Get ready: the Ethereum ETFs are coming

In a nutshell: An Ethereum exchange-traded fund (ETF) is an investment vehicle that tracks the price of Ethereum (ETH). It allows institutional investors to participate in the cryptocurrency market without needing to directly purchase and secure crypto tokens.

Anticipation is building towards an expected approval of an Ethereum ETF by the US Securities and Exchange Commission, with applications already submitted from leading firms such as Blackrock, Fidelity, VanEck, and Grayscale.

Ethereum’s appeal is in its wide utility, supporting a global smart contract network for decentralized applications (dApps). Having Ethereum ETFs means easier access to that versatility.

What are Ethereum ETFs?

An ETF is a basket of securities that is traded on the stock market. Traditionally, the fund may consist of a suite of related stocks, bonds, or commodities. Crypto ETFs now exist too, with a Bitcoin ETF approved by the US SEC in January 2024.  

An Ethereum ETF, which has yet to enter the US stock market, would track the price of ETH and enable it to be traded as if it were like any normal stock. 

Cryptocurrencies are normally acquired from a direct peer-to-peer transaction between two parties or are purchased and sold at cryptocurrency markets such as an exchange. The underlying technology behind cryptocurrencies, known as a blockchain, allows for direct transactions and self-custody of the assets to be made instantly and securely thanks to a distributed ledger infrastructure.

In contrast, a conventional stock market requires investors who wish to purchase a stock or security to rely on the services of a third-party institution or a stockbroker to coordinate and execute their trades.

A crypto ETF straddles the middle ground, enabling cryptocurrencies to be traded in the stock market without buyers needing to assume custody of the tokens themselves. An Ethereum ETF can allow anyone to purchase ETH on paper, without needing to engage with the underlying technology.

How will Ethereum ETFs work?

When a fund issues an Ethereum spot ETF, the fund purchases the actual Ethereum tokens and stores them in its custody. As the price of ETH fluctuates in the market, the value of the ETF moves accordingly, giving direct exposure to the Ethereum market to anyone who purchases the ETF as if they were in possession of the actual tokens. 

The ETF can then be sold and resold on the stock market, with its prices always corresponding to the actual values of ETH in the cryptocurrency market.

But why trade with ETFs?

It might sound counterintuitive to trade cryptocurrencies in the stock market, as they were invented primarily to break away from traditional financial channels and institutions and empower people to conduct business directly with each other without the need for institutional middlemen. 

However, ETFs have benefits in the cryptocurrency market:

• ETFs circumvent the technology barriers associated with the use of cryptocurrencies, allowing anyone to acquire crypto without needing the technical knowledge necessary for transacting securing one’s assets. 
• Traders are assured of the security and integrity of their cryptocurrencies by the ETF issuer, removing risks such as losing one’s private keys, or external threats such as malware, scammers, or hackers. 
• ETFs avoid high gas fees associated with transacting with crypto directly, particularly for Ethereum, which historically has experienced high fees due to ongoing scalability issues.  
• ETFs contribute to the demand for crypto, as it opens up the crypto market to institutional and retail traders, as seen in recent surges in Bitcoin trading being attributed to ETFs. 
• Taxes for ETFs are more convenient to process rather than trading with cryptocurrencies directly. 

Do note that ETFs rely on conventional trading rather than blockchain technology. That means there are some disadvantages, such as not being able to trade around the clock, unlike how blockchain technology allows the direct crypto market to operate 24/7. 

When will Ethereum ETFs arrive?

While Ethereum ETFs are already available in Canada, Germany, and Switzerland, that is not yet the case in the United States.

The US SEC recently pushed back its decision to approve an Ethereum ETF, with the delay expected to continue to as late as May 23, 2024: the last day for filing applications.

The delay, according to the US SEC, is due to the need to conduct further inquiry as to whether the arguments that supported the approval of Bitcoin ETFs can also be used to support Ethereum ETFs. 

Major firms such as BlackRock, Fidelity, Franklin Templeton, Ark 21Shares, VanEck, and Grayscale are all waiting for a decision on their applications. 

Ethereum ETFs in the US have been pending approval since as early as May 2021, when VanEck first filed for an Ethereum ETF. 

Afterword: Bitcoin vs Ethereum 

Bitcoin and Ethereum may be the two largest cryptocurrency networks by market capitalization, which explains the widespread interest for their corresponding ETFs. However, the two cryptocurrencies vary greatly in terms of their infrastructure, economics, and utility. 

• Bitcoin was designed simply to be a payment network with bitcoins as the medium of value exchange. Though Ethereum can also function as a payment network, Ethereum was designed to do so much more because it also has a scripting layer. Decentralized applications (dApps) can be programmed onto it, allowing functionality with anything from deFi applications, games, social networks, and DAOs. 

• While Bitcoin is a distributed ledger, Ethereum is a distributed server. From an investment perspective, some analysts see Ethereum’s wider utility as an edge over Bitcoin in the long run.

• Bitcoin’s fixed supply of 21 million tokens makes it deflationary, which is the reason most people utilize it as a store of value and as a hedge against inflation, like investing in gold. Meanwhile, Ethereum has no maximum supply limit, relying instead on a burning mechanism to remove tokens from circulation to keep its inflation rate low. 

• Bitcoin runs on a Proof-of-Work mining consensus protocol, which is often criticized as it consumes an immense amount of energy. Meanwhile, Ethereum now operates on a highly efficient Proof-of-Stake consensus, with more upcoming network upgrades scheduled in the future to improve scalability and network speed. 

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