Ethereum Staking Could Pose Challenges for Grayscale’s ETHE Fund
Ethereum staking has the potential to create difficulties for Grayscale, a crypto asset manager, if the Securities and Exchange Commission (SEC) approves the conversion of its ETHE fund, similar to what was done for GBTC. BitMEX research suggests that if staking is not allowed, there could be significant outflows from the ETHE fund, surpassing those from its Bitcoin ETF.
“All the more reason to redeem from ETHE as soon as you can,” it advised.
Implications of Staking in ETFs
BitMEX research also highlights that if Grayscale reduces the fee from 2.5% to 1.5% and the staking yield is 4%, investors may lose 5.5% by not redeeming and holding stETH instead. The research further speculates that if the SEC allows ETH staking, other ETF issuers like BlackRock and Fidelity might adopt a policy where 70% of inflows are staked, while 30% is held in spot ETH for liquidity.
“For ETHE, it’s not so easy; they are expecting large and unknown outflows. This will mean the ETHE yield could be lower, encouraging more outflows.”
Since its conversion less than ten weeks ago, Grayscale has already witnessed a 40% decline in GBTC assets under management (AUM).
Grayscale’s Ethereum Trust currently manages $10.2 billion in assets, which roughly equals 3 million ETH. A significant exodus from this fund could impact spot market prices unless rival Ethereum ETFs acquire these assets, assuming they receive SEC approval by the May deadline.
BitMEX Research concludes:
“Given what happened to GBTC, if Grayscale doesn’t manage to do staking, outflows could be even more intense. If they do stake, dealing with large outflows at the start could be even more challenging.”
Fidelity Seeks ETH Staking Approval
On March 18, Fidelity, a prominent investment firm, filed an amendment with the SEC requesting permission to stake a portion of the ETH held by its proposed spot ETF. Currently, there are eight ETF issuers with spot ETH fund applications awaiting SEC approval, including BlackRock, Ark 21Shares, Franklin Templeton, Grayscale, and Van Eck.
However, analysts express doubt about these approvals as the regulator has not been as cooperative with issuers as it was with Bitcoin products. Moreover, the SEC has already taken a stricter stance on staking in the United States.
These developments may signal a challenging road ahead for Ethereum. The asset has experienced a decline of over 6% in a day and is currently trading at $3,387. Unlike Bitcoin, Ethereum has not reached a new all-time high and remains 30% lower than its peak in November 2021.
Hot Take: Potential Challenges for Grayscale’s ETHE Fund
The potential approval of Ethereum staking by the SEC presents both opportunities and challenges for Grayscale’s ETHE fund. While staking can offer attractive yields for investors, it also raises concerns about possible outflows and lower yields for the fund itself.
If staking is allowed:
- ETHE could experience significant outflows initially as investors redeem their holdings to stake ETH themselves.
- Grayscale may face difficulties in managing these large outflows, which could impact the fund’s performance and yield.
If staking is not allowed:
- BitMEX research suggests that there could be substantial outflows from the ETHE fund, potentially exceeding those seen in the Bitcoin ETF.
- Investors who choose not to redeem and hold stETH instead may experience losses due to higher fees and missed staking yields.
The implications of Ethereum staking go beyond Grayscale. Other ETF issuers, such as BlackRock and Fidelity, are also considering staking as part of their investment strategies. However, regulatory challenges and uncertainties may hinder the approval process for these ETFs.
As the SEC evaluates these proposals, it remains to be seen whether Ethereum staking will become a widespread practice in the ETF industry. In the meantime, investors should carefully consider the potential risks and rewards associated with staking and make informed decisions based on their investment objectives.
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