Can altcoin ETFs avoid the dilemma of Ethereum?

The new chairman of the U.S. Securities and Exchange Commission, Paul Atkins, faces significant challenges at the outset of his tenure, including reviewing over 70 cryptocurrency ETF applications. Although he has postponed the rulings on several ETF proposals until June, this delay highlights the daunting task facing the new chairman, who has a friendly stance towards cryptocurrencies.

Interestingly, as the altcoin ETF craze rises, the Ethereum ETF is experiencing significant capital outflows. As of April 18, the Ethereum ETF has seen seven consecutive weeks of capital outflow, totaling over $1.1 billion. As of April 11, the assets under management have plummeted to $5.24 billion, marking a historic low since these products were launched in July 2024.

In comparison, Bitcoin ETFs performed strongly, with nearly $1 billion in inflows recorded each day last Thursday and Friday despite market volatility, pushing the price of Bitcoin back to the $95,000 level.

This contrast raises a key question: since the Ethereum ETF is facing such difficulties, why are alts still competing to apply for ETFs?

Asset management companies have submitted ETF applications for at least 15 cryptocurrencies other than Bitcoin and Ethereum. These applications cover a range from mature alts like Solana and XRP to meme coins like Dogecoin and Penguin Coin, and even include Trump-related tokens.

The main motivation for applying for an ETF is to enhance investor accessibility and achieve broader adoption through fund companies. As Bloomberg ETF analyst Eric Balchunas said, turning cryptocurrencies into ETFs is like adding music to all streaming services; it doesn't guarantee that anyone will listen, but it makes the music available to the vast majority of listeners.

The dilemma of the Ethereum ETF highlights several key issues:

1. Fee structure: High management fees make certain ETFs difficult to compete with low-cost rivals.

2. Complex Value Narrative: Ethereum's multiple roles (smart contract platform, DeFi settlement layer, NFT market pillar, etc.) make it difficult to simply explain to investors.

3. Regulatory Restrictions: The SEC prohibits the inclusion of staking rewards in ETFs, depriving them of an important differentiating feature.

Despite these challenges, the altcoin ETF application frenzy continues, mainly due to:

1. "Atkins Effect": The new SEC chair's supportive stance on innovation provides applicants with unprecedented opportunities.

2. Institutional Demand: Most institutional investors plan to increase their cryptocurrency allocation this year.

3. Differentiated value proposition: Each altcoin provides unique investment reasons that may be easier to explain than Ethereum.

4. Growth Potential: Compared to Bitcoin and Ethereum, which have reached a trillion-dollar market value, small and medium-cap alts may offer more significant returns.

The launch of altcoin ETFs could have a significant impact on the market. Analysts predict that the ETFs for Solana and XRP alone could attract $7-14 billion in capital inflow in the first year, which may lead to substantial changes in token prices and market dynamics.

However, the risk of asset dilution also exists when institutional capital is spread across multiple cryptocurrency ETFs, which may result in the asset management scale of all alts ETFs failing to reach a critical point.

For retail investors, ETFs provide a regulated and secure investment channel, but it also means potentially obtaining returns lower than directly holding the assets due to management fees and tracking errors.

Ultimately, the success of altcoin ETFs may depend on whether they can learn from the failures of Ether ETFs. Some issuers have begun to explore new strategies, such as introducing differentiated features like staking rewards. Small-cap tokens with clearer value propositions and greater growth potential may become the biggest winners.

The dilemma of Ethereum ETFs should not be seen as a harbinger of doom for cryptocurrency ETFs, but rather as a necessary experience that provides valuable market feedback for the next generation of products.