24.07.2024
If Bitcoin is digital gold, then Ethereum is digital oil. Bitcoin ETFs and Ethereum ETFs -with their recent approval by the U.S. SEC-, have significantly increased access to crypto assets for both institutional and retail investors. These investment vehicles enable traditional investors, who otherwise wouldn't have access to these assets, to invest in Bitcoin and Ethereum without dealing with the technical issues of self-custody or the risks associated with unregulated exchanges. Traditionally, investors have viewed Bitcoin and other crypto assets as high-risk investments due to their volatility and the lack of regulation in many exchanges. With ETFs, investors can benefit from Bitcoin's and Ethereum’s growth potential with greater security and convenience.
Of course, these investment instruments are not free of controversy, both from traditional investors and the crypto community. Traditional investors often see Bitcoin ETFs as an opportunity to access an asset previously deemed too risky due to its volatility and the lack of regulation in crypto exchanges. However, for crypto investors, particularly Bitcoin maximalists, these ETFs represent a betrayal of the fundamental principles of the crypto ecosystem.
Bitcoin maximalists, who champion Bitcoin's supremacy over other crypto assets, view the involvement of large institutions like BlackRock with suspicion. These institutions, which previously criticized Bitcoin as a medium for illicit activities such as money laundering, now position themselves as advocates of an asset promoting decentralization and transparency. For maximalists, the right to self-custody is crucial, and an ETF does not respect this principle, as it only offers exposure to Bitcoin's price without direct ownership of the asset. This discrepancy highlights the tension between the pursuit of legitimacy and security in traditional markets and the adherence to the original ideals of the crypto ecosystem.
Staking is a crucial process in the Ethereum network that, in addition to providing security and stability, allows participants to earn passive returns on their ETH holdings. This process has gained greater relevance after Ethereum's transition from the Proof of Work (PoW) to the Proof of Stake (PoS) model. All recent significant upgrades to the network, such as Shanghai and Dencun, have been implemented to strengthen the functionality, decentralization, and dynamism of Ethereum 2.0.
In the PoS model, network validators, instead of miners, as in PoW, are responsible for verifying transactions and adding new blocks to the blockchain. Validators commit a certain amount of ETH as collateral in exchange for a reward that incentivizes their participation in the network. This staking process and direct participation are essential for participants to align their interests with the stable growth and security of the Ethereum network.
Just as Bitcoin maximalists staunchly defend self-custody as a fundamental right and principle reflecting the intrinsic values of the blockchain, Ethereum participants value staking as a crucial part of the network, acting as a stabilizing principle for its sustainability and decentralization. Nevertheless, if acquiring ETH through ETFs bypasses staking, how can an Ethereum ETF holder participate directly and actively in promoting the network's security and integrity?
Holding an Ethereum ETF does not entail direct ownership of ETH and deprives investors of the ability to participate in the network through staking (and thus receive rewards). This controversy is rooted in the debate over whether Ethereum is a commodity or a security. Even with the approval of Ethereum ETFs, this issue still needs to be solved.
The distinction between a commodity and a security is crucial because it determines how Ethereum is regulated. If considered a commodity, it would be regulated by the Commodity Futures Trading Commission (CFTC). It would fall under the Securities and Exchange Commission (SEC) jurisdiction if classified as a security. This difference has significant implications for investors and how financial products related to Ethereum, such as ETFs, can operate.
This context implies stricter regulatory restrictions to protect investors if Ethereum were classified as a security. In contrast, if it were considered a commodity, it would have greater flexibility with fewer obstacles, opening the door to staking tied to ETFs and providing that exposure and benefit to traditional investors.
Applicants for issuing Ethereum ETFs removed the possibility of staking from their applications precisely to avoid the debate over the nature of Ethereum as an asset: whether it is a commodity or a security. With their ETFs' approval and understanding of Ethereum's essence, we are looking at a diluted version of Ethereum. On its first day of trading, ETH ETFs attracted nearly $1 billion in trading volume, a very attractive number so far. In its first year, the ETFs are expected to attract 60% less inflows than Bitcoin ETFs received in six months. This anticipated reduction in inflows may partially be due to the elimination of staking, which suppresses an intrinsic and distinctive characteristic of Ethereum.
In the case of 8 out of the 10 Ethereum ETF issuers, Coinbase is the custodian of the assets (with Fidelity and Gemini being the other custodians). The question we can pose is: can Coinbase, Gemini or Fidelity stake the ETH equivalent to the issuance of the ETFs? The answer is very clear and can be found precisely in the filings made by all the applicant entities. For example, in the case of Fidelity's filing:
“Neither the Trust, nor the Sponsor, nor the Custodian, nor any other person associated with the Trust will, directly or indirectly, engage in action where any portion of the Trust’s ETH becomes subject to the Ethereum proof-of-stake validation or is used to earn additional ETH or generate income or other earnings.”
The shorter answer is no, no one associated with the Ethereum ETFs can perform staking. What are the implications for the Ethereum network if a significant amount of ETH remains unstaked? In the short term, the quantities of ETH held by custodians may not pose a threat to the network's integrity and security. However, we anticipate that this situation will intensify the debate over whether ETH is a security or a commodity. This is precisely the issue at the heart of the SEC's lawsuit against Coinbase for offering ETH staking services on its platform.
We believe that ETFs provide interesting exposure to a portion of the value of crypto assets. However, we must not overlook that one of the essential aspects of Ethereum is that it is also a platform for developing the crypto ecosystem. Therefore, it cannot be confined solely to its price relationship with the dollar and other fiat currencies, which represent only a fraction of its value. When you truly recognize the intrinsic value of Bitcoin or Ethereum, the dollar-denominated price becomes the least relevant aspect. If Bitcoin is digital gold, Ethereum is the equivalent of digital oil: It powers the machinery of Web3 and is likely to make applications possible that will drive decentralized value in everyone's life in ways we cannot even grasp yet. An ETF is just a speculative shadow you can use to bet on that future while missing out on real ownership and staking rewards for the sake of comfort.