The Rise of Alts ETF, A New Era of Encryption Investment is Here

In January 2024, the spot Bitcoin ETF began trading on Wall Street, and six months later, the spot Ethereum ETF made its debut. To this day, the U.S. Securities and Exchange Commission is facing 72 applications for encryption ETFs, and this number continues to grow. From Solana to Dogecoin, XRP, and even PENGU, asset management companies are competing to package various digital assets into regulated products.

The success of the Bitcoin ETF far exceeded expectations, rewriting the script for asset management. Within a year, the Bitcoin ETF attracted $107 billion, and after 18 months, its asset scale reached $133 billion. A large asset management company's Bitcoin ETF holds over $74 billion worth of 694,400 Bitcoins. All ETFs combined control 1.23 million Bitcoins, accounting for approximately 6.2% of the total circulation.

This success has created a virtuous cycle: ETFs absorb Bitcoin supply, exchange balances decrease, institutional holdings increase, Bitcoin price stability improves, and the entire encryption market gains unprecedented legitimacy. Even during periods of market volatility, institutional funds continue to flow in.

ETFs have brought mainstream recognition to cryptocurrencies. They allow investors to buy and sell digital assets through regular brokerage accounts just like trading stocks, without needing to set up wallets or handle the technical details of the blockchain. The custody and security of ETFs are managed on behalf of the investors and provide high liquidity assets traded on mainstream exchanges.

Several major institutions have submitted applications for Solana ETF, with a high approval probability of 90%. The ETF applications for Ripple, Cardano, Litecoin, and Avalanche are also under review. Even meme coins like Dogecoin and PENGU have ETF applications.

This phenomenon is the result of multiple forces converging. The new government has taken a friendly stance towards encryption currencies, and the regulatory environment has undergone dramatic changes. The recognition of Bitcoin and alts by institutions, the surge in corporate encryption currency reserves, and the shift in financial advisors' attitudes towards allocating encryption assets have all created an unprecedented demand for diversified encryption exposure.

However, early analysis indicates that the acceptance of altcoin ETFs may vary significantly from that of Bitcoin ETFs. The total inflow is expected to range from hundreds of millions to 1 billion, far below the achievements of Bitcoin ETFs. The performance of Ethereum ETFs further highlights this gap, attracting only about 4 billion in net inflows over 231 trading days.

One major difference between altcoin ETFs and Bitcoin ETFs lies in the ability to earn returns through staking. The regulatory approval for staking has opened the door for ETFs to stake their held assets and distribute returns to investors. This creates a new revenue model for ETF issuers and provides investors with a new value proposition.

However, ETF managers managing staked encryption assets face multiple challenges, including balancing liquidity demands, maximizing returns, and managing technical risks.

The large number of applications almost guarantees the compression of fees. When numerous products compete for limited institutional capital, pricing becomes a key differentiating factor. Some issuers may even leverage staking yields to subsidize management fees, launching zero-fee or negative-fee products to attract assets.

The craze for altcoin ETFs is changing people's perception of encryption investment. Different cryptocurrencies are viewed as investment tools with different uses. Cryptocurrencies are no longer a peculiar asset class but have become dozens of investment options with varying risk characteristics and use cases.

This development shows the degree to which cryptocurrency has diverged from its roots. As meme coins receive ETF applications, as numerous products vie for attention, and as fees are compressed like other commodity businesses, we are witnessing the complete mainstreaming of an industry.

The key question is whether this development creates real value or merely packages speculation into a regulatory-approved shell. The answer may vary from person to person, but ultimately the market will decide who is right.