Key Points
The conversation surrounding Ethereum exchange-traded funds (ETFs) has increasingly focused on the possibility of spot Ethereum ETFs launching in the US this year. BitMEX analysts have recently contributed to this discussion, emphasizing a key factor that could influence these ETFs’ appeal to investors: the ability to earn staking yields.
Understanding Staking Yields
Staking yields refer to the profits that participants earn when they deposit their digital assets to support a blockchain network’s operations and security. These rewards typically come from transaction fees, new coins created through block rewards, or a combination of both.
The attractiveness of ETH spot ETFs to institutional investors and ETF buyers largely depends on the “yield from staking,” according to BitMEX Research analysts. They argue that without staking yields, the appeal of spot ETH ETFs could diminish, considering these rewards’ role in increasing returns.
The analysts suggest that if ETFs do not include staking yields, ETH’s price might even fall behind Bitcoin in the long term, despite stakers potentially earning higher returns through rewards. They further explained that the staking system could make Ethereum less attractive or unsuitable for certain ETF investors, as the ETFs might not be able to stake.
The analysts also noted that Ethereum’s staking system presents unique challenges for creating spot ETH ETFs, largely due to the complexities of managing ETF redemptions in conjunction with ETH’s staking exit queue system. This system requires stakers to pass through two queues to exit, including a daily withdrawal limit and a validator sweeping delay that adds wait time.
For ETFs, aligning daily outflows with these constraints can create operational difficulties, potentially impacting the fund’s liquidity and attractiveness to investors, according to analysts. They also highlighted that during periods of market volatility, the wait time for exiting staking could significantly increase, posing a challenge for potential ETH staking ETFs.
Despite these challenges, the analysts explored possible solutions to the staking yield issue in ETH ETFs. One strategy involves staking only a part of the holdings, as some ETH staking exchange-traded products (ETPs) in Europe do. This strategy allows for liquidity during redemptions while still benefiting from staking rewards, although it inherently decreases potential yields.
Institutions like Ark Invest/21Shares and CoinShares have already started offering Ethereum-staking ETPs in Europe, the analysts noted. Services like Figment Europe and Apex Group are also preparing to launch similar products on the SIX Swiss Exchange.
The discussion around ETH ETFs and the inclusion of staking yields is happening amidst regulatory scrutiny, with the US Securities and Exchange Commission (SEC) adopting a cautious stance towards approving such products.
The analysts believe that the approval of Ethereum ETFs is inevitable, but the timing remains uncertain due to regulatory challenges and the unique nature of Ethereum staking. They stated that, like Bitcoin, the courts might eventually force the SEC’s hand. They also suggested that some people argue that Ethereum staking, which generates a yield and allows stakers to propose blocks, makes Ethereum a ‘security,’ providing a reason for the SEC to reject Ethereum ETFs.
