Ethereum ETFs Are Trading Like They’re on Another Planet

The first time I heard of Ethereum was from one of my son’s friends, back when they were in high school. That was so long ago (about seven years), we’ve had a pandemic, then a historic year when stocks and bonds both were crushed, and cryptocurrency is now available not only through crypto platforms, but via any brokerage firm, in ETF form. Plus, we have meme stocks, some of which make no sense fundamentally, and others which are solid market innovators who might grow into their earnings…if we look ahead 10 years or so.

Yes, the stock market has always been accused of being a form of casino gambling, going all the way back to the classic Wall Street novel, “Confessions of a Stock Operator” and even further back in time than that. But today’s version of the Wall Street casino feels a bit like we are on a different planet. And since that first mention of Ethereum from my son’s high school buddies made me think they were talking about some new planet discovered by astronomers, I’ll stick with that line of thinking. 

Ethereum funds have been trading in the public markets since the Grayscale Ethereum Trust (ETHE) closed-end fund debuted around this time of year in 2019, followed by futures-based Ethereum ETFs like the ProShares Ether Strategy ETF (EETH), that debuted late last year. Now we could be nearing an event that mimics what bitcoin fans rejoiced over back in January. That is, the approval, creation and listing of ETFs that track the spot price of Ethereum.  

What Planet Are We On? Ethereum!

Now, planet Ethereum is a lot like planet earth. The difference is that, as was the case when astronauts walked on the moon (the earth’s moon that is, since I don’t know if planet Ethereum has any moons), everything moves a bit differently. As if there were, you know, less gravitational force. So, prices tend to lift a lot faster. And, that weightlessness maps itself onto some investment commentators, including one that had a headline recently that read like this (paraphrasing) “Ethereum’s price just went up 40%, time to buy!” 

What planet are…oh wait, I used that line already. But really, those of us who started in this business last century have a hard time relating that type of Pavlovian take to anything but the dot com bubble and bust. That’s for the future to determine. But it is worth noting that the way crypto assets swing around sometimes, the argument that they are a “store of value,” akin to a fiat currency, may be a bit premature.

Do Ethereum ETF Prices Move Like Stock Prices?

I tried to see if ETHE, now a nearly $11 billion closed end fund, was highly correlated to anything. Because for a while, I recall that bitcoin ETFs were trading largely in sync with leveraged ETFs on the giant Invesco QQQ Trust ETF (QQQ). With ETHE, that has been the case to a lesser extent, but not one where I’d consider the correlation to be high enough to devote much attention to at this stage of its evolution.  

It has followed the ProShares UltraPro QQQ ETF (TQQQ), triple-leveraged fund, closely over the past few years, typically posting a correlation above 0.7 which is strong but not super strong. ETHE has also had an interesting and understandable high correlation to the new crop of spot bitcoin ETFs, such as the huge iShares Bitcoin Trust ETF (IBIT). 

From the launch of IBIT and several of its peers on January 11 through early March, there was little daylight between them. That changed when it appeared for a few weeks that near potential for spot Ethereum ETFs to hit the traditional stock exchanges became less likely. At least, that’s what the market thought.

Ethereum: Same Planet, Just Very Different Times

One month at more than a 50% price lift later, ETHE was in a galaxy by itself, gaining about seven times that of IBIT since early last month. That brings us to now, where excitement is high in the world of crypto. Soon we should see if spot Ethereum’s price fluctuations sync up with those of spot bitcoin ETFs. If they do, it might be a signal to investors and investment advisors that when it comes to these new world asset classes, the emotion and optimism surrounding their future may cause them to be treated all the same by investors. 

In other words, the first two cryptocurrencies to break through in listed, spot form will ironically look a lot like today’s stock market, where “risk on” and “risk off” drive much of the short-term price moves, and much of the market moves together.  

That’s the planet we are on now. And sort of like the new Planet of the Apes movie, we have been brought forward this decade to a time when animal spirits challenge traditional investment approaches. Same physical planet, but it sure looks different.