The launch of spot Ethereum ETFs has yet to live up to the market’s initial optimism, as reflected in their performance over the past few weeks.

The Ethereum ETFs’ total on-chain holdings currently stand at approximately 2.81 million ETH, valued at around $7.33 billion, which accounts for about 2.3% of Ethereum’s total supply.

Despite these significant holdings, the net flows since launch have been negative, with a total outflow of 136,700 ETH.

The outflows are primarily attributable to Grayscale’s ETHE, which recorded a withdrawal of $487.88 million on the first trading day alone. Other Ethereum ETFs have seen consistent inflows, but these have not been sufficient to offset the drag from ETHE.

The market’s reaction to these outflows has been reflected in Ethereum’s price, which has struggled to maintain momentum post-launch. After an initial rise in anticipation of the ETF launches, Ethereum’s price dropped significantly, hitting a low of $2,338 on Aug. 7.

Although there has been some recovery since then, with prices hovering around $2,600, the overall sentiment remains cautious. The broader market downturn has compounded this uncertainty, leading to a lack of clear upward momentum for Ethereum.

Adding to the complexity, the Ethereum futures market has shown a marked increase in leverage ratios, signaling heightened risk-taking among traders. This spike in leverage suggests that while some investors are betting on short-term price movements, the broader sentiment remains volatile. The market’s reaction to these leveraged positions could further exacerbate price fluctuations, particularly if negative sentiment continues to dominate.

Despite these challenges, there is still a significant institutional interest in Ethereum-based financial products. BlackRock’s iShares Ethereum Trust (ETHA) has consistently attracted some of the highest inflows among Ethereum ETFs, signaling that not all players are bearish on Ethereum’s long-term prospects.

Moreover, the overall market for Ethereum ETFs has shown some positive movement, with occasional days of net inflows, particularly as outflows from ETHE have begun to slow. This has led some analysts to speculate that the worst of the outflows may be over, potentially setting the stage for a recovery in both ETF flows and Ethereum’s price.

The current state of Ethereum ETFs shows that the market is still finding its footing amid broader volatility and specific challenges related to Grayscale’s ETHE.

While the initial performance has been underwhelming compared to spot Bitcoin ETFs, the slowing outflows from ETHE and continued institutional interest suggest that there may be room for optimism in the medium to long term.

However, for now, Ethereum and its ETFs remain in a precarious position, with its future performance likely tied closely to broader market trends and the actions of major institutional players.

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Spot Ethereum ETFs recorded a robust trading debut in the US on July 24 after months of speculation and regulatory uncertainty.

The ETFs recorded an impressive volume of $1.11 billion on the first trading day, led by BlackRock’s $266.5 million inflows. Within the first 90 minutes of trading, ETH ETFs recorded $361 in trading volume, reflecting strong interest and confidence in Ethereum.

While the first-day trading volume for Ethereum ETFs still represents around a quarter of the volume Bitcoin ETFs saw upon launch, it’s still a major development for ETH. Aside from a brief spike in spot price, the surge in interest for ETFs has also affected the derivatives market.

Ethereum derivatives saw a volatile June but had a relatively calm July. Over the past week, the entire derivatives market saw gradual but noticeable growth that seems to have sped up after the ETFs launched. Data from CoinGlass showed a steady climb in options open interest, particularly on July 24, when it reached $7.39 billion.

Ethereum futures followed a similar trend, albeit the larger size of the market meant that the $460 million increase in open interest didn’t show up as such a significant uptick.

A rise in open interest is significant as it often brings about increased liquidity and trading volume, providing Ethereum with a more robust market structure. As the trading activity around ETH ETFs heats up in the coming weeks, we can expect the derivatives market to continue its upward trajectory.

The growing institutional interest in ETH ETFs could very well translate into derivatives. Institutional and sophisticated investors could begin employing basis trade strategies, leading to an increase in derivatives OI and volume.

Basis trading is a sophisticated strategy that involves taking advantage of the price difference between the spot and futures market. It has become a significant part of the Bitcoin market, especially after the launch of Bitcoin ETFs. Previous CryptoSlate analysis found that the Bitcoin basis trade has significantly influenced the market, leading to flat price action that defies the inflows and volume seen in spot ETFs. With the introduction of Ethereum ETFs, a similar thing could also happen in the ETH market.

While this trading strategy suppresses any significant price action, it could bode well for Ethereum by increasing OI, creating a more liquid and active derivatives market. Such a market enhances price discovery and risk management capabilities.

However, if a basis trade involving Ethereum ETFs and derivatives gains a lot of traction, it could negatively affect the market. The most significant risk for Ethereum comes from the potential for market manipulation, where large institutional players could exploit discrepancies to manipulate prices.

Furthermore, if the basis trade becomes too crowded, it could reduce the strategy’s profitability, leading to abrupt exits and potentially triggering sharp corrections. Given the size of Ethereum’s DeFi market, this could prove especially dangerous for the coin.

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