Can altcoin ETFs avoid the dilemma of Ethereum?

Recently, the U.S. Securities and Exchange Commission welcomed its new chairman, Paul Atkins. Upon taking office, he faced the important task of reviewing over 70 cryptocurrency ETF applications, including many altcoin ETFs. Although Atkins has postponed decisions on several ETF proposals until June, this has not stopped fund companies from competing to apply for various altcoin ETFs.

However, at the same time, the Ethereum ETF, as the second largest cryptocurrency, is facing a massive outflow of funds. This contrast raises a thought-provoking question: since the Ethereum ETF is underperforming, why are alts still eager to apply for ETFs?

Currently, at least 15 cryptocurrencies other than Bitcoin and Ethereum have submitted ETF applications. These include well-known projects like Solana, Cardano, XRP, Dogecoin, and even some lesser-known tokens. The purpose of these applications is to enhance investor accessibility and achieve broader adoption through fund companies.

However, the situation of the Ethereum ETF is concerning. As of mid-April, the Ethereum ETF has experienced outflows for 7 consecutive weeks, totaling over $1.1 billion. In contrast, the Bitcoin ETF has recorded nearly $1 billion in inflows daily recently, and the price of Bitcoin has thus risen to around $95,000.

The issues facing the Ethereum ETF mainly fall into three areas: first, the high management fees; second, the increasingly complex value narrative of Ethereum, which is difficult to explain clearly to investors; and finally, the regulatory restrictions on the staking function. These factors collectively contribute to the predicament of the Ethereum ETF.

Nevertheless, the enthusiasm for altcoin ETF applications has not diminished. This is mainly due to the new SEC chair Gary Gensler's friendly attitude towards the cryptocurrency industry, which has opened up new possibilities for ETF approvals. Additionally, the growing demand from institutional investors for cryptocurrencies is also a significant reason. Data shows that about 83% of institutional investors plan to increase their cryptocurrency allocation this year.

Each altcoin has its unique value proposition, which may be easier to understand and accept than Ethereum. For example, Solana is known for its efficient transaction speed and its evolving DeFi ecosystem, XRP focuses on the cross-border payment sector, while Hedera is quite popular in enterprise applications. Furthermore, compared to Bitcoin and Ethereum, mid-to-small cap altcoins may have greater growth potential, which is very attractive to some investors.

If altcoin ETFs are approved, it could have far-reaching effects on the cryptocurrency market. Analysts predict that the ETFs for Solana and XRP alone could attract $7-14 billion in inflows in the first year, which would significantly impact token prices and market dynamics. However, there is also a risk of asset dilution with institutional capital spread across multiple cryptocurrency ETFs.

For retail investors, ETFs provide a relatively safe and regulated way to invest in cryptocurrency, but they also come with management fees and potential tracking errors. Additionally, a large number of tokens locked in ETFs may reduce the circulating supply, thereby exacerbating the volatility in the spot market.

Although the Ethereum ETF is currently underperforming, this does not mean that altcoin ETFs are doomed to fail. On the contrary, some issuers are learning from the lessons of the Ethereum ETF and are seeking innovation. For example, some companies have applied for ETF products that include staking rewards to address the structural issues faced by the Ethereum ETF.

Ultimately, those tokens with smaller market caps but clear value propositions may become the biggest winners in the ETF market. They can not only provide investors with higher growth potential but may also meet institutional investors' demand for high returns.

Overall, the experience of the Ethereum ETF should not be seen as a warning, but rather as a necessary market feedback that paves the way for future participants. The new generation of altcoin ETFs is expected to learn lessons and be more refined in design and operation, thereby achieving success in the market.