There’s A Case to Be Made for Spot Ethereum ETFs

There’s A Case to Be Made for Spot Ethereum ETFs

Following the approval of a spot Bitcoin ETF not long ago, the most prominent cryptocurrency in existence is grappling with selling pressure, with market participants wanting to offload their Bitcoin. It’s practically a tug-of-war between buyers and sellers, providing invaluable insight into cryptocurrency market sentiment. By contrast, Ethereum’s performance has been elevated by corporate entities and high-net investors who increased their buying pressure shortly after the SEC verdict. Binance data shows that strategic investors have entered a buying spree, with self-custody wallets approaching a historic high of 56 million ETH.

The question now is: Could spot Ethereum ETFs be next? Multiple asset managers, including VanEck, BlackRock, Fidelity, and Invesco Galaxy, to name a few, have filed applications in 2023. With the SEC approving 11 spot Bitcoin ETFs, there’s reason for hope, and it would mark the first such product for Ethereum, which already enjoys popularity among institutional investors. The earliest deadline for spot Ethereum ETF application is May this year. It’s likely that spot Ethereum ETFs will be approved, and the SEC will offer guidance for every other major token.

Spot Ethereum ETFs May Face Regulatory Challenges in The Future  

Until now, it was hard to imagine that a spot Bitcoin ETF would be possible. Nevertheless, the SEC finally approved ETF trading, giving the green light for several applications. BlackRock filed for its own offering in June 2023 and now has a spot in the Ethereum ETF proposal, with Coinbase Custody as the guardian. In other words, the asset management giant seeks to list an equivalent product for Ethereum as part of its journey towards tokenization. Other financial institutions, namely Ark and Fidelity, have followed in their footsteps, filing for spot Ethereum ETFs.

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Eric Balchunas, senior ETF analyst at Bloomberg, pointed out that he doesn’t envision a scenario in which spot Bitcoin ETFs are approved at the expense of spot Ethereum ETFs, given the direct correlation between the two crypto titans. Joe Carlasare, an active investor and Bitcoin proponent since 2015, believes the SEC will approve spot Ethereum ETFs, but the securities regulator will want to set a precedent for how future applications are handled, retaining some discretion in establishing what products come to the market. Carlasare is of the opinion that spot Ethereum ETFs won’t start trading until the third quarter of 2024.

Much of the uncertainty regarding the approval of a spot Ethereum ETF revolves around the potential categorization of Ether, the native cryptocurrency of the Ethereum blockchain. Ether is often regarded as digital silver, although it’s not considered a security under the law. Ether has long been treated as a commodity by state and federal regulators, so classifying it as a security would have a considerable impact on the cryptocurrency markets, impacting the way it’s traded in the U.S. By transitioning to Proof of Stake, Ethereum relies on a pooling method that incentivizes users to own and stake ETH, altering the core functionality.

Spot Ethereum ETFs Explained: Everything You Need to Know

Conceived in 2013, Ethereum’s pioneering role in the blockchain revolution can’t be denied. Ethereum can process complex transactions like NFT minting, DeFi transactions, and ICOs. Its ecosystem thrives on Ether, which is used to pay transaction fees and as collateral by network participants (for the privilege of being a validator). An Ethereum ETF is a type of investment vehicle that offers exposure to the cryptocurrency without users having to buy or store the digital asset themselves. The financial product tracks the price of Ethereum, so you can buy and sell shares on traditional stock exchanges.

A spot Ethereum ETF could bring about many advantages to traders interested in the world’s second-largest cryptocurrency project by market capitalization. It aims to track Ethereum’s “spot” price, i.e., the real-time price the underlying asset is trading for in the marketplace. In essence, the Ethereum spot is worth exactly what Ethereum is trading for in the cryptocurrency markets. It’s easier for people to invest in Ethereum, and the new trading prospect could legitimize Ethereum as a recognized asset. As opposed to a futures ETF, the fund manager who makes available the ETF owns and oversees the pool of coins.

Spot Ethereum ETFs might enhance the liquidity of the market by ensuring more buyers and sellers. What is more, enhanced liquidity could engender stabler prices and less volatility, making Ethereum more attractive to ordinary individuals. It’s easier for investors, particularly those who aren’t knowledgeable about cryptocurrency, to invest in Ethereum.

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 ETFs don’t have minimum investment requirements, but you need at least the current price of one share to get started. Newer investors are in the habit of checking their portfolios all too often and making emotional decisions, so don’t make the same mistake.

Futures-based Ethereum ETF Products Are Already Available in The U.S.

The first-ever ETF based on Ethereum futures began trading last year, providing an investment vehicle focused on the most popular digital token after Bitcoin. A futures ETF is a passively managed index fund traded on an exchange, which aims to imitate the performance of Ethereum by investing in futures contracts. Any investor can speculate on the price moves of the native token of the Ethereum network. Benefits include but aren’t limited to regulatory compliance, diversification, and ease of access. Surprisingly, futures-based Ethereum ETF products haven’t gained traction and were launched without much interest.

Futures-based Ethereum ETFs have failed to impress, and it’s not hard to understand why. Bitcoin futures ETFs had the advantage of being launched during a bull market in full swing. Ether futures premiums increased considerably before the launch, unable to reverse the year-long declining trend in Ethereum vs. Bitcoin. In spite of the increase in interest in Ethereum futures since September 2023, funding rates remained neutral, suggesting a lack of market direction. Futures contracts are mostly used for speculative or hedging purposes, so you can invest in Ethereum without inconveniencing yourself via exchanges.

The Takeaway

No one ultimately knows where Ethereum will end up in the upcoming years, but it’s likely it will continue to move higher. The SEC will approve a spot Ethereum ETF in the future – it’s not a possibility, but an imminent reality.


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