July 23 (Reuters) - It may take a little more time for

ether to edge out of bitcoin's shadow.

Investors are more cautious and divided ahead of the U.S.

launch of exchange-traded funds tied to ether's spot

price on Tuesday, presenting a contrast to the general euphoria

that preceded the arrival of ETFs linked to bitcoin.

"It will be less of an event than people are making it seem

to be," said Nathan Gauvin, CEO of asset manager Gray Digital

and $2 billion hedge fund Blackridge Investment Management.

Trading in the ETFs issued by nine asset managers led by

BlackRock ( BLK ), VanEck, and Franklin Templeton on

U.S. trading platforms comes six months after bitcoin ETFs

debuted in January.

The consensus forecast is for ether ETFs to attract about

25% of bitcoin's flows, though Steven McClurg, head of U.S.

asset management at CoinShares estimated it at just 10%.

A major issue for some investors is the SEC's exclusion of

the "staking" mechanism, a key feature on the Ethereum

blockchain which releases ether, the world's second-largest

cryptocurrency after bitcoin.

Staking allows Ethereum users to earn rewards by locking up

their ether to help secure the network. The rewards or yield

come in the form of freshly-minted ether tokens and parts of

network transaction fees.

The annual percentage yield on staking Ethereum was around

3.12% as of July 22, according to StakingRewards.com. Staking is

appealing because it enhances returns.

As currently constructed, the SEC will only allow the ETFs

to hold regular, unstaked ether.

"An institutional investor looking at ether knows that there

are yields to be had," said CoinShares' McClurg. "It's like a

bond manager saying I will buy the bond, but I don't want the

coupon, which is counter to what you're doing when you're buying

bonds."

The SEC believes staking in exchange for tokens is

considered an investment contract, which requires disclosures

and safeguards under U.S. securities laws.

McClurg believes investors will continue to stake ether

outside an ETF and earn a yield as opposed to paying fees and

holding it in an ETF.

He said CoinShares, which oversees more than $6 billion in

assets, is going to wait and see how this all pans out. "We made

a conscious decision not to get involved in this round for an

ETF that's not staked."

Gray Digital's Gauvin thinks staking will eventually be

included in the ETF sometime next year. "But this is a midpoint

to get there." The firm is also not participating in this

launch, but will watch it closely.

'LIKE A STOCK WITH NO DIVIDEND'

Chanchal Smadder, ETC Group's head of product, echoed

comments from CoinShares' McClurg, saying holding the ETF

without the staking yield is "like owning a stock and not having

the right to the dividend."

ETC, with $1.4 billion in assets, is Germany's first issuer

of crypto exchange-traded products (ETP), which are similar to

ETFs. It has both staked and unstaked ether ETPs totaling $150

million.

Demand for staked ether ETPs is higher than the unstaked

ones, Smadder said, with the staked fund getting $51 million in

inflows so far this year, while the unstaked saw outflows of $95

million.

Smadder did point out, though, that illiquidity is a risk

when staking ether with validators or stakers having to queue to

withdraw their staked ether. The processing time to complete the

exit queue could sometimes take eight to nine days, he said.

"With unstaked, the ether is unlocked and available at all

times."

Nana Murugesan, president of Matter Labs, a research and

development company that helps scale Ethereum, said the ether

ETFs launch was less about staking, but more a "watershed

moment" in crypto.

The more important thing, Murugesan said, is investors'

access to a blockchain underpinning multiple applications. "As

Ethereum and its adoption grow, the ETF's value also grows with

all the network effects."

Overall, investors agree that ether flows are unlikely to

come close to those bitcoin ETFs captured in the first week of

trading, given ether's smaller market capitalization of $424

billion, compared with bitcoin's $1.4 trillion.

Bitcoin ETFs drew nearly $7 billion in assets in their first

three weeks of trading, Morningstar Direct data showed. As of

end-June, the ETFs had attracted a net $33.1 billion in inflows.