Ethereum ETFs Will Test Financial Advisors

With spot bitcoin ETFs busting through ETF growth records, we spoke with Nicholas Codola, senior portfolio manager at Orion in Omaha, Neb., about how a likely spot Ethereum ETF might be in getting more advisors on the cryptocurrency train.

Jeff Benjamin: Do you think there is pent up demand for a spot Ethereum ETF?

Nicholas Codola: There is for sure pent-up demand and interest. VanEck stated there are around 20 million active distinct monthly users on the Ethereum blockchain. Ycharts data pinpoints the average daily user volume of 400,000 in 2023, and this year, the average popped to 490,000. I think that’s a solid, engaged, potential base of people who would buy the ETF.

Spitballing here, but if the daily average each bought $1,000 worth of the ETF on the launch, that would be about $500 million in inflows on the first day, and over the course of the month about $20 billion in inflows from distinct individuals.

Attacking your question from a different angle, Grayscale’s Ethereum Trust (ETHE), which operates just like their old Bitcoin Trust before it converted to an ETF, currently has $11 billion. That’s about half of what GBTC had at the end of 2023, right before the spot Bitcoin ETF launched in January 2024. So, I’d say there is some healthy appetite.

JB: For investors and financial advisors, what are some of the unique characteristics that will distinguish an Ethereum ETF from the existing bitcoin ETFs?

NC: For the ETF investor, the experience buying the spot Ethereum ETF versus the spot bitcoin ETF will largely be the same. Same purchase mechanism and settlement.

I would liken it to investing in physical commodity ETFs. Like the experience for a person investing in a gold ETF and a silver ETF is largely the same experience; they make money on their investments based on other people’s consumption and demand for gold or silver for whatever purpose.

JB: Will Ethereum ETFs take off on a similar trajectory as spot bitcoin ETFs, which have grown to $50 billion since hitting the market in January?

NC: Based on my guesstimations for flows, yeah, I think the Ethereum ETFs will have a similar trajectory, but perhaps not quite the same magnitude.

JB: Why are financial advisors still generally reluctant to embrace cryptocurrency investing?

NC: I think there are a number of reasons for why advisors and end investors haven’t hopped on the crypto train. First, you have the group that don’t know anything about cryptocurrencies and don’t know where to go to find reputable information about them.

Second, you have the group that doesn’t believe in it and thinks it is a fad ala the Dutch with Tulip Mania, and they’ll just stick to their current asset allocation cooking, thank you very much.

Third, you have the group that's nervous about application of the fiduciary rule, as well as litigation should they invest in what turns out to be bad actors in the crypto space such as FTX, or Kraken, or the Mount Gix meltdown.

Clients lost all their assets or are still embroiled in litigation to reclaim all or a portion of their assets. This group is thinking the returns aren’t worth the risk and headache if the company that you think is the Berkshire Hathaway of crypto turns out to be the Bernie Madoff instead.

Fourth, you have the group that’s waiting for developments like spot crypto ETFs to come out where they know the asset management company, the custodian, and the auditor, and know for sure they are all sterling companies that have been in the financial realm for decades if not more. Because beyond reputational assurance, let’s be honest here, trying to get some of these newfangled crypto firms to integrate with their current systems for reporting, billing, etc. is a nightmare and that’s assuming their broker-dealer and custodian will even let them.

JB: There are still large platforms, including Vanguard, refusing to allow the trading of spot bitcoin ETFs. Do you see any softening of those stances by the financial services industry anytime soon?

NC: The cynic in me says yeah because there is money to be made. I’d wager dollars to doughnuts that their hard moral stances will deteriorate if they really start lagging peers because they avoid doing crypto.

Look at JP Morgan, where CEO Jamie Dimon has been quite vocal against crypto for years, and a month ago called bitcoin a Ponzi scheme and fraud. But they still custody crypto, have their own private crypto fund, and have explored other institutional opportunities in the space.

We’ve also seen it in politics. A couple years ago not many politicians were pro crypto but now both parties are seemingly warming to crypto.