Some may love crypto and some may hate it, but cryptocurrencies have undeniably shaken up the financial markets. That excitement has spread into the ETF world, which marked a perfect union between cryptocurrency (the new digital frontier) and ETFs (which are typically on the edge of innovation). The launch of spot bitcoin ETFs seemed like a major milestone in this saga. But excitement did not die down after the launch, and talk about spot ether ETFs have kept the momentum going.
Many (including myself) believed the spot ether approval would receive relatively little attention. But the current environment has led to continued enthusiasm. Bitcoin prices have surpassed their 2021 peak and are now around $70,000, Roaring Kitty is back, and technology/artificial intelligence has revitalized interested in riskier growth assets. Interest does not always lead to investment. But investors may be ready for something new and exciting. Here’s a rundown on spot ether ETFs and what investors need to consider before investing.
Spot ether ETFs supported by excitement surrounding cryptocurrency
Crypto has had its highs and lows, and the crypto ETF market has also experienced the same. In 2021, interest in bitcoin and other cryptocurrencies coincided with the launch of several crypto equity ETFs, and eventually bitcoin futures ETFs. At the time, this was the closest to spot bitcoin ETF investors could get in the U.S. But hope for potential approval was weak given Grayscale’s issues with the SEC.
Soon after, in late 2022 and early 2023, crypto ETF market excitement died down along with the price of bitcoin. Several crypto ETFs announced closures and it had been several months since a launch. Finally in August, bitcoin excitement returned around the time Grayscale won its case against the SEC. From here, there was a whirlwind of “good news.” That included the launch of ether futures ETFs in October 2023 and the long-awaited spot bitcoin ETFs launch in January 2024.
Thoughts about spot ether ETF approval were mixed. But the SEC approved 19b-4 proposals for eight spot ether ETFs on May 23, 2024. These are expected to launch within weeks to months. (But assuming a similar timeline as spot bitcoin ETFs, likely within the next 90 days.)
Most of the same issuers with spot bitcoin ETFs are launching spot ether ETFs
Ether ETFs have not officially launched, but after the launch there could be nine (or more) choices. Like their spot bitcoin counterparts, the greatest differentiating factor will likely be fees. Most of the issuers that launched spot bitcoin ETFs are also in line to launch spot ether ETFs. So, fees could be similar for each spot bitcoin’s spot ether counterpart.
Assuming most issuers will have fees within the same range, large well-known issuers like iShares and Fidelity may dominate once again. And that's not because of scale, but because these larger name brands create an illusion of safety. That's especially so when investing in a higher-risk asset. Even after five months, the iShares Bitcoin Trust (IBIT) and the Fidelity Wise Origin Bitcoin Fund (FBTC) continue to gather significant interest. On a 1M basis, IBIT ranks 11th and FBTC ranks 15th in flows among 3,566 U.S. ETFs. On a YTD basis, IBIT ranks second (after VOO) and FBTC ranks 6th.
While their products were less popular, crypto-focused issuers also benefited from the spot bitcoin ETF launch. They could still see some interest in the spot ether ETF battle. Bitwise, for example, has been very active in the crypto space, with several crypto ETFs, including the Bitwise Bitcoin ETF (BITB). Notably, ARK will not be involved in the spot ether space after being active in the crypto space (particularly with crypto equity ETFs) and launching its spot bitcoin product, the ARK 21Shares Bitcoin ETF (ARKB) with its partner, 21Shares.
21Shares, which has also been very active in the crypto community, is continuing its plans to launch its spot ether product. Also notable, ProShares -- which is best known for launching the first bitcoin futures ETF, the ProShares Bitcoin Strategy ETF (BITO), and the first inverse bitcoin futures ETF, the ProShares Short Bitcoin Strategy ETF (BITI) -- filed their S-1 for a spot ether ETF on June 11, 2024. While ProShares earned an impressive reputation in the crypto futures ETF market, it did not launch a spot bitcoin product.
Many investors may choose bitcoin over ether, but some may want both
With spot bitcoin ETFs, we often mention a specific type of retail investor interested in bitcoin who doesn’t want to invest directly. ETFs open up a way for these investors to access bitcoin easily in their brokerage accounts. They can do so through well-established entities like BlackRock and Fidelity.
These investors are typically interested in bitcoin for several reasons: 1) diversifier and inflation hedge; 2) digital disruption; and 3) exciting returns. If all three of these are found in both bitcoin and ether, most retail investors would not necessarily want to invest in both ether and bitcoin. Although correlations have recently diverged, correlations are still relatively high between the two. That means means investors may not have diversification as a reason to invest in both.
But that doesn't necessarily mean ether or ether ETFs don’t have a place in investor portfolios. Ether and bitcoin have two very different use cases. Bitcoin is a digital currency that was created as an alternative to fiat currency offering an escape from mainstream financial institutions. Ether, also a digital currency, powers the ethereum network, which serves as a platform for applications like stablecoins, nonfungible tokens (NFTs), decentralized autonomous organizations (DAOs), and other decentralized applications (dApps). So while bitcoin is more mainstream, ether could potentially have more growth opportunities as its applications grow.
No staking in spot ether ETFs is not a surprise
Spot ether ETFs don’t allow staking, which isn’t a big surprise. That is because staking is similar to features offered by securities like receiving interest or dividends. The SEC already had lawsuits with Kraken and Coinbase over this issue. But exchange-traded products in other countries offer ether staking products, so it isn’t unheard of outside of the U.S. Canada, which was ahead of the U.S. with its spot bitcoin ETFs, has approved ether ETFs that include staking. 3iQ offers staking in both the 3iQ Ether Staking ETF (TSX: ETHQ) and the Ether Fund (TSX: QETH).
Currently, Coinbase’s reward for staking ether is 2.7% APY. That’s not enough for investors to use ether solely as an income investment. They can get higher income from less risky investments like dividend ETFs, money market funds, or even high-yield savings accounts. But that does give another reason for investors to choose a direct investment in ether over an ETF. So investors interested in ether must decide if additional yield from staking outweighs the ease of accessing ether through an ETF.
Bottom Line:
The potential spot ether ETF launch is exciting news for both the crypto and the ETF world. But ETF investors interested in crypto have several decisions to make: 1) whether the benefits of investing in a spot ether ETF outweigh benefits of direct investment (e.g., staking), 2) whether an investment in spot ether ETFs could complement an investment in spot bitcoin ETFs or be useful on its own; and 3) how to pick which specific spot ether ETF to invest in.
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