Cryptoverse: Ether Funds in the Midst of a Winter Chill

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The cryptocurrency market is facing turbulence this autumn, and the signs of an impending winter are looming large.

Amid economic uncertainties and ongoing conflicts in Ukraine and the Middle East, the long-awaited introduction of a group of exchange-traded funds (ETFs) linked to ether has revealed the prevailing malaise in the crypto sector.

Six ETFs, launched on October 2, providing exposure to ether futures contracts, garnered just under $10 million in their first week of trading, according to data from CoinShares. During the week ending October 13, Ethereum-related products experienced net outflows of $7.5 million.

“The timing of futures ETFs could hardly be worse,” commented Vettel Lunde, a senior analyst at K33 Research.

October 2nd also saw Treasury yields reach their highest levels in decades, while investors were withdrawing from riskier assets due to expectations of “higher-for-longer” interest rates.

Ether prices have witnessed a decline of over 5% this month, with the total cryptocurrency market capitalization falling from $1.15 trillion to $1.12 trillion, as reported by CoinGecko.

The trading volumes of ether futures ETFs remained below $2 million on their first trading day, as observed by K33 Research. In stark contrast, the ProShares Bitcoin Strategy ETF (BITO.P), the first ETF tracking bitcoin futures, attracted approximately $570 million in inflows on its debut trading day in October 2021.

This contrast with ETF launches during the peak of the crypto frenzy in 2021 demonstrates how institutional investors, who once drove substantial demand, have retreated from digital assets in response to the increasingly uncertain macroeconomic landscape.

Crypto ETFs have witnessed a decline in activity for several months. Lunde highlighted that global bitcoin ETFs experienced net outflows of 11,157 bitcoin between August 1 and October 3. Many traditional investors prefer these funds as they provide easier access through regular stock exchanges without the need to directly hold cryptocurrencies.

Ben McMillan, chief investment officer at IDX Digital Assets, said his company is adopting a more defensive investment strategy until there is more clarity on Federal Reserve policy and the possibility of a recession. “Investors are securitizing their portfolios and looking for ways to make them more defensive. Even with attractive growth prospects, speculative assets have become a lower priority,” he said.

Returning to Bitcoin’s safe-haven status as the original “digital gold” has somewhat supported it, with declines of approximately 2% this month. Bitcoin-focused ETFs attracted $43 million in inflows during the week of October 2, while Bitcoin’s share of the cryptocurrency market capitalization has increased from 47% to 48%.

Ether prices have seen a 32% increase this year, though they lag behind Bitcoin, which has gained over 70%.

The recently launched ETFs exclusively tracking ether futures on the Chicago Mercantile Exchange, offered by ProShares (EETH.P), VanEck, and Bitwise (AETH.P), have all experienced drops exceeding 6% since their launch. ProShares and Bitwise have also introduced funds that track a combination of Bitcoin and Ether futures, while Valkyrie Funds converted its pure-play Bitcoin ETF into one offering exposure to both Bitcoin and Ether (BTF.O). These dual-exposure funds have performed better, with Bitwise’s and ProShares’ ETFs down approximately 3%, and Valkyrie’s slightly up by 0.3%.

McMillan at IDX pointed out that although the response to the ether futures ETFs has been underwhelming, factors such as the utilization of the Ethereum blockchain by major financial institutions for tokenizing assets could rekindle investor interest.

For now, the prevailing macroeconomic backdrop appears to be the dominant factor influencing the cryptocurrency landscape.

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