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Thursday ETH-Day Mailbag

Q: Is an ETH ETF as exciting as the BTC one?

Probably not: Eric Balchunas expects the collective AUM of ETH ETFs to be only 10-15% of the AUM for BTC spot ETFs — well below the 34% you’d expect if it was proportional to their market capitalizations.

AUM for spot Bitcoin ETFs is currently $13.3 billion, so, at the high end of Balchunas’s estimate, spot ETH ETFs would attract $2 billion over the next six months.

That seems like not a lot?

Others are more optimistic: OKX expects $500 million of inflows in the first week of trading (vs. bitcoin’s first-week total of $1.1 billion).

One data point supportive of the more pessimistic view is that AUM for ETH ETFs in Hong Kong is only 19% of that for BTC ETFs.

I’m not sure why they’d prove more popular in the US.

Q: Why would ETH be less popular than BTC with ETF investors?

Because investors love elevator pitches and bitcoin’s elevator pitch — digital gold — is about as good as it gets.

Ethereum’s pitch, by contrast, is more of a Rorschach test: World computer, ultrasound money, internet bond, modular money.

This works for crypto people who spend a lot of time thinking about Ethereum — we can all buy it for our own reasons — but it muddies the message for traditional investors who won’t want to spend much time thinking about it.

Traditional investors put a big premium on simplicity, and Ethereum is anything but simple. 

Q: Is Ethereum the App Store of crypto?

That would be an excellent elevator pitch!

And there’s a case to be made for that, but I’m not sure it would catch on with TradFi investors. 

If they approached it from that angle, I think they’d wonder 1) where the moat is and 2) why the take-rate is so low.

Composable crypto is the opposite of the walled garden that allows Apple to take a 30% cut of everything that happens within it.

What’s Ethereum’s cut?

I’m not sure that’s something we could exactly calculate, but whatever it is, it’s small.

Of ether’s current 3.3% yield, only about 0.5% comes from fees and MEV, and the rest is issuance (the big dark blue part below): 

That could grow, sure, but activity is moving to L2s and the take-rate from activity on L2s is so infinitesimally small it makes Ethereum look more like not-for-profit Linux than it does hyper-profitable Apple.

Q: But TradFi loves yield, right?

Retail TradFI does, sure.

But professional TradFi prefers “compounders”: companies whose earnings are retained and profitably reinvested rather than paid out as dividends — compounding is exponential and dividends are linear.

But I don’t think the initial ETH ETFs will be allowed to pay yield, anyway, and I’m not sure how many people would buy a stock where they have to forego a 3% dividend that everyone else gets.

So, to fully tap TradFi demand for ETH, we might have to wait for the staked-ETH ETF. And that is likely to be a long while still.

Q: Do we have a chance of a SOL ETF?

It’s always good to be thinking ahead in investing, but Polymarket puts the odds of a SOL ETF by the end of this year at just 7% — so that might be thinking a little too far ahead.

A Doge ETF, which would be more entertaining, seems about equally as probable.

But, hey, the odds of an ETH ETF were only 10% as recently as Monday — so, yes, I’m telling you there’s a chance.

Q: Do we want FIT21 to be law or not really?

It’s hard to say, because there are some strange bedfellows on this one.

Gary Gensler spoke out against the bill before the House voted on it. And now that it’s passed, many of Gary Gensler’s biggest haters are speaking out against it, too.

Gensler fears the bill would create a “self-certification process” that disempowers the SEC.

Which sounds pretty good!

But Gensler’s opponents think 1) the SEC would remain the arbiter of what is and isn’t a security (everything, presumably) and 2) even for the ones the SEC allows as commodities, the CFTC might turn out to be just as hostile as the SEC has been.

Most of the crypto enthusiasm for FIT21, therefore, seems to be predicated on the assumption that it won’t become law.

The best-case scenario might be to let FIT21 die in the Senate, and then start over from scratch.

As Kristin Smith notes here, the regulatory environment is much friendlier now than it was when FIT21 was written, so a full rethinking of the law would probably result in much friendlier regulation.

Q: Is crypto even crypto if it’s regulated?

I’m not sure.

To my mind, the raison d'être of crypto is that it’s a permissionless capital market — but if issuers have to ask the SEC’s permission to issue a token then, well, it’s just another permissioned capital market.

I don’t know how to square that circle.

Q: Is it regulators that have been holding us back?

It doesn’t seem like it, no.

Unlike two or three years ago, it’s now unremarkable for projects to explicitly state plans to earn revenue and return it to token holders.

That would obviously make them unregistered securities in the US if the SEC were to ever look at them. But the protocols must either think the SEC won’t get around to them or that, if they do, there’s not much they can do about it.

The only nod to US regulators seems to be that everyone geofences their websites, but that’s just compliance theater — they’d block VPNs if they were really trying, which almost no one does.

Yes, there may be some protocols that could be collecting revenue, but are not for fear of the SEC. 

But would any of them be bringing in significant revenue if they did?   

It doesn’t seem that way, which suggests it’s not regulation that’s holding us back, it’s the lack of mainstream use cases.

A spot ETH ETF won’t help with that, unfortunately.

Q: Why has Pepe been the biggest winner from the ETH ETF news?

Right. Pepe is up 45% on the ETH news vs. ETH up just 20%, which seems silly.

The only logical explanation is that it’s a Gensler-Warren conspiracy to make us look like unserious people.

A Pepe ETF would for sure be a hit, though.

― Byron Gilliam

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