Ethereum ETF: A Guide to Investing in the Next Big Cryptocurrency
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Understanding Ethereum as an Investment
Following the introduction of the Bitcoin spot ETF, all eyes are on a potential Ethereum ETF.
If approved, this would be a big moment for Ethereum, allowing investors to easily add Ethereum to their portfolios without having to manage a cryptocurrency wallet. This will bring ETH to the masses.
but, An Ethereum ETF will look a lot different than a Bitcoin ETF. Ethereum offers rewards in the form of staking yields, similar to dividends in the traditional financial world, something that Bitcoin does not have. ETH has utility beyond its investment potential. You will need this utility to execute transactions on the Ethereum network.
In this guide we’ll cover: Ethereum ETF from start to finishPay particular attention to these key questions: Should you invest in them??
Staking: The Big Questions
The biggest question about the Ethereum ETF is “How will staking rewards be handled?”
After Ethereum switched to a proof-of-stake consensus mechanism, staking became a core feature. Participants lock up their ETH, which they then use to verify new transactions and are rewarded with “staking rewards”. (Learn more about staking in our beginner’s guide.)
The Ethereum algorithm selects a validator to verify each new block of data based on the amount of cryptocurrency you have staked. The more you stake, the higher your chances of being selected. Once selected, validators receive newly minted cryptocurrency as compensation for their work (also known as “yield”).
In this way, staking returns are often compared to dividends in the traditional financial space. While dividend yield is a portion of profits distributed by a company, staking yield is a reward provided in return for participating in the verification process.
Historically, staking has proven to be more volatile than dividends, but offers higher rewards on average.
Ethereum ETFs around the world
While SEC approval for the US fund is still pending, the Ethereum ETF has been operating in Canadian and European markets for several years.
funds such as CI Galaxy Ethereum (Ticker: ETHX.B) and 3iQ Ethereum Staking ETF (Ticker: ETHQ) was launched for the Canadian market in April 2021. 21-Week Ethereum Staking ETP and VanEck Ethereum ETN They were released in March 2019 and March 2021, respectively.
Europe dominates the global Ethereum ETF scene with over 81.4% market share and $4.6 billion AUM, according to CoinGecko research. Canada is a close second, with 16.6% market share and AUM of $949 million.
So how do these Ethereum ETFs handle staking? Some spot ETH ETFs offer Ether staking rewards, while others do not..
For example, 21Shares’ fund currently offers a yield reward of 1.48%. They do the staking for you and then pay you a percentage of the profits. It is also one of the largest cryptocurrency asset ETFs by market capitalization, with a total AUM of $380.5 million.
While staking remains a significant advantage for Ethereum, it has also raised a red flag in the eyes of the SEC. Considering that the infrastructure is currently maintained by many contributors, it shows that the staking function is somewhat centralized.
With the SEC coming to platforms that offer centralized staking services like Kraken, it seems unlikely that we will be seeing the staking rewards offered by Ethereum ETFs anytime soon.
How will the Ethereum ETF affect the price of ETH?
A potential ETH ETF is likely a good thing for Ethereum in the long term, but there is a lot of price action to expect before the funds hit the market. One potential strategy is the old trading adage, “Buy on the rumor, sell on the news.”
In this strategy, investors try to capitalize on market movements by opening positions based on rumors and closing them when the news is confirmed. (That is, they will buy ETH now and sell it after the Ethereum ETF is approved. This may or may not happen!)
Let’s take a look at some recent examples of technology stocks.
In 2024, AI will be one of the hottest topics in tech stocks. Many technology companies are already taking advantage of this influx of interest by incorporating AI into their product lines. Nvidia ($NVID), the world’s leading chipmaker, has undoubtedly been a benefactor in 2023, as it provides much of the AI processing power these companies need.
Ahead of its fourth-quarter 2023 earnings release, Nvidia posted a daily gain of 8.5%. On the day of the announcement, the stock price soared 10% before opening hours as positive news was delivered, but remained flat at the close. The decline continued the next day with $NVID falling -2.4%.
“Buy on the rumor, sell on the news”
In the week leading up to the Bitcoin ETF approval, we saw daily gains of up to 6.9%. Just two days after the announcement, Bitcoin fell -7.7% and was even down -21.6% from its peak in a week.
Bitcoin price from 2019 to 2024. The Bitcoin ETF was approved in late January 2024. In particular, in the fourth quarter just before the announcement of ETF approval, prices show a clear upward trend until 2023.
Does the US Ethereum ETF offer staking rewards?
Creating a US-based ETH ETF that offers rewards is not an easy task. Issuers must provide a framework that is consistent with the SEC’s regulatory framework. As mentioned above, the SEC has already expressed some concerns about offering staking as an investment product.
Moreover, considering regulatory risks, it may not be reasonable for issuers to run validator nodes. We will see the first batch of issuers have a “plain vanilla” architecture that does not offer rewards and simply tracks the Ethereum price.
Rule of thumb: If no rewards are offered, we recommend purchasing and staking ETH directly..
Another downside to ETF providers is that returns are always determined by factors outside of your control. Price volatility, trading volume and technical glitches will affect the amount of rewards provided when staking. Remember that while rewards are fixed over time, the amount of staked capital changes, so demand on both the network and investor side plays a large role in rewards.
Rule of thumb: It may be easier to buy an Ethereum ETF if it offers rewards, especially if it offers low fees.. The fund will manage the technical issues for you and you can hold Ethereum directly in your brokerage account.
Additional Investment Opportunities
Given the positive outlook for the spot ETH ETF, how will this impact the overall market and what strategic investments should investors make?
Futures ETH ETF
In addition to investing on the platform, investors can also gain exposure by buying and holding futures-based ETH ETFs, such as: VanEck Ethereum Strategy ETF and ProShares Ethereum Strategy ETF, both of which are available to U.S. investors. In a futures ETF, you bet on the future price of Ethereum, unlike a spot Ethereum ETF that directly tracks the price of Ethereum once approved.
Buy and hold ETH
The simplest and most direct way to gain exposure to potential price increases is to buy and hold ETH. Whether through a cryptocurrency exchange or a wallet, you can hold Ethereum and take on volatility risk, but without having to pay any performance or management fees.
A distinct advantage of holding ETH is the ability to stake Ethereum and earn profit rewards. Whether you choose to staking solo or use staking-as-a-service, the decision is ultimately yours. This is more than you can earn by investing through ETFs.
Invest in Coinbase ($COIN)
Coinbase, with its infrastructure and know-how to provide staking services, could be a big beneficiary of the Ethereum ETF for the following three reasons.
- infrastructure: Coinbase has resources and knowledge available to institutions looking for staking rewards partnerships, including operating validator nodes. (Coinbase has already been chosen as custodian for all U.S.-based spot Bitcoin ETFs.)
- regulatory compliance: Coinbase has a long-standing commitment to regulatory compliance, making it an ideal partner for institutions.
- Existing staking service: Coinbase is already implementing a staking service in the form of the Earn on Coinbase platform. Coinbase has the resources and experience to simplify the staking process to increase user engagement and revenue.
Investor Implications
We believe the approval of a spot Ethereum ETF will be good news for ETH holders in the long term. However, predicting short-term price increases is difficult. Or even whether it will be approved at all!
Savvy investors can use services like Earn on Coinbase to buy and stake ETH right now.. What the Ethereum ETF offers is simplified buying and selling, but investors will give up some (or all) of their staking rewards for the convenience.
In the long term, we believe in Ethereum because it is the best smart contract blockchain in the world. Have a sustainable competitive advantage. We don’t have a traditional management team, but we do have a talented person named Vitalik Buterin who is supported by a strong community.
No need to wait for the Ethereum ETF. In our opinion, this is one of the best investments in cryptocurrency right now.
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