What is an Ethereum ETF and How to Trade it
Cryptocurrency, or 'crypto', is still a buzzworthy topic in financial circles. Its potential to revolutionize markets by offering decentralized, secure, and borderless transactions challenges traditional financial systems and regulations — and concerns over its volatility, use in illicit activities, and environmental impact have fueled controversy and intense discussion.
On May 23, 2024, the U.S. Securities and Exchange Commission (SEC) approved 19b-4 proposals for the first spot Ethereum — or Ether (the currency that powers the Ethereum system and network) — ETFs in the US, making it the second crypto spot ETF to get SEC approval for listing and sale, following the Bitcoin spot ETF in January 2024. As the landscape of digital assets evolves, these developments continue to stir conversations about the role and future of cryptocurrencies in mainstream finance.
What is Ethereum?
Ethereum is a digital platform that runs on a network of computers, and that allows developers to create and launch programs that can work without a middleman. These programs, called smart contracts and decentralized applications (dApps), can automate tasks and run as programmed, potentially offering a more secure and efficient way to handle transactions and other functions.
Launched in 2015 by Vitalik Buterin, Ethereum is the second-largest cryptocurrency by market cap after Bitcoin. Its native cryptocurrency, Ether (ETH), is like the fuel that powers everything on its network. While Bitcoin is mainly used as digital currency, Ethereum aims to build a new kind of internet called Web3, where things are more decentralized and controlled by users. Its innovative features, like the ability to automate agreements through smart contracts, have made it a favorite among developers and businesses looking to harness blockchain technology.
What are Ethereum ETFs and how do they work?
An Ethereum ETF is a type of investment fund that allows you to invest in Ethereum without directly purchasing the cryptocurrency. Think of it as a basket of Ethereum assets managed by professionals and traded on the stock market, similar to buying shares of a company.
This provides a convenient way for both individual and institutional investors to gain exposure to Ethereum's potential growth and innovative blockchain technology without the complexities of buying and storing the digital currency themselves. In essence, an Ethereum ETF brings the potential benefits of traditional investing to the world of cryptocurrency.
List of Ethereum ETFs
As of May 2024, eight spot Ethereum ETFs have been approved by the SEC. These eight ETFs were the first Ethereum ETFs to be approved by the SEC. They were all approved simultaneously to be listed on Nasdaq, CBOE, and NYSE exchanges.
When can I trade Ethereum ETFs?
As of June 6, 2024, investors are not yet able to buy and trade spot Ethereum ETFs. The SEC has approved the ETFs for trading but the registration statements (S-1 Registration Forms) for each ETF remain under review. Before trading can start, the SEC must approve these registration statements from ETF issuers, which outline important investor information. This approval process generally includes significant back-and-forth between the issuers and SEC officials.
The timeline for final approval varies from weeks to months, depending on the complexity of the application. Not all ETFs will get final approval, as each is assessed on its structure, risk management, and investor protections. Some may need adjustments to meet regulatory requirements.
Types of Ethereum ETFs
While Ethereum ETFs are not yet able to be traded in the United States, Ethereum futures ETFs have been available to trade for some time.
Spot Ethereum ETF
Spot Ethereum ETFs operate like large digital wallets that directly hold Ethereum tokens (ETH). This allows them to more closely mirror Ethereum's real-time price movements, giving investors direct exposure to changes in Ethereum’s value. Unlike Futures Ethereum ETFs, which have higher counterparty risk, these ETFs hold actual ETH and aim for a direct price correlation with the cryptocurrency. However, it’s important to note that, like other ETFs, spot Ethereum ETFs will only be available for trading during regular market hours. In contrast, the cryptocurrency market, including ETH, trades 24/7. This difference in trading hours can lead to price gaps between the ETF and the underlying Ethereum during non-market hours.
Futures Ethereum ETF
Ethereum Futures ETFs work differently from those that hold actual Ethereum. Instead of owning the cryptocurrency, they use futures contracts to mimic Ethereum's market performance. These ETFs are already available for trading and offer a way to invest in Ethereum without holding it directly. They have lower fees, and are easier to launch. However, they can suffer from tracking errors due to market conditions, don't hold any actual Ethereum, and carry higher counterparty risks.
Ethereum ETFs vs Bitcoin ETFs
Ethereum and Bitcoin ETFs let you invest in these cryptocurrencies without directly buying them. Both work similarly, but there are some differences. Bitcoin ETFs have been around longer (since January, 2024) and are more established. Ethereum ETFs are newer and focus on ether, Ethereum's cryptocurrency.
Ethereum has unique features like smart contracts, which Bitcoin doesn't have. However, both face similar regulatory scrutiny. Currently, Ethereum ETFs can't stake ether (earn rewards by helping secure the network), while Bitcoin doesn't have this feature. In short, the main difference is the cryptocurrency they track and some specific features of the Ethereum network.
How to trade Ethereum ETFs using Moomoo
As of early June 2024, investors are not able to trade Ethereum ETFs. So, what's the hold up?
The SEC has approved Ethereum ETFs for trading, but their paperwork is still being reviewed, and it’s unclear when this will be done. The paperwork might need changes based on the SEC’s feedback. Recently, the rules were updated to prevent these ETFs from staking ether, which is a way to earn rewards by locking up ether to help secure the Ethereum network. The SEC considers this staking as a type of investment, so for now, the ETFs can’t do it with the ether they buy.
What are some of the potential advantages of Ethereum ETFs?
As the second-largest virtual digital asset, Ethereum has established a strong market presence. The introduction of a spot Ethereum ETF will give investors an opportunity to access cryptocurrency from a traditional brokerage account, such as moomoo, without having to hold the crypto asset directly themselves. As well as ease of access, spot Ethereum ETFs will be overseen by the SEC, which should ensure a higher level of security and provide investors with greater protection.
The introduction of an Ethereum ETF may also attract institutional investors, who would bring capital and a long-term investment outlook. Strong investor confidence could potentially bolster growth of the asset class, as it did for Bitcoin following its January approval: Despite recent demand slowing, investors sunk more than $12 billion into Bitcoin ETFs within the first four months of the category's launch. However, it's important to note that Bitcoin remains the leading crypto asset by market capitalization, which may have contributed to its initial funds inflow and is independent from Ethereum ETFs, and that accurately forecasting future trading volumes is not possible.
Potential growth of Ethereum could also be good news for those involved in the Web3 community. Increased investment could potentially lead to greater funding and support for Web3 projects, fostering innovation and development in decentralized applications and smart contracts. It could also enhance public awareness of blockchain technology, potentially helping to accelerate the adoption of Web3 principles and infrastructure.
Possible benefits and risks of Ethereum ETFs
Benefits
Accessibility: Could allow investors to gain exposure to Ethereum without needing to directly purchase or manage the cryptocurrency.
Convenience: Could provide a more convenient way for investors to add Ethereum to their investment portfolio through traditional brokerage accounts that offer the spot ETF.
Regulation: ETFs are subject to regulatory oversight, potentially offering investors a greater sense of security compared to direct cryptocurrency investment.
Liquidity: ETFs are traded on public exchanges, offering liquidity in buying and selling shares.
Diversification: Investing in an Ethereum ETF provides potential diversification benefits within the cryptocurrency sector, as the ETF may hold multiple assets.
Professional management: ETFs are managed by professionals who handle the buying, selling, and rebalancing of assets, relieving investors of the need for active management.
Risks:
Fees: ETFs may charge management fees and other expenses, which can reduce overall returns.
Market volatility: Ethereum ETFs are subject to market volatility, which can lead to fluctuations in share prices.
Potential tracking error: The performance of an ETF may not perfectly mirror the performance of the underlying Ethereum assets due to tracking error.
Dependency on exchanges: Investors rely on exchanges to buy and sell ETF shares, and disruptions or issues with these exchanges could impact liquidity and trading.
Regulatory changes: Regulatory changes or restrictions imposed on cryptocurrencies or ETFs could affect the value and availability of Ethereum ETFs.
FAQ about Ethereum ETFs
Do Ethereum ETFs pay dividends?
At present, Ethereum ETFs do not pay dividends. Although staking could theoretically allow a spot Ethereum ETF to generate income, the SEC has specifically removed provisions for staking from current ETF filings before approval. Staking involves holding and securing Ether to support the Ethereum network and potentially earning rewards in new Ethereum. However, without the ability to participate in staking, spot Ethereum ETFs are currently unable to generate dividend income from these rewards.
Can you short a spot Ethereum ETF?
As you would a regular ETF, you will be able to short a spot Eth ETF. Once an ETH ETF is approved by the SEC, investors will be able to borrow shares from the broker (this often requires an investor to have a margin account), sell them, and then buy them back if prices fall. The investor will then return the shares to the broker from whom they were initially borrowed.
What will this potentially mean for the future of cryptocurrency?
The approval of a spot Ethereum ETF could be a big deal for the future of crypto. It could signal that cryptocurrencies are becoming more accepted in mainstream finance, making it easier for both big institutions and everyday investors to get involved. This could lead to more market stability and liquidity. It might speed up the adoption of blockchain technology and Web3 innovations, encouraging the growth of decentralized apps and smart contracts. In short, it's a significant step towards integrating digital assets into our traditional financial systems, paving the way for wider recognition and use of cryptocurrencies in the future.
Cryptocurrency ETFs are speculative and involve a high degree of risk. An investor may lose all or substantially all of an investment in the Fund. Cryptocurrency has historically exhibited high price volatility relative to more traditional asset classes, which may be due to speculation regarding potential future appreciation in value among other factors. The performance of these ETFs should follow bitcoin prices closely, minus fees and the fund’s trading costs. Before investing in an ETF, you should read both its summary prospectus and its full prospectus, which provide detailed information on the ETF’s investment objective, principal investment strategies, risks, costs, and historical performance (if any). You can find prospectuses on the websites of the financial firms that sponsor a particular ETF, as well as through your broker.
