Authors: Tom Carreras, Benjamin Schiller; Source: Coindesk; Translation: Mary Liu from BitpushNews

For many investors, the performance of the spot Ethereum (ETH) exchange-traded funds (ETF) has been disappointing.

Despite the fact that the spot bitcoin etf has processed nearly $19 billion in inflows over 10 months, the ethereum etf, which started trading in July, has failed to generate the same level of interest.

What's even worse is that Grayscale's ETHE, existing as an Ethereum Trust before converting to an ETF, has seen a large amount of redemptions, with demand from other similar funds failing to offset these redemptions.

This means that the net outflow of the spot Ethereum ETF has reached 0.556 billion USD since its launch. According to Farside's data, just this week alone, the net outflow of these products has reached 8 million USD.

So, why is the performance of Ethereum ETF so different? There could be several reasons.

Background of Fund Inflows

First, it is important to note that the performance of Ethereum ETF is not ideal compared to Bitcoin ETFs. Bitcoin products have broken so many records, arguably being the most successful ETF ever.

For example, the ETFs IBIT and FBTC issued by BlackRock and Fidelity raised $4.2 billion and $3.5 billion respectively in the first 30 days after listing, breaking the record set by another fund under BlackRock, Climate Conscious, which raised $2.2 billion in the first month after listing (August 2023).

Nate Geraci, President of The ETF Store, said that while the Ethereum ETF did not have a "stellar performance", three of them still made it to the top 25 best-performing ETFs this year.

BlackRock's ETHE, Fidelity's FBTC, and Bitwise's ETHW have collectively attracted nearly $1 billion, $0.367 billion, and $0.239 billion in assets respectively - a very good result for funds that have been established for two and a half months.

Geraci told CoinDesk: "In terms of inflows, the spot Ethereum ETF can never challenge the spot Bitcoin ETF."

"If you look at the underlying spot markets, you will find that Ethereum's market cap is about a quarter of Bitcoin's market cap. This should reasonably represent the long-term demand for spot Ethereum ETF compared to spot Bitcoin ETF."

The issue is that significant outflows from Grayscale's ETHE have overshadowed the performance of these funds.

Established as a trust in 2017, ETHE initially did not allow investors to redeem their ETF shares for regulatory reasons - the funds were trapped in the product. This changed on July 23rd when Grayscale received approval to convert its trust into a formal ETF.

During the conversion, ETHE had around $1 billion in assets. While some assets were transferred by Grayscale to its other fund - the Ethereum Mini ETF, ETHE suffered nearly $3 billion in outflows.

It is worth noting that Grayscale's bitcoin ETF - GBTC - has also experienced the same situation, with over $20 billion in outflows since the conversion in January. However, the excellent performance of Blackrock and Fidelity's spot bitcoin ETFs is enough to offset GBTC's losses.

Lack of staking income

A significant difference between Bitcoin and Ethereum is that investors can stake Ethereum - essentially locking it in the Ethereum network to earn Ethereum rewards.

However, the current form of the Ethereum ETF does not allow investors to participate in staking. Therefore, holding Ethereum through an ETF means missing out on this yield (currently around 3.5%), and paying a management fee of 0.15% to 2.5% to the issuer.

While some traditional investors do not mind giving up yield for the convenience and security of an ETF, it makes sense for native crypto investors to look for alternative ways to hold Ethereum.

Crypto data company Kaiko Research analyst Adam Morgan McCarthy told CoinDesk: "If you are a professional fund manager with a basic understanding of the crypto market and managing someone's funds, why would you buy an Ethereum ETF right now?"

McCarthy said: "You can pay for exposure to ETH (asset is held at Coinbase), or buy the asset yourself and stake it with the same provider to earn a certain return."

Marketing dilemma

Another obstacle facing the Ethereum ETF is that some investors may find it difficult to understand Ethereum's core use cases because it aims to take a leading position in multiple different areas of the cryptocurrency.

Bitcoin has a hard cap on its supply: Bitcoin's issuance will never exceed 21 million. This makes it relatively easy for investors to see it as 'digital gold' and a potential tool to hedge against inflation.

Explaining why decentralized, open-source smart contract platforms are important – and more importantly, why the value of ETH continues to increase – is another matter.

Bloomberg industry research ETF analyst Eric Balchunas wrote in May: "One of the challenges facing the Ethereum ETF as it enters the world of the 60/40 baby boomer generation is to distill its purpose/value into easily understandable content."

McCarthy agrees, telling CoinDesk: 'The concept of ETH is more complex than other cryptocurrencies and is not easily explained in a simple sentence.'

Therefore, the cryptocurrency index fund Bitwise recently launched an educational advertising campaign emphasizing the technical advantages of Ethereum, which is necessary.

Zach Pandl, research director at Grayscale, told CoinDesk: 'As investors become more familiar with stablecoins, decentralized finance, tokenization, prediction markets, and many other applications supported by Ethereum, they will warmly embrace these two technologies and the Ethereum ETP listed in the United States.'

Poor cost performance.

In fact, this year ETH's performance is not very good compared to BTC.

The second largest cryptocurrency by market cap has only risen 4% since January 1, while BTC has risen 42% and continues to hover near its 2021 all-time high.

Brian Rudick, Director of Research at cryptocurrency trading company GSR, told CoinDesk: "One factor in the success of Bitcoin ETFs is investors' risk appetite and fear of missing out, with these ETFs still being mainly driven by retail investors, influenced by BTC's 65% rise at the launch of ETFs and subsequent 33% increase."

Rudick added: "Since the ETF launch, ETH's price has fallen by 30%, significantly dampening retail investors' enthusiasm to buy these funds, with people having a mediocre view of Ethereum, believing it falls between Bitcoin (best monetary asset) and Solana (best high-performance smart contract blockchain)."

Valuation is not attractive.

Traditional investors may not consider ETH's valuation attractive at these levels.

ETH's market cap is about $290 billion, already higher than that of any bank globally, trailing only behind JPMorgan and Bank of America, with market caps of $608 billion and $311 billion respectively.

Although it may seem like comparing apples to oranges, Quinn Thompson, Founder of cryptocurrency hedge fund Lekker Capital, told CoinDesk that compared to technology stocks, ETH's valuation is also high.

In September, Quinn Thompson wrote that the valuation of ETH is "worse now compared to other assets, as no valuation framework can prove its price rationality. Either the price must fall, or a new universally accepted asset valuation framework needs to be formed."