What Are Ethereum ETFs, and Why They Haven't Affected the ETH Price?
The long-awaited launch of Ethereum ETF did not meet expectations. The funds failed to influence the price of the main altcoin. Let's find out why.
What is an Ethereum ETF?
An Ethereum ETF is a financial product that allows investors to purchase shares in a fund that tracks the price of Ethereum without having to directly own the asset itself. These funds trade on traditional exchanges as stocks, making them accessible to a wider range of investors, including traditional ones who are used to the simplicity and security of trading assets on regulated platforms.
Investors don't need to directly buy Ethereum to trade the asset. The fund does that for them. And investors only buy and sell shares of the fund on Ethereum. The price of Ethereum ETF is directly related to the price of the asset itself. In other words, if the price of Ethereum rises or falls, the price of the Ethereum ETF will rise or fall in a similar way.
Futures vs. spot
Unlike spot Ethereum ETFs, futures ETFs have been operating in the market since 2021. Futures ETFs are agreements to buy or sell Ethereum at a set price in the future. Futures ETFs do not buy Ethereum itself, but instead invest in Ethereum futures contracts. The share price depends on the value of the futures contracts, which may differ from the current price of Ethereum.
Meanwhile, a spot Ethereum ETF buys and holds real Ethereum. When an investor buys shares of such an ETF, the fund actually owns an equivalent amount of Ethereum. The share price of a spot ETF directly reflects the current price of Ethereum on the market.
This year, the U.S. Securities and Exchange Commission approved spot Ethereum ETFs. The market expected that their launch would drive adoption and increase the price of the second most capitalized cryptocurrency through an influx of institutional investors. But since Ethereum ETFs began trading in late July, the price of Ethereum has fallen by almost 25%.
Reasons why ETFs did not affect the price of ETH
Even before trading began, analysts disagreed on whether Ethereum ETFs would have the same impact on Ethereum as Bitcoin ETFs once did for BTC. Some argued that Ethereum ETFs would not have the same impact as Bitcoin ETFs. In just nine weeks since the launch of Bitcoin ETFs, the major cryptocurrency has managed to rise 58% to an all-time high of $73,738.
Ethereum loses dominance
Ethereum, meanwhile, is failing to break out of its downtrend. It has a much lower market attractiveness, which means that inflows into funds based on it will be slower than into Bitcoin ETFs, which will also affect the price.
From the very start, Ethereum ETFs have underperformed expectations, according to analysts, and Ethereum is losing market dominance. CoinMarketCap data shows that the Ethereum dominance index has dropped to 15%, which has not been seen in the last 4 years. This index also indicates that the altcoin season is likely to begin. Ethereum's market share has been falling since June last year.
Outflows from funds
Speaking of the funds' impact on the asset's price, last month's cumulative outflows from Ethereum ETFs totaled $440 million, which could put significant pressure on Ethereum's price and prevent the asset from enjoying the moment of reaching all-time highs.
The Grayscale fund was under the most selling pressure. At the time of writing, about $2.5 billion has been withdrawn from it.
There is supply, but no demand
Ethereum has become an inflationary asset during this period. The usage rate of the network has declined due to the development of Layer 2 solutions. In the last week only, 18,000 ETH were issued and 1,500 ETH were burned. Decreased demand and increased supply have put pressure on the cryptocurrency's price.
