETPs. Here’s how the two assets compare by AUM if you aggregate all available funds in each market:

Europe

• Bitcoin ETPs: €4,601 (78%)

• Ethereum ETPs: €1,305 (22%)

Canada

• Bitcoin ETPs: $4,942 CAD (77%)

• Ethereum ETPs: $1,475 CAD (23%)

It’s remarkable that the asset split is virtually identical, and also that it is roughly in line with the market cap breakdown I highlighted above. This suggests my earlier estimate is within an appropriate range.

One question you might be asking: Why are Ethereum ETPs slightly underperforming their absolute market cap weight? After all, they’re currently gathering 22-23% of total AUM versus a 26% market cap weighting.

I can imagine various reasons, including that Bitcoin ETPs arrived first in many of these markets (as they did in the U.S.). Some investors may have bought a Bitcoin ETP and stopped there, thinking their crypto exposure was covered. I suspect this dynamic will be true in the U.S. as well.

As a result, let’s take down our estimate and assume Ethereum ETPs only get 22% of the market, matching Canada. That lowers our estimate of net inflows from $25 billion to $18 billion, excluding the assets from Grayscale’s trust.

Other Factors to Consider

There is one other major factor to consider: the differing roles the “carry trade” could play in the BTC and ETH ETP markets.

A significant fraction of U.S. Bitcoin ETP flows are related to the carry trade. The carry trade involves buying spot Bitcoin ETPs and then selling Bitcoin futures contracts against that position. The trade profits from the fact that Bitcoin futures contracts currently trade at a premium to the spot price of Bitcoin. The profitability of the carry trade varies, but for much of the time since BTC ETPs launched, investors could earn ~10% per year on the trade with limited risk. I estimate about $10 billion of the current Bitcoin ETP AUM is linked to the carry trade.

I don’t expect Ethereum will have the same dynamic—the Ethereum ETP carry trade isn’t profitable right now for institutions (in part because U.S. Ethereum ETPs won’t engage in staking their assets). For that reason—and to keep my estimate of Ethereum ETP flows on the conservative side—we need to remove the $10 billion in carry-trade-related AUM when sizing the Bitcoin market.

If we do that, the Bitcoin ETP denominator falls to $90 billion AUM. With this, our estimate for net inflows for Ethereum ETPs goes from $18 billion to $15 billion.

Conclusion

There are a lot of ways to tweak this model.

For instance, you could argue that Ethereum ETPs will underperform my estimate because they will not stake assets, which will lower demand. I don’t think this is true—staking income is a rounding error on ETH’s average annual return, and I think ETP investors will be happy simply having exposure. But it is a valid critique.

On the other hand, my estimate doesn’t take into account the multiple tailwinds behind Ethereum’s growth, including the rise of stablecoins, growing regulatory clarity, and the aftereffects of the blockchain’s recent Dencun upgrade, which dramatically lowered transaction costs on Ethereum. A strong bull market for ETH as an asset would significantly increase demand.

Still, I think $15 billion in the next 18 months is a good starting point. My gut tells me we’ll do better than that; ETH is a compelling asset powering the world’s most versatile blockchain. But even $15 billion in net new demand will have a dramatic impact on the Ethereum market.

Notes

(1) While “ETF” is the term most people use colloquially to describe spot Bitcoin and spot Ethereum funds, technically these are considered ETPs, or exchange-traded products. That's because regulators make a distinction between 1933 Act products (ETPs) and 1940 Act products (ETFs), which have different sets of rules and investor protections.

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