Summary Ethereum had a strong 2024, with its price rising from ~$2,300 to ~$3,300, bolstered by the SEC's approval of Ethereum spot ETFs. Spot Ethereum ETFs have amassed $6.72 billion in net assets, but lag behind Bitcoin ETFs in market cap percentage and recovery during market dips. Staking integration in Ethereum spot ETFs could be a major growth catalyst, with Bitwise poised to benefit due to its existing staking infrastructure. Regulatory clarity on staking is crucial; if approved, Bitwise's ETHW could offer competitive staking rewards and attract significant institutional interest. Ethereum ( ETH-USD ) had a solid performance in 2024. Opening the year at ~$2,300 and closing the year at ~$3,300. The ambiguity surrounding Ethereum's security status was also somewhat alleviated, following the SEC’s approval of the Ethereum spot ETFs in July. The Ethereum spot ETFs launch was a smoother process (there was much less back and forth between fund managers and regulators) as the fund managers had drawn lessons from the launch and performance of their respective spot Bitcoin ( BTC-USD ) ETFs. All of the launched spot Ethereum ETFs strived to be low cost and there wasn't much difference between the ETFs’ main structure, save for factors like for liquidity, custody partner choice, and early fee waivers. These “minor” factors still influence investors' attraction to a specific spot ETF based on their investment convictions. Personally, I was drawn to the Bitwise Ethereum ETF ( ETHW ) because of the fund’s expertise in launching and managing crypto ETPs since 2017, as well as Bitwise’s commitment to growing the Ethereum ecosystem by pledging to donate 10% of ETHW profits to open-source development on the Ethereum network. The Block Since launch, the spot Ethereum ETFs have steadily commanded over 90% of market share compared to Ethereum futures ETFs. Investors' direct exposure to Ethereum as an underlying asset, rather than to ETH derivatives, spurred growing institutional confidence in Ethereum as an investable asset class. The Block The spot Ethereum ETFs can be thought of as partially successful since their launch. In 8 months since launch, the funds have amassed around $6.72 billion in net assets, and have generated around $62.5 billion in cumulative volume. Ethereum spot ETFs total net assets are about 2.9% of Ethereum's total market cap. While in comparison, the total net assets of spot Bitcoin ETFs are currently around 5.7% of the Bitcoin market cap. During market dips, the spot Bitcoin ETFs bounce back quicker than the spot Ethereum ETFs. Following the dip seen earlier this month, net flows have turned positive for Bitcoin, while Ethereum has just recorded 13 straight days of total outflows. Spot Ethereum ETF outflows recorded from March 5 to March 21 (Farside Investors) This is unsurprising to some degree, given Bitcoin’s entrenched position as a store of value and as a strategic asset, and the increasing attention from the current U.S. administration regarding crypto reserves and several proposals for government Bitcoin purchases over time. Investors typically have the mindset to hold Bitcoin as a store of value. For ETH, the investment thesis seems more complex. Therefore, in a bearish market, Bitcoin is the first choice during market uncertainty. While Bitcoin is still the dominant asset in the crypto space, I believe Ethereum has the potential to play catch-up with BTC in terms of demand for their spot ETFs. I'm not saying the Ethereum ETFs will overtake Bitcoin in adoption, but the Ethereum spot ETFs have significant room to grow such that the net assets relative to the market cap will be more comparable to that of the BTC spot ETFs. Spot Ethereum ETF Staking is a Potential Catalyst One main catalyst to drive that demand and growth for Ethereum spot ETFs will be if staking gets approved for the spot Ethereum ETF holdings. There have been many talks about integrating staking into Ethereum ETFs, and the talks between the SEC and fund managers are advancing. Fidelity and 21Shares have filed proposals with the SEC to enable staking within their Ethereum ETFs. Early this month, the Cboe filed amended documents with the SEC on behalf of Fidelity's Ethereum Fund ( FETH ) to permit staking of its Ether holdings. A similar amendment was filed for 21Shares' proposal to integrate staking into its and BlackRock’s spot Ethereum ETF (ETHA). The SEC just cleared the air on crypto proof-of-work consensus in a statement released March 20, that proof-of-work (“PoW”) mining activities do not involve the offer and sale of securities and are not subject to U.S. securities laws. I expect a similar clarity on proof-of-stake (“PoS”) consensus soon. Ethereum uses the PoS consensus mechanism to secure its network and verify blocks. If you’d like to understand the PoS and PoW consensus mechanisms here on Seeking Alpha, there is a detailed educational piece covering the consensus mechanisms, here on Seeking Alpha. In the past, with Gary Gensler at the helm of affairs, the SEC scrutinized proof-of-stake-based products. Ethereum was investigated after transitioning from PoW to PoS consensus mechanism with The Merge in 2022. Following that migration, the SEC intensified its scrutiny of Ethereum 2.0 to determine whether staking-based rewards made ETH a security under the Howey Test, with the SEC trying to evaluate whether Ethereum’s shift to PoS made it more like an interest-bearing security rather than a commodity. The SEC’s primary concern was whether Ethereum’s staking mechanism constituted an investment contract under the Howey Test. These concerns will have to be addressed and clarified by the current SEC leadership, and when this happens, I believe staking for spot ETH ETF holdings will be one step closer to reality. Now let’s focus on Bitwise's ETHW spot Ethereum ETF and how ETH staking (if eventually allowed) positions Bitwise favorably compared to peer fund managers. There have been some strategic moves these past months that place Bitwise in an advantageous position if staking gets enabled in spot Ethereum ETFs. Firstly, Bitwise already operates a fully functional institutional grade staking ETP in Europe called the Bitwise Ethereum Staking ETP (ET32) . ET32 is 100% physically backed with ETH held in cold storage custody, and tracks the staking index called the Compass Ethereum Total Return Monthly Index . With ET32, Bitwise has garnered expertise in distributing staking rewards effectively. The ETP adds rewards directly to the crypto entitlement per ETP unit, minus a staking service fee. If staking is approved for U.S. spot Ethereum ETFs, Bitwise could seamlessly implement a similar model for ETHW. Another strategic move by Bitwise was the acquisition of the Ethereum staking provider Attestant , in November last year. At acquisition, Attestant managed around $3.7 billion in staked assets. The acquisition of Attestant gives Bitwise a leg up in ETH staking by bringing the infrastructure in-house, meaning Bitwise won’t have to be reliant on third-party providers if spot Ethereum ETFs get the green light for staking. By eliminating third parties, Bitwise can reduce operational costs and pass on those savings to investors, potentially offering a more competitive staking fee structure. Having an in-house staking infrastructure could also mean lower costs and smoother operations compared to competing fund managers that would likely have to rely on third-party staking services. With the existing expertise in ETH staking ETP and the existing staking infrastructure that Bitwise has, If staking becomes part of spot ETFs Bitwise could hit the ground running and ETHW could potentially be the spot Ethereum ETF with the best staking rewards. Risks The biggest wild card surrounding Ethereum right now is whether staking will ultimately be allowed in Ethereum spot ETFs. While the discussions between fund managers and the SEC seem to be advancing well, regulatory clarity isn’t guaranteed yet. If the SEC decides against permitting staking within the spot Ethereum ETFs, it could dampen investor enthusiasm towards ETH further, since the spot ETF staking is one of the most anticipated potential catalysts that investors and hodlers of ETH look forward to at the moment. Takeaway If staking integration in the spot Ethereum ETFs gets the green light, it will ultimately redefine how investors view Ethereum as an investable asset. Bitwise, with their existing staking infrastructure and expertise, is well-positioned to capitalize on this. Should staking get approved, the race among fund managers to offer the best ETH staking ETF will begin. I believe more attention, especially institutional attention, will turn to ETH. ETHW could become the most attractive spot Ethereum ETF with potentially lower cost and higher staking rewards if the fund rightly leverages their in-house staking infrastructure and expertise.
