Picture this: a groundbreaking moment in the world of cryptocurrencies, where the lines between traditional finance and digital assets blur. It's not just a distant dream; it's happening now. The recent news that Cathie Wood’s ARK Invest filed for the first spot ether (ETH) exchange-traded fund ETF in the United States marks a pivotal turning point.
It signifies not only the opening of doors for institutional investors but also the dawn of institutional liquid staking.
Matt Leisinger co-founder and chief product officer of Alluvial.
Why is there excitement over an ETH ETF? The answer lies in the resounding demand from investors seeking to integrate digital assets into their portfolios. While investors are hungry for these opportunities, current offerings fall short. U.S. investors eyeing a spot bitcoin ETF have to look beyond American shores.
For instance, Grayscale's GBTC, has consistently traded at a 20% discount to its net asset value: when an investor purchases GBTC, they're not just buying bitcoin exposure but navigating the complexities of liquidity in the crypto market — a daunting task.
The global demand for a spot ETH ETF becomes even more evident when you look at the thriving exchange-traded product (ETP) markets in Canada and Europe, boasting a combined market size nearing $33 billion. This is nothing short of a seismic shift in the world of global finance.
Zooming out, we see macroeconomic forces at play with industry giants like BlackRock embracing crypto. Combine that with PayPal's push into the stablecoin arena, and the result is undeniable pressure on Congress and regulatory bodies like the Securities and Exchange Commission (SEC) to create a viable framework for digital assets.
But where does liquid staking fit into this picture? A spot ETH ETF, if approved, could induce demand from institutional traders, who will then likely scramble to participate staking. Simply holding ETH won’t be enough, these institutions will pivot to staking, looking to give their investors a higher return on their ETF holdings (especially on a deflationary asset).
If the approval of a spot ETH ETF opens a floodgate of institutional investment, institutions will be eager to participate. This is principally because of recent innovations made in Ethereum staking. Stakers can retain liquidity even while locking up their assets using a liquid staking protocol that gives users a tradable token, something institutions cannot get when locking up capital in government bonds, for instance.
Typically, asset managers gravitate towards shorter redemption periods, aiming for a daily cadence if possible. Liquid staking allows people to stake and earn yield while retaining liquidity, often without a lockup.
This preference for shorter redemption periods stems from minimizing the net asset value discounts, avoiding liquidity challenges and the operational burden of managing staking and unstaking. Given the period of time to withdraw staked ETH is variable (from five to more than 30 days), these managers will need a solution that offers the ability to process daily redemptions while providing their investors the benefit of higher returns.
Institutions will seek a solution through compliant and security-focused liquid staking tokens that offer liquidity, a diverse node operator set and operational efficiency. The best way to manage staked ETH positions with shorter redemption periods is through a compliant liquid staking token.
Approving a spot ETH ETF isn't just likely; it's necessary in crypto's march to mainstream adoption. With the underpinnings of institutional demand beginning to take shape, it’s time for U.S. regulators to take notice and approve ARK Invest’s spot ETH ETF.