Ethereum ETF
While we are getting closer and closer to mass adoption of cryptocurrencies, it hasn't arrived yet. All the necessary solutions exist for retail investors to purchase cryptocurrencies such as Bitcoin or Ethereum without problems: crypto exchanges, exchanges, P2P marketplaces, decentralized exchanges (DEXes) and various cryptocurrency brokers.
However, for institutional investors, the options for buying cryptocurrencies are still limited to the OTC market or, in other words, OTC. The situation can be remedied by placing financial instruments such as ETFs.
What are ETFs, and why are they needed?
ETF is an abbreviation for Exchange-Traded Funds, which means "exchange-traded funds". This financial instrument allows you to buy and sell an asset through intermediaries without owning it directly and without the associated costs.
In addition, exchange-traded funds relieve investors of the obligation to store assets, which carries additional risks for them — intermediaries take on all this. This is especially relevant for the cryptocurrency market, as most large investors are wary of buying cryptocurrencies directly due to their many risks, including legal risks.
What is Ethereum ETF
Ethereum ETF is an exchange-traded fund backed by the Ethereum cryptocurrency or its associated contract price. An ETF refers to traditional financial instruments regardless of the asset it is supported by and traded on stock exchanges.
This means that the Ethereum ETF must go through all the registration steps before this exchange-traded fund is available to investors. The Ethereum ETF will allow investors, including institutional investors, to speculate on the cryptocurrency's price without owning the asset.
Ethereum ETF is structured as a fund that manages a portfolio of assets and reflects the price performance of the Ethereum cryptocurrency. The financial instrument may include derivatives, futures or perpetual contracts and other assets.
Unlike the cryptocurrency itself, the regulation of which is not fully defined, Ethereum ETF is straightforward and familiar to traditional investors' instruments that work in accordance with all the rules established by regulators. This tool greatly simplifies asset investment, essentially just buying and selling ETFs.
Types of Ethereum ETFs
Like any other exchange-traded funds, Ethereum ETFs can be of two types: spot and futures:
- A spot Ethereum ETF is an exchange-traded fund whose portfolio includes only the underlying asset. In this case, it is Ethereum. A transaction to buy or sell the underlying asset involves its physical delivery. It is like investing in Ethereum directly on the exchange. In this case, investors indirectly own the underlying asset but do not face additional risks or costs associated with storing and managing the cryptocurrency.
- Ethereum futures ETF is an exchange-traded fund whose portfolio consists of derivative financial instruments, i.e. contracts on cryptocurrency (futures or open-ended). In this case, the price is determined by the value of its futures contracts rather than the value of the underlying Ethereum asset. Futures carry increased risks for investors due to the intense volatility of cryptocurrencies, that is, the ability of the price to change significantly in a short period of time. This cryptocurrency ETF type is also called a "synthetic" ETF.
In this case, the funds do not own the underlying asset but only provide contracts to buy or sell it. Thus, futures Ethereum ETFs allow you to earn income on price differences when the underlying asset rises and falls.
At what stage the adoption of Ethereum ETFs is at
In mid-November 2023, BlackRock filed its application with the SEC to list the iShares Ethereum Trust. BlackRock is the largest international investment company, managing assets with a total value of more than $9 trillion.
On 10 November, the company also applied to the regulator to list an Ethereum ETF on the Nasdaq Stock Market and, on 15 June this year, to register a Bitcoin ETF.
Neither application has been approved yet, but many analysts are already confident of a positive outcome, and the event is the catalyst for a new bull rally (bullrun). Also in October, major companies Bitwise, VanEck and ProShares sent their applications to register a spot in Ethereum ETF.
Experts expect that adopting Ethereum ETFs will positively impact the dynamics of the crypto market and accelerate the mass adoption of cryptocurrencies. In addition, exchange-traded funds will help increase market liquidity as they will ensure the influx of large institutional money. Retail investors are likely to follow the institutionalists, as is usually the case.
However, experts are unsure whether the applications will be approved in 2023 or as early as 2024. The deadline for the SEC to review the application is March 2024.
The status of the Ethereum cryptocurrency itself also adds to the uncertainty.
As for Bitcoin, the US Securities and Exchange Commission (SEC) itself has agreed that the first cryptocurrency is not a security, but not everything is so clear about Ethereum. So far, SEC Chairman Gary Gensler has not decided to recognise the second most capitalized cryptocurrency as an asset. However, it is worth it because, unlike many other tokens such as XRP, SOL, MATIC and ATOM, the ETH cryptocurrency has never been mentioned in SEC lawsuits, which can be a positive sign when approving Ethereum ETFs.
