How will the differences between Bitcoin and Ethereum affect spot ETFs?

analyst predict The U.S. Securities and Exchange Commission (SEC) plans to approve applications for a spot Bitcoin ETF in January 2024, following approval of a Bitcoin (BTC) futures ETF in October 2021 and an Ether (ETH) futures ETF in October 2023.

Accordingly, existing financial institutions also applied to issue a spot Ether ETF. Applicants like BlackRock have a near-perfect track record of obtaining SEC approval for ETFs, so it’s likely that a spot Ether ETF will also be approved. However, the SEC may only approve it after Bitcoin, which would mean approval of the Ether ETF in late 2024 or early 2025.

If approved, the Spot Bitcoin and Ether ETF will attract millions of new investors who were previously unable or unwilling to purchase cryptocurrency assets directly. Will the different investment principles of Bitcoin and Ethereum and the ability of issuers to integrate the features of each asset into a spot ETF will impact the success of the newly created product?

In the case of Ether in particular, the differences between the use cases of the underlying assets and spot ETF product offerings raise doubts about the viability of such products. Spot Ether ETFs do not allow shareholders to participate in the Ethereum network. This is the main reason why investors want to acquire Ether. Meanwhile, Bitcoin’s widespread use as a store of value makes spot Bitcoin ETFs a more straightforward investment proposition.

There is no investment thesis for the Ether ETF.

The Ether investment thesis revolves around the ability for individuals and institutions to utilize ETH tokens on the Ethereum network. Unlike Bitcoin, which is recognized in some quarters for its monetary properties as a store of value and medium of exchange, Ether tokens act as the “gas” of the technology ecosystem. One way users use ETH is for staking, the process of participating in transaction verification on a proof-of-stake blockchain by locking up an amount (stake) of the network’s native tokens to verify consensus and earn a return.

River CEO Alexander Leishman decided, “ETH has established itself as a technology platform and now has no choice but to compete as such.” The role of the ETH token as a utility token on the Ethereum platform means that its investment thesis is not based on its fundamental monetary characteristics.

Ether’s core value proposition makes it difficult for companies to market ETF products that only provide price exposure to investors. Investors do not hold Ethereum because of its decentralization or monetary nature. Companies like MicroStrategy do not sell stock to buy Ether. Countries such as El Salvador have not designated Ethereum as a fiat currency. In fact, as far as anyone knows, no national government is even talking about it.

Another obstacle is that applications like BlackRock do not even mention staking, which is central to their Ether investment thesis. The SEC has been strict about cryptocurrency exchanges offering staking-as-a-service features, so it’s much less likely that BlackRock or another issuer will get permission to offer staking through an ETF.

Bitcoin ETF

As currently implemented, issuers of in-kind Bitcoin ETFs do not offer in-kind redemptions, meaning shareholders cannot store their Bitcoin. Therefore, these instruments impose additional counterparty risk. However, shareholders may be exposed to the price of Bitcoin. This allows you to benefit from price increases even though annual management fees cut into your profits.

Spot Bitcoin ​ETFs allow issuers to anticipate demand from market participants who view Bitcoin as a store of value and seek long-term price exposure. Store-of-value investment theory allows Wall Street firms to easily sell Bitcoin ETF products to financial advisors and retail investors.

In anticipation of approval for spot Bitcoin products, traditional financial leaders such as BlackRock CEO Larry Fink have shifted their rhetoric. They no longer sound like “money laundering indices” when it comes to Bitcoin. Instead, Fink now calls it an “international asset” that “digitizes gold” and represents a “flight toward quality” for investors.

Fink’s explanation reflects the perception that Bitcoin is suited to Western markets as a store of value due to its decentralization and the network’s monetary policy. Some US-based companies are creating Bitcoin products focused on payments, but most Bitcoin holders store their wealth in Bitcoin for the long term.

from now on

The lackluster launch of the Ethereum futures ETF in October may indicate that spot Ethereum ETFs will meet similarly low demand. The underlying investment thesis of Bitcoin and Ethereum determines the demand for ETFs issued for these assets. Since Ether’s utility comes from its ability to be used within the Ethereum ecosystem, a spot ETH ETF is unlikely to be a valuable product offering.

This is a guest post by David Waugh. The opinions expressed are solely personal and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.