Economic Considerations Behind the Ark Fund's Withdrawal from the Ethereum ETF Application

Recently, the ARK Fund led by Cathie Wood decided to withdraw its application for an Ethereum ETF, drawing market attention. This decision actually reflects some real challenges in the cryptocurrency ETF market.

The Ark Fund's Bitcoin ETF currently holds the fourth position in the market, with approximately 6% market share. However, despite this, the profitability of this business does not seem optimistic. The cryptocurrency ETF industry is experiencing intense fee competition, with most products' fees hovering between 0.19% and 0.25%.

Based on the current size of the Ark Bitcoin ETF, the annual management fee income is approximately $7 million. Considering that operating costs may be comparable, this means that the profit margin for this product is quite limited. In this case, launching an Ethereum ETF may bring greater financial pressure to the company.

For smaller market cap cryptocurrencies, the situation is even more severe. Taking Solana (SOL) as an example, its market cap is only about 5% of Bitcoin's. To make a SOL ETF product break even, it would need to manage at least 20 million SOL, which accounts for 4.5% of the theoretical circulating supply of SOL. In contrast, even the industry leader BlackRock manages only 1.5% of the total Bitcoin for its Bitcoin ETF.

In addition, SOL faces additional challenges:

1. SOL can earn an on-chain yield of about 8%, while ETF products are not allowed to include staking features. This means that investors holding SOL ETFs will lose this potential yield, significantly reducing the product's attractiveness to investors.

2. The actual circulating supply of SOL may be less than the official figure of 460 million, which further increases the difficulty of managing a large amount of SOL.

3. Compared to Bitcoin, SOL has a smaller market capitalization and circulation, which means that institutional investors need to hold a larger proportion of assets while facing high yields and regulatory pressure, leading to higher risk.

In summary, for many cryptocurrencies, especially those with smaller market capitalizations, launching ETF products may face the dilemma of being difficult to profit from. Driven by business logic, institutions may adopt a cautious attitude towards such products. This also explains why even industry leaders like Ark Invest have to reconsider their ETF strategies.