Lack of staking yield in Ethereum ETFs could potentially reduce their appeal, BitMEX analysts opine

Amid ongoing speculation surrounding the prospect of a spot ether ETF launching in the U.S. this year, whether it offers yield from staking on the Ethereum ETH -0.41% network is a crucial factor in its success, BitMEX Research analysts noted.

Staking rewards on Ethereum — currently yielding around 3.7% — are incentives received for locking up ether to support the operation and security of the blockchain network — a key differentiator from Bitcoin.

While the yield may not be important to all ether holders, it's a more important consideration for institutional investors and ETF buyers, the analysts claimed. “It is certainly possible that the raw ether price underperforms bitcoin in the long run, yet Ethereum stakers, with the benefit of the staking yield, could earn higher returns than bitcoin holders,” they said.

However, the complexity of Ethereum’s staking system could diminish the attractiveness of spot ether ETFs if the funds are unable to offer a staking yield, the analysts added.

Staking vs non-staking Ethereum ETFs

If spot ether ETFs are launched in the U.S. without staking yields, existing holders and stakers may be less willing to switch their holdings to an ETF, the BitMEX Research analysts further claimed. New entrants may also be reluctant to invest in a spot ether ETF if they know they are getting a worse deal, they added.

Regulatory issues and the complexity of managing ETF redemptions under the Ethereum staking exit queue system make staking ETFs more challenging to launch and operate. To exit from Ethereum’s staking system, stakers must pass through two queues.

The standard exit queue limits the number of stakers allowed to exit daily. Currently, this stands at around 100,000 ETH per day or nearly $400 million at current prices. From an ETF perspective, it’s possible daily outflows could be more than this alone in certain economic conditions, the analysts said, citing Grayscale’s GBTC outflows.

While the wait is only around 12 hours right now, in periods of market volatility this could become much longer — potentially months — hence the challenge for prospective Ethereum staking ETFs, they noted. The second queue, the validator sweeping delay, applies an additional random wait, currently nine days, they added — much longer than the redemption process for a normal ETF of one to two days.

Similarly, Ethereum’s staking entry queues may also cause a delay, though only temporarily reduce the yield. However, if staking directly or purchasing liquid staking tokens like stETH is not possible for some institutional investors, how significant the yield is remains uncertain, the analysts noted.

Can the issue be solved?

There are ways around the problem, according to BitMEX Research, such as staking only part of the holdings and leaving the rest available for redemptions. Indeed, this is a strategy already employed by Ethereum staking exchange-traded products in Europe, with a benchmark of around 50% of assets utilized for staking. However, this reduces yields, of course.

Ark Invest/21Shares and CoinShares currently offer such Ethereum staking ETPs in Europe. Institutional staking services provider Figment Europe and Apex Group are also set to launch one on the SIX Swiss Exchange next week via Issuance.Swiss AG.

Alternatively, issuers could avoid Ethereum staking ETPs altogether and issue a stETH ETF instead, transferring the redemption issue to liquid staking platform Lido instead, the analysts suggested.

However, with the Securities and Exchange Commission “keen to put every possible obstacle in the way of the ETF providers,” issuers are “desperate to get the products over the line,” they added, meaning staking yield inclusion may be a step too far at this stage.

“This staking ETF problem is probably actually pretty positive for Ethereum from a security and decentralization perspective,” the analysts said. “The last thing Ethereum needs is for BlackRock to be the largest validator. This would potentially be much worse for Ethereum, than if BlackRock became the largest bitcoin holder, since bitcoin holders have no role in block production or selecting between competing valid chains.”

Is a spot ether ETF coming this year?

With the spot bitcoin ETFs launching successfully in January, attention has turned toward another narrative for crypto markets — the prospect of a spot ether ETF in the U.S. Big-name firms, including Fidelity, BlackRock and Franklin Templeton have applied for a spot ether ETF over the last few months.

Growing speculation over the potential approval of such products has seen the price of ether outperform that of bitcoin in 2024. Bloomberg ETF analyst Eric Balchunas recently suggested a 70% possibility for approval by May 23 — the final deadline for the SEC to rule on a spot ether ETF application from Ark and 21Shares, the first that was filed.

However, investment bank TD Cowen said the SEC is unlikely to approve spot ether ETFs "any time soon," and JPMorgan doesn't see more than a 50% chance of a spot ether ETF approval by May.

Variant Fund Chief Legal Officer Jake Chervinsky, also recently said the SEC’s denial of spot ether ETFs by the May deadline is more likely than people think — due to legal issues and the policy environment in Washington D.C.

While many in the crypto community have cited BlackRock’s record of just one ETF denial in its history as a positive indicator of a spot ether ETF approval, Chervinsky seemingly disagrees. “‘BlackRock always wins’ is a lazy bull take,” the former Compound Labs General Counsel said.

“The SEC appears keen to reject or delay the applications, as much as it is able to do so,” the BitMEX Research analysts added. “As with bitcoin, the courts may eventually force the SEC’s hands and again as with bitcoin, the SEC may be accused of hypocrisy for allowing Ethereum Futures ETFs. In our view, it looks like an Ethereum ETF is inevitable at some point, it is just a matter of timing.”

In January, SEC Chair Gary Gensler stated that the agency’s approval of spot bitcoin ETFs was limited to the single cryptocurrency and “shouldn’t be read to be anything more than that.” Further uncertainties remain surrounding spot ether ETF approvals, given Gensler's stance that cryptocurrencies other than bitcoin are securities.

“Some argue that since Ethereum staking generates a yield or because stakers propose blocks, this makes Ethereum a 'security' and therefore this provides a rationale for the SEC to reject Ethereum ETFs,” BitMEX Research said.

Ultimately, the analysts argued ETF approval was a less critical factor for Ethereum than Bitcoin as the bitcoin ETFs are already first out of the gate, Ethereum culture is more aligned with technology than investing, and the staking issue makes ether ETFs less attractive.