Investing in Ethereum ETFs: What to Know

Ether’s (ETH) price is fast approaching its highest in two years as the second-largest cryptocurrency by market value is having a similar bull run to bitcoin’s last year.  

Investors are bidding up the price of ETH, the cryptocurrency of the Ethereum blockchain protocol, in hopes that the Securities and Exchange Commission (SEC) will approve a spot ether exchange-traded fund, which would presumably drive ETH higher as spot ETF approval has done for bitcoin in 2024. Such hopes, and a growing investor embrace of digital assets have already fueled a more than 65% increase in ether’s price year to date, more than bitcoin’s increase this year.

For investors who don't want to wait for the SEC to approve of a spot ether ETF, there's futures-based Ethereum ETFs.

Like bitcoin ETFs, these ether ETFs offer investors a convenient means of gaining access to a cryptocurrency without having to hold the digital asset directly. 

Find out how ether ETFs work, how they compare with bitcoin ETFs, and what the future may hold for Ethereum.  

What Is an Ethereum ETF?

An Ethereum ETF, or ether ETF, is an exchange-traded fund that seeks to track the price of ether, which is the second-largest cryptocurrency in market capitalization behind bitcoin. Most Ethereum ETFs track the price movement of ETH by holding futures contracts. This structure enables investors to gain exposure to ether without having to buy or store the cryptocurrency.  

What Do Ethereum ETFs Hold?

Most Ethereum ETFs hold ETH futures contracts, while some ether ETFs hold a mix of ether and bitcoin futures. Using futures to track the price of a digital asset is nothing new as the first bitcoin ETF, the ProShares Bitcoin Strategy ETF (BITO), holds cash settled, front-month bitcoin futures.  

What Is Ethereum?

In the cryptocurrency universe, Ethereum is an open-source blockchain platform that was created to enable the development of decentralized applications, or dapps, and smart contracts. It was proposed in late 2013 by computer programmer Vitalik Buterin, who believed that blockchain technology had applications beyond financial transactions. Development began in early 2014, with the network going live on July 30, 2015.  

• Blockchain platform: At its core, Ethereum is a decentralized blockchain platform. This means that it's a secure public ledger similar to Bitcoin, but its use extends beyond just recording cryptocurrency transactions. 
• Smart contracts: Ethereum allows developers to build and deploy smart contracts. These are essentially self-executing agreements written in code. They can be used for various purposes, like automating the sale of an asset when a certain price is reachedor facilitating secure online voting. 
• Ether (ETH): The cryptocurrency of the Ethereum network is called ether (ETH). It's used to pay for transaction fees and services on the Ethereum network.  

Ether vs Bitcoin

Overall, Ethereum is a more versatile platform than Bitcoin, but it also has a more complex purpose. Here's a quick comparison of Ether to Bitcoin: 

• Focus: While bitcoin is primarily a digital currency for storing and transferring value, Ethereum aims to be a platform for various decentralized applications. 
• Smart contracts: A key difference is Ethereum's ability to run smart contracts, whereas bitcoin's script language is intentionally not Turing complete. This means it's not capable of the complex computations and functionalities that power more advanced smart contracts on platforms like Ethereum. 

Ethereum ETFs vs. Bitcoin ETFs

Ethereum ETFs and futures-based bitcoin ETFs have a few key similarities. Both types of ETFs track the price of their respective cryptocurrencies with futures contracts, and they offer investors convenient exposure to crypto without having to directly hold the digital asset. However, there are also some key differences between the two types of ETFs.  

Here is a quick comparison of Ethereum ETFs and bitcoin ETFs:  

• Benchmark asset: Ethereum ETFs track the price of ether (ETH), whereas bitcoin ETFs track the price of bitcoin (BTC).  
• Time on the market: The first Ethereum ETFs were launched on Oct. 2, 2023, whereas the first bitcoin ETF, BITO, made its debut on Oct. 19, 2021. The first spot bitcoin ETFs were approved by the SEC on Jan. 11, 2024, and began trading the next day, Jan. 12.  
• Trading volume: Being newer to the market, Ethereum ETFs have lower trading volume compared with the larger bitcoin ETFs.
• Expenses: Ethereum ETFs and futures-based bitcoin ETFs have relatively high expenses, as expense ratios for both typically range from about 0.65% to 0.95%. Spot bitcoin ETFs generally have lower fees, which range from 0.12% to 1.50%. 

Spot Ethereum ETF Approval

The approval of a spot Ethereum ETF by the SEC is currently uncertain but developing. The SEC is reportedly leaning towards approving spot Ethereum ETFs, with some sources suggesting approvals could come as early as May 23, as it considers a proposal from VanEck, specifically the form 19b-4, which outlines rules changes related to trading that address investor protections and regulatory oversight.  

Several other companies, including BlackRock, Fidelity and Invesco have filed applications for spot ether ETFs. 

The SEC has delayed its decision on these applications twice, as it has requested public comments on concerns about Ethereum's switch to a proof-of-stake mechanism. 

While the SEC's concerns create some uncertainty, the recent approval of spot bitcoin ETFs in early 2024 is seen as a positive sign for Ethereum ETFs. 

How to Invest in Ethereum ETFs

The steps for investing in Ethereum ETFs are the same as any other type of ETF, as well as other securities like stocks, bonds, and mutual funds. To invest in an ether ETF, you will need an investment account, such as an individual brokerage account or a type of individual retirement account, or IRA. Once you have the investment account open, you will need to fund it with cash, and you’ll be ready to invest in ether ETFs.  

The basic steps to invest in ETFs are:  

• Open an investment account.  
• Fund the investment account with cash.  
• Select the Ethereum ETF(s) to purchase.  
• Execute the trade(s) to buy shares.  

Read more about how to build an ETF portfolio.  

List of Ethereum ETFs

Data as of May 21, 2024.

Outlook and Price Prediction for Ethereum ETFs

Ether’s price recently touched $3,800, fast approaching its 2024 high. The all-time high for ETH is just over $4,600, which was reached in Nov. 2021, according to crypto markets platform CoinMarketCap. Some crypto analysts predict that ether has the potential to double in value this year and possibly reach $8,000. An SEC approval could spur that sort of gain. Other analysts call for a range of at least $4,500 to $6,000. 

The outlook for Ethereum ETFs looks bright, but the road ahead could be bumpy. In the long run, Ethereum is a platform that can be used to build dapps and smart contracts, or computer programs that execute things like trades automatically based on preset criteria. This gives Ethereum the potential to revolutionize many industries, such as finance, healthcare and supply-chain management. 

In summary, ether is more than just a digital currency. However, like bitcoin ETFs and other crypto-related investments, the rapid growth potential for ether ETFs comes with the potential for price volatility. Therefore, investors should use caution and do their research before considering an investment in these unique ETFs.