Altcoin ETFs: Challenges and Opportunities on Wall Street

Altcoin ETFs Enter Wall Street: A Closer Look

With the US SEC greenlighting crypto ETFs and the regulatory environment gaining clarity, an increasing array of altcoins are seeking a seat on Wall Street's stage. Just since last month, eight altcoin ETFs have been approved. However, amid headwinds dominating the broader cryptocurrency market, these products face an uphill battle regarding capital inflows. In the near term, they are unlikely to provide a significant boost to coin prices.

Four Altcoins Land on Wall Street: Limited Inflow Capabilities Short-Term

The four crypto projects, Solana, Ripple, Litecoin, and Hedera, have secured what can be considered a 'ticket' onto Wall Street. However, scrutinizing the financial flows reveals their overall appeal remains limited. Notably, some of these ETFs experienced zero inflows for multiple days. Cumulatively, these four have garnered approximately $700 million USD in net inflows. It's also worth noting that the prices of the coins in question have generally declined following the launch of their respective ETFs, partially attributable to a broader cryptocurrency market downturn.

Solana

There are currently five US Solana spot ETFs on the market. Bitwise, VanEck, Fidelity, Grayscale, and Canary are the issuers. Similar products from 21Shares and CoinShares are in the pipeline. According to SoSoValue data, US Solana spot ETFs have totaled approximately $420 million USD in net inflows, while the total net asset value stands at $594 million USD. Bitwise's BSOL has contributed the largest trading volume, experiencing cumulative inflows over three weeks totaling $388 million USD. However, the bulk of this came from an initial investment of nearly $230 million USD on day one. Subsequent inflows have slowed considerably. Fidelity's FSOL saw a modest $2.07 million USD in net inflows on its first day of trading on November 18th, with a total net asset value of $99.97 million USD. Canary's SOLC saw no net inflows on its first day of trading, with a total net asset value of $820,000 USD. It's worth noting that spot ETF issuers are supporting staking functionalities, which may provide some support to market demand.

CoinGecko data reveals that since the first Solana spot ETF launched on October 28th, the price of SOL has declined by 31.34% to date.

XRP

Regarding US XRP spot ETFs, the only listed product is XRPC launched by Canary. Similar products from CoinShares, WisdomTree, Bitwise, and 21Shares are in the pipeline. According to SoSoValue data, XRPC has achieved cumulative net inflows exceeding $270 million USD since its launch. The first-day trading volume was $59.22 million USD but yielded no net inflows. The following day, the fund saw $243 million USD in net inflows through cash or in-kind subscriptions, and the trading volume was $26.72 million USD.

CoinGecko data indicates that since the first Ripple spot ETF launched on November 13th, the price of XRP has declined by approximately 12.71% to date.

Litecoin

In late October this year, Canary Capital officially launched the first US Litecoin tracking ETF, LTCC. Similar products from CoinShares and Grayscale are still in the pipeline and are expected to launch later. According to SoSoValue data, as of November 18th, LTCC had cumulative net inflows of approximately $7.26 million USD. Daily net inflows have typically been only a few hundred thousand USD, and there have been multiple days with zero inflows.

CoinGecko data shows that since the first Litecoin spot ETF launched on October 28th, the price of LTC has declined by approximately 7.4% to date.

Hedera

The first US HBAR tracking ETF, HBR, was also launched by Canary Capital at the end of last month. According to SoSoValue data, as of November 18th, HBR had cumulative net inflows of approximately $74.71 million USD. Nearly 60% of this funding was concentrated in the first week, after which net inflows declined markedly, even hitting zero for multiple consecutive days.

CoinGecko data indicates that since the first Hedera spot ETF launched on October 28th, the price of HBAR has declined by approximately 25.84% to date.

In addition to the above projects, spot ETFs for other crypto assets such as DOGE, ADA, INJ, AVAX, BONK, and LINK are still progressing. Bloomberg analyst Eric Balchunas predicted that Grayscale's Dogecoin ETF would launch on November 24th.

Crypto ETF Expansion Cycle Begins: Initial Offerings Face Multiple Challenges

According to incomplete statistics from Bloomberg, there are currently 155 ETP (exchange-traded product) applications in the crypto market, covering 35 digital assets, including Bitcoin, Ethereum, Solana, XRP, and LTC, indicating a growth resembling a beachhead invasion. With the end of the US government shutdown, the approval of these ETFs is expected to accelerate. With the gradual clarification of the US regulatory environment, this could drive a new round of expansion in crypto ETF applications. The US SEC has approved a general listing standard for crypto ETFs and recently released new guidance allowing crypto ETF issuers to expedite the effectiveness of their registration filings. At the same time, the US SEC has significantly deleted previous routine crypto project chapters in its most recent fiscal year review priorities document. This contrasts with the period of former Chairman Gary Gensler, when cryptocurrencies were explicitly listed as a review priority, with spot Bitcoin and Ethereum ETFs specifically named.

Additionally, the introduction of staking functionalities is believed to incentivize institutional investor demand, thereby attracting more issuers to join the ETF application ranks. Research from Swiss crypto bank Sygnum indicates that although the market has recently experienced a significant correction, institutional investor confidence in crypto assets remains strong. Over 80% of institutions expressed interest in crypto ETFs other than Bitcoin and Ethereum, and 70% said they would begin or increase their investments if the ETFs were able to provide staking yields.

Positive signals for ETF staking have also emerged at the policy level. Recently, US Treasury Secretary Scott Bessent issued a new statement saying he would cooperate with the US Internal Revenue Service to update guidance to provide regulatory support for cryptocurrency ETPs that include staking functionalities. This action is believed to potentially accelerate the approval schedule for Ethereum staking ETPs, while also paving the way for multi-chain staking products for networks like Solana, Avalanche, and Cosmos.

However, the inadequate attractiveness of altcoin ETFs at this stage is primarily due to multiple factors such as market size, liquidity, volatility, and market sentiment. On the one hand, the market size and liquidity of altcoins are limited. CoinGecko data reveals that as of November 18th, Bitcoin's market share is close to 60%. Excluding ETH and stablecoins, the market share of other altcoins is only 19.88%. This makes the underlying liquidity of altcoin ETFs poor.

Meanwhile, compared to Bitcoin and Ethereum, altcoins are prone to short-term narratives and have higher volatility, being regarded as high-risk beta assets. According to Glassnode data, since this year, most of the relative profit realization of altcoins has fallen into a deep capitulation zone. A significant divergence between Bitcoin and altcoins has emerged that is uncommon in previous cycles.

Therefore, it is difficult for altcoin ETFs to attract investors on a large scale, especially single-token ETFs. In the future, investors may prefer diversified, distributed basket of altcoin ETF strategies to reduce risk and increase potential returns.

On the other hand, altcoins face market manipulation and transparency risks. Many altcoins lack sufficient liquidity and are prone to price manipulation. The net asset value estimation of ETFs relies on underlying asset prices. If altcoin prices are manipulated, it will directly affect the value of the ETF, leading to legal risks or regulatory investigations. Additionally, some altcoins may be considered unregistered securities. The US SEC is currently pushing a token classification plan to distinguish whether cryptocurrencies are considered securities.

Furthermore, the uncertainty in the macroeconomic environment exacerbates investor risk aversion. With overall confidence low, investors prefer to allocate to traditional assets such as US stocks and gold. At the same time, altcoin ETFs lack the name recognition and market recognition of Bitcoin or Ethereum spot ETFs, especially the lack of endorsement from large institutions such as BlackRock. The distribution network, brand effect, and market trust brought by top issuers are difficult to replicate, further reducing the attractiveness of altcoin ETFs in the current environment.