As one of the most popular and influential cryptocurrencies in the world (second only to Bitcoin), Ethereum has built an impressive reputation as a multifaceted platform. Its native token ether (ETH), goes beyond just a medium of exchange. ETH is the fuel that enables an ecosystem of decentralized applications (dApps), smart contracts, NFTs, and more.
This crucial functionality led to Ethereum becoming the hub for innovation and transformation across finance, gaming, art, and social media in the crypto world.
Despite the attractiveness of the Ethereum ecosystem, investing in it remains a risky and challenging endeavor. Its token, ETH, is subject to the same volatility and regulatory uncertainty other cryptocurrencies face; this can be daunting if you’re new to crypto and unfamiliar with its technical aspects.
The solution? Get back to the basics of investing.
If you’re familiar with exchange-traded funds (ETFs), you’ll be happy to know Ethereum ETFs are a thing. Instead of tracking traditional assets like stocks and bonds, Ethereum ETFs monitor the performance of ETH and invest your funds accordingly.
So how will Ethereum ETFs shape the crypto landscape in the future? This article will show you how Ethereum ETFs are a safe and regulated alternative to investing directly in ETH, diversifying your portfolio without subjecting you to unnecessary risk.
What is an Ethereum ETF?
Ethereum ETFs don’t reinvent the ETF wheel; they’re simply ETFs that track the price of ETH in the same way a regular ETF monitors traditional assets. By investing in an Ethereum ETF, you expose yourself to Ethereum without holding ETH yourself.
Here’s why investing in an Ethereum ETF may be a good idea for you:
- Accessibility: Ethereum ETFs are easily available at your regular ol’ brokerage platforms - no need to set up a crypto wallet or exchange account just to dabble in ETH.
- Liquidity: Ethereum ETFs are tradeable at any time within market hours. You don’t have to fret over the availability or speed of transactions on the blockchain.
- Security: While regular ETH investors have to be very mindful of their private keys (essential for accessing and transferring ETH), Ethereum ETFs take this responsibility out of your hands. The ETF issuer stores and safeguards the underlying ETH with a trusted custodian.
- Transparency: As with other ETFs, information about the performance and holdings of the Ethereum ETF is available publicly on its prospectus and website. The ETF issuer is also bound to regulatory oversight and disclosure requirements, giving you an added layer of protection over your investment.
- Tax efficiency: Depending on your jurisdiction and tax status, you enjoy lower tax rates on capital gains from selling Ethereum ETFs instead of selling ETH directly.
What is the Difference Between ETH and an Ethereum ETF?
The main difference is that ETH is a cryptocurrency that runs on a blockchain network, while an Ethereum ETF is an investment product that tracks the price of ETH.
By investing in ETH directly, you own and control your ETH and can use it for various purposes on the blockchain. This is not the same if you invest in an Ethereum ETF. As you don’t own or control any ETH, you only benefit from the price movements of ETH.
ETH and an Ethereum ETF also have different risk profiles. Investing in ETH is inherently riskier than investing in an Ethereum ETF, with some of the key risks including:
- Volatility: The price of ETH can fluctuate significantly due to various factors, such as supply and demand, market sentiment, news events, technical issues, hacks, forks, and regulations. You may experience huge gains or losses as a result.
- Security: You need to secure your private keys to access your ETH. If you lose or forget your keys, or if your keys are stolen or hacked by malicious actors, you may lose all your funds permanently.
- Regulation: The legal status and treatment of ETH varies across different jurisdictions and may change over time. You may face regulatory uncertainties, restrictions, or sanctions that could affect your ability to buy, sell, or use ETH.
- Complexity: Investing in ETH requires a basic understanding of how Ethereum works. This includes the creation and management of a crypto wallet, using a crypto exchange, and how to pay transaction fees.
As for investing in Ethereum ETF, it is theoretically less risky, but you do face a different set of risks:
- Tracking error: The price of the Ethereum ETF may not perfectly match the price of ETH due to various factors, such as fees, expenses, liquidity, and market conditions. This can result in a deviation or discrepancy between the performance of the ETF and the underlying ETH.
- Counterparty risk: If the ETF issuer or the custodian fails to fulfill their obligations or meet their contractual terms, it could result in losses or delays. For example, if the custodian loses or mismanages the ETH that backs the ETF, or if the issuer defaults or goes bankrupt, you may not be able to recover your funds.
- Regulatory risk: The ETF may face regulatory changes or interventions that could affect its viability. For example, if the Securities and Exchange Commission (SEC) rejects or revokes the approval of the ETF or if the tax authorities impose unfavorable rules on the ETF, your investment may not be as profitable as you initially predicted.
Does Ethereum Have ETFs?
The answer is yes. However, they are only available in a few select markets, including Canada and Europe. Here are some of the existing Ethereum ETFs currently available:
In April 2021, Canada became the first country to launch Ethereum ETFs. Currently, there are four Ethereum ETFs listed on the Toronto Stock Exchange (TSX). These include:
- CI Galaxy Ethereum ETF (ETHX): This is the first physically-backed Ethereum ETF in the world. Launched by CI Global Asset Management in partnership with Galaxy Digital Capital Management, it holds ETH in cold storage with Gemini Trust Company as the custodian. As of January 2023, ETHX has a management fee of 0.40% and assets under management (AUM) worth $910 million.
- Purpose Ether ETF (ETHH): This is another physically-backed Ethereum ETF launched by Purpose Investments. It also holds ETH in cold storage with Gemini Trust Company as the custodian. As of September 2022, ETHH has a management fee of 1.00% and AUM of $232 million.
- Evolve Ether ETF (ETHR): A physically-backed Ethereum ETF launched by Evolve Funds Group. It holds ETH in cold storage with Gemini Trust Company as the custodian. As of January 2022, ETHR has a management fee of 0.75% and AUM of $74 million.
- 3iQ CoinShares Ether ETF (ETHQ): A physically-backed Ethereum ETF launched by 3iQ Corp in partnership with CoinShares International Limited. It holds ETH in cold storage with Coinbase Custody Trust Company as the custodian. As of January 2023, ETHQ has a management fee of 1.25% and AUM of $67 million.
Europe has several exchange-traded products (ETPs) that track the performance of ETH, such as exchange-traded notes (ETNs) and exchange-traded commodities (ETCs). Though similar to ETFs, ETNs and ETCs are different financial products:
- An ETN is an unsecured debt obligation issued by a bank. ETNs promise to pay you the returns of underlying assets minus the fees and costs.
- An ETC is backed by physical assets instead of securities.
Some Europe-based ETPs include:
- VanEck Vectors Ethereum ETN (VETH): This ETN does not hold any physical ETH and trades on Deutsche Börse Xetra under the ticker VETH. As of January 2023, VETH has a total expense ratio (TER) of 1.00% and AUM of $32 million.
- ETC Group Physical Ethereum ETC (ZETH / ETHE): This ETC holds ETH in cold storage with BitGo Trust Company as the custodian. It trades on various exchanges under different tickers, such as ZETH on SIX Swiss Exchange and ETHE on the London Stock Exchange. As of January 2023, it has a TER of 1.49% and AUM of $28 million.
- WisdomTree Ethereum ETP (ETHW / WETH): This ETP holds ETH in cold storage with Coinbase Custody Trust Company as the custodian. It trades on various exchanges under different tickers, such as ETHW on SIX Swiss Exchange and WETH on the London Stock Exchange. As of January 2023, it has a TER of 0.95% and AUM of $18 million.
The United States
The United States is relatively late to the ETH ETF scene, owing to the Securities and Exchange Commission (SEC) maintaining a punitive stance against crypto for a long time. Nevertheless, the SEC relaxed its stance in end-September 2023, approving three ETH futures ETFs in one go. They are:
- Valkyrie Bitcoin and Ether Strategy ETF (BTF): Previously a Bitcoin-only futures ETF, this ETF includes ETH futures contracts.
- Bitwise Ethereum Strategy ETF (AETH): This pure ETH futures ETF invests in regulated Chicago Mercantile Exchange (CME) Ether futures.
- Bitwise Bitcoin and Ether Equal Weight Strategy ETF (BTOP): This ETF is a 50/50 combo that invests in regulated CME Bitcoin and CME Ether futures.
Looking ahead, you can expect more Ethereum ETFs to be approved, as other US-based asset managers have filed for these. In September 2023, for example, ARK Invest and 21Shares collaboratively applied for regulatory approval for an Ethereum ETF. This fund intends to use Coinbase Custody Trust Company as a custodian.
The Impact of Ethereum ETFs on the Crypto Landscape
The introduction of Ethereum ETFs will have a significant impact on the future of the crypto landscape.
They will increase the liquidity and efficiency of the ETH market by providing more trading options and opportunities for investors and traders. In turn, more mainstream investors will join the crypto party, given that Ethereum ETFs offer a low-risk alternative to gain exposure to crypto.
They will also likely introduce greater regulation to the crypto industry, as it needs to comply with the existing rules and standards of the securities market and the authorities to maintain the ETFs.
With the inflow of capital and talent to the Ethereum ecosystem, you can also expect an uptick in innovation and competition in the crypto space.
While the impact of Ethereum ETFs is largely positive, there are some key challenges and limitations they may run into. Among these is the inability of Ethereum ETFs to fully capture the potential and value of Ethereum as a platform for decentralized applications, smart contracts, and Web 3.0.
Ethereum ETFs may also be unable to reflect the true demand and supply of ETH, creating artificial scarcity or abundance due to their creation and redemption processes.
In the same light, Ethereum ETFs could also struggle to keep up with the rapid changes and developments of the Ethereum network, inevitably affecting its ability to accurately track the shifting prices of ETH.
Ethereum ETFs are also subject to more stringent regulatory uncertainties, delays, and interventions that could affect their availability in different markets.
Ethereum ETFs Will Inspire Mainstream Crypto Acceptance
Ethereum ETFs are a promising and exciting development for the crypto landscape, offering you a convenient and accessible way to gain exposure to ETH without owning or managing the coin itself.
Although their long-term impact remains to be seen, Ethereum ETFs are well on their way to inviting more people to join the Ethereum community and participate in its development. You could even find yourself using Ethereum ETFs as your entry point into crypto before investing directly into it.
When you’re ready, sign up to get your Bake account for an easy and efficient way to invest in ETH today!
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