By Michael Scott
Experts anticipate a “double-whammy effect” as Ethereum staking returns edge closer to bridging the gap with the traditional risk-free rates in the subsequent quarters.
The Ethereum staking returns could surpass the US interest rates next year. The shift could bolster the uptrend momentum for the ETH price as investors pursue higher yields.
Experts forecast that the market dynamics propelled by higher transaction fees and rates cut on the Ethereum network will lift the staking returns. The shift will edge closer to the traditional risk-free rates to narrow the negative spread. Notably, it has remained negative since June last year, with the Effective Federal Funds Rate (EFFR) edging the Ethereum Composite Staking Rate.
Bullish Forecast for Ethereum Staking Yields
Crypto trading outfit FalconX acknowledges a pair of factors could propel the spread into positive territory by June 2025. The institutional brokerage firm expects such to deliver the ‘double-whammy effect’.
In a Friday, September 27 note to investors, FalconX illustrated that the dovish move by the Federal Reserve (Fed) to lower interest rates is bullish of subsequent reductions next year.
The futures markets portray an 85% potential for the federal funds rate to drop below 3.75% by the end of Q1 2025 and a 90% chance to 3.5% by mid-2025, per CME FedWatch data.
The lower rates will ultimately erode the yields derived from traditional assets such as treasury bonds. In particular, such will narrow the spread with the Ethereum staking, which the current data shows hovers around 3.2%.
FalconX research head David Lawant indicated they are yet to witness the juicy staking rates spread relative to the risk-free rate despite the crypto bull fully fledging on the Ethereum price.
The FalconX analyst indicates that ETH staking rates could revisit their historic spell in Q4 2022 when they outpaced the risk-free rates. The period coincided with the FTX implosion that plunged the crypto market into a cold winter.
The previous week saw Ethereum’s transaction fees peak in nearly two months, per YCharts data. The fee is critical in staking rewards, though it slipped on Sunday to an average of $0.80 before increasing to $1.064 on Monday, September 30.
Although the fees are yet to match the previous bull market peaks, FalconX says the recent uptick suggests increasing blockchain activity. Higher transaction fees constitute a catalyst bolstering the staking yields, thus offering attractive returns for the Ethereum stakes.
FalconX illustrates that integrating rising Ethereum yields and declining US rates could expedite the spread to positive by Q2 2025. The upside movement will transform Ethereum’s staking competitiveness relative to the traditional yield-bearing assets.
The analyst observes that a positive spread will make Ethereum staking more appealing when it offers higher returns than the risk-free options. Real Vision head of crypto Jamie Coutts considers that the industry-coveted institutional investors will likely embrace staking yields via regulated products.
Ethereum ETFs Activity
The preference for staking adds a twist, considering that the Securities and Exchange Commission (SEC) approved eight bids for spot Ethereum ETFs in May. Most issuers eliminated the references to staking customer ETH, possibly to clear potential regulatory hurdles.
The shift to proof-of-stake (PoS) by Ethereum in Sept. 2022 allowed the ETH holders to deposit their crypto assets. Unlike US ETF products, where staking remains elusive, direct deposits earn rewards for the holders.
Coutts considers that unless the SEC approves the offerings, institutional demand for the ETF products will remain subdued.
The crypto analyst notes that sophisticated asset managers and established private wealth management firms could invest directly. By doing so, direct exposure to Ethereum could spike the demand among traditional institutions through slow development.
The US Ethereum’s Spot ETFs have experienced a harder post-launch activity than the BTC funds. Nonetheless, signs point towards stellar performance in Q4.
The ETF Store head Nater Geracy noted that the BlackRock iShares ETHA had a standout performance. It exceeded US$1 billion in assets under management (AUM), positioning it among the top 20% of performing funds.
While the ETH Funds portray collective outflows, ETHA led them to the strongest weeks since their unveiling in late July. The total weekly net inflows hit $95.5 million, with Fidelity’s FETH realising $64.8 million.