Spot Ethereum ETF: What Is It And Should You Invest?

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Last updated Jun 24, 2024 | 02:00 PM UTC

The US Securities and Exchange Commission (SEC) recently approved the first Spot Ethereum Exchange-Traded Funds (ETFs) on 23 May 2024. This approval allows asset managers such as Grayscale, Fidelity, and Bitwise to list their Ethereum ETFs on stock exchanges. This means Ethereum-based investment products will now trade alongside traditional stocks like Apple, Amazon, Microsoft, and so on. 

According to multiple reports, Ethereum ETFs will start trading on US stock exchanges in early July. So, with this monumental development in the crypto industry, now is the best time to ask the question: What are Ethereum ETFs? How will they change the market? And should you invest?

Key takeaways

  • Spot Ethereum ETFs: These are funds that hold actual Ethereum, providing direct exposure to its price.
  • Current status: The SEC has approved several Ethereum spot ETFs, with major stock exchanges like NYSE and Nasdaq set to list them.
  • Differences from Futures ETFs: Spot ETFs hold the asset directly, while Futures ETFs hold contracts that bet on future prices.
  • Advantages: Direct exposure, regulatory oversight, ease of trading, and higher liquidity.
  • Risks: Market volatility, regulatory changes, custodial risks, and potential tracking errors.
  • Investment consideration: Suitable for those seeking direct, regulated exposure to Ethereum without handling the cryptocurrency directly.

What are ETFs?

Before diving into crypto ETFs, it’s important to know what ETFs are in general and how they work. ETFs are investment funds traded on stock exchanges, much like stocks. They pool money from many investors to buy a diversified portfolio of assets, including stocks, bonds, commodities, or a combination of these.  

Think of an ETF like a basket of fruit. Imagine you want to eat a variety of fruits but don't want to buy each one separately. You go to the market and buy a pre-packed basket that includes apples, bananas, oranges, and grapes. This basket gives you a taste of each fruit without having to purchase them all individually.

In the financial world, an ETF is like that fruit basket. Instead of buying individual stocks like Apple, Microsoft, or Amazon, you buy an ETF that includes shares of all these companies. This way, you get exposure to the entire tech sector (or any sector the ETF focuses on) with a single purchase. This diversification reduces risk, as you’re not reliant on the performance of a single company.

How ETFs work graphic
Image: Example of an ETF | Source: SDW

ETFs trade on stock exchanges, making them easy to buy and sell throughout the day, just like individual stocks. This makes them a flexible and convenient investment option for both new and experienced investors.

What is a Spot Ethereum ETF?

A Spot Ethereum ETF directly holds Ethereum, giving investors a way to own Ethereum without having to buy and store it themselves. Think of it like a stock that represents a chunk of Ethereum. When you buy shares of a Spot Ethereum ETF, you're essentially buying a piece of the fund's Ethereum holdings.

For example, imagine a fund collects Ethereum and then issues shares to investors. These shares trade on stock exchanges just like any other stock. If the price of Ethereum goes up, the value of the shares in the ETF also goes up. This makes it easy for investors to gain exposure to Ethereum’s price movements without dealing with the complexities of cryptocurrency exchanges and wallets​ 

When will Ethereum Spot ETF be approved?

In the US, the SEC has already approved several applications, signaling a major shift. Major players like BlackRock and VanEck have received the green light to launch their Ethereum ETFs​​.

Globally, other regions have been more proactive. Canada approved its first Ethereum ETFs in 2021. Europe has also seen a variety of Ethereum ETFs flourish. Australia also has Ethereum ETFs, though on a smaller scale compared to North America and Europe. The Global X 21Shares Ethereum ETF is one of the notable options available​. 

The UK has also approved Ethereum ETNs (Exchange-Traded Notes) recently, and they have started trading on the London Stock Exchange. Ethereum ETNs are similar to ETFs but only differ in structure.

How does a Spot ETF differ from a Futures ETF?

Spot ETFs and Futures ETFs differ mainly in their underlying assets. A Spot ETF holds the actual asset, Ethereum, and reflects its current market price. In contrast, a futures ETF deals in contracts that speculate on the future price of Ethereum.

Spot ETFs offer more stability. They provide direct exposure to Ethereum, allowing investors to benefit from actual price movements. Futures ETFs, while potentially more volatile, can involve complex strategies and higher costs due to contract rollovers​.

The cost structures also differ. Spot ETFs generally have lower management fees. Futures ETFs might incur additional costs related to managing futures contracts. This difference impacts the overall returns for investors. Spot ETFs offer a simpler, more transparent investment in Ethereum​.

These distinctions make Spot ETFs a preferred choice for many investors looking for straightforward exposure to Ethereum.

Advantages of investing in a Spot ETF

Investing in a Spot Ethereum ETF offers several key advantages:

  1. Direct exposure: You get direct exposure to Ethereum’s price movements without having to buy and store the cryptocurrency yourself. This makes it simpler and more accessible, especially for those new to cryptocurrency investing​.
  2. Regulated environment: Spot ETFs operate within a regulated framework. This provides a layer of security and oversight that is not available when buying Ethereum directly from exchanges. The regulation ensures transparency and compliance with financial laws.
  3. Convenience: Spot ETFs trade on traditional stock exchanges. This means you can buy and sell them through your regular brokerage account, just like you would with stocks. There is no need to set up a cryptocurrency wallet or deal with exchanges​.
  4. Liquidity: ETFs typically offer higher liquidity. You can buy or sell your shares quickly without worrying about the liquidity issues that sometimes affect direct cryptocurrency trading. This makes it easier to enter and exit your investment​.

These benefits make spot Ethereum ETFs an attractive option for investors looking to gain exposure to Ethereum in a simple, secure, and regulated manner.

Different ways to gain exposure to crypto Source Purpose Investments
Different ways to gain exposure to crypto. Source: Purpose Investments

Risks associated with Spot Ethereum ETFs

Investing in Spot Ethereum ETFs carries several risks that investors should consider:

  • Market volatility: Ethereum is known for its significant price swings. These fluctuations can lead to substantial gains but also significant losses. The value of a spot ETF will mirror these price movements closely, making it a volatile investment.
  • Regulatory risks: The regulatory environment for cryptocurrencies is still evolving. Changes in regulations can impact the operations and profitability of Ethereum ETFs. For example, stricter regulations could lead to increased costs for compliance or even restrictions on trading​.
  • Custodial risks: While ETFs use secure methods like cold storage to protect their Ethereum holdings, there is always a risk of theft or hacking. Any breach could impact the value of the ETF and lead to potential losses for investors​.
  • Tracking error: Although spot ETFs aim to track the price of Ethereum closely, there can be minor discrepancies due to management fees and other operational costs. These differences can slightly impact the returns compared to holding the cryptocurrency directly​.

Should you invest in Spot Ethereum ETFs?

Deciding whether to invest in Spot Ethereum ETFs depends on your financial goals and risk tolerance:

  • Investor profile: Spot Ethereum ETFs are suitable for investors who want exposure to Ethereum without dealing with the complexities of buying and storing it. A spot ETF can be a good choice if you prefer a regulated and straightforward investment.
  • Use cases: These ETFs can diversify your investment portfolio. They offer exposure to the cryptocurrency market, which can be beneficial if you believe in the long-term potential of Ethereum. Additionally, they are ideal for investors looking to speculate on Ethereum’s price movements without directly owning it​.
  • Alternatives: Consider other investment options, such as direct cryptocurrency purchases, futures ETFs, and mutual funds. Each option has pros and cons. For instance, while direct purchases offer full control, they also require dealing with exchanges and secure storage​.
  • Expert opinions and predictions: Financial analysts and industry experts see potential in Ethereum ETFs, especially with recent regulatory approvals. However, they also caution about the inherent risks and volatility. It’s crucial to stay informed and consider professional advice before investing​.

To sum it up

In conclusion, while spot Ethereum ETFs offer a convenient and regulated way to invest in Ethereum, they come with risks.

Thorough research and a clear understanding of your investment goals and risk tolerance are essential before diving into these financial products.

Frequently Asked Questions

Where can I buy a Spot Ethereum ETF?

You can buy a Spot Ethereum ETF through major stock exchanges using a brokerage account. For exchange, in Canada, it’s available on the Toronto Strock Exchange. When launched in the US, it will be available on major stock exchanges like the New York Stock Exchange (NYSE) and Nasdaq.

What companies offer Spot Ethereum ETFs?

Several financial institutions have been approved by the SEC to provide spot Ethereum ETFs, including:

  • Grayscale
  • Fidelity
  • VanEck
  • CI Financial
  • Purpose Investments
  • 21Shares

How do I choose the best Spot Ethereum ETF?

To choose the best spot Ethereum ETF, consider the following factors:

  • Management fees: Lower fees can increase your net returns.
  • Performance: Look at historical performance to gauge reliability.
  • Liquidity: Higher liquidity means easier trading.
  • Custodian: Ensure the ETF uses reputable custodians for Ethereum storage.
  • Regulation: Choose ETFs that operate within strong regulatory frameworks.

Written by

Mohammad is an experienced crypto writer with a specialisation in cybersecurity. He covers a wide variety of topics spanning everything from blockchain and Web3 to the retail crypto space. He has also worked for several start-ups and ICOs, gaining insight into the mindset and motivation of the founders behind the projects.