In mid-January this year, the US Securities and Exchange Commission (SEC) opened Pandora’s box by approving spot bitcoin ETFs. The cryptocurrency market took off and new investors who had not previously invested in digital assets rushed into the market. This ensured an influx of billions of dollars into the sector. 

Then the minds of crypto enthusiasts began to wonder what would happen next. Would applications for ETFs on other virtual coins, primarily Ethereum, the world’s second most capitalized cryptocurrency, be approved? The launch of spot Ethereum ETFs has been one of the hottest topics this summer. Whether the SEC will approve it or not, whether ETH will rise or crash, how institutional investors will behave. All these questions have been hotly debated by analysts and experts. 

Let’s understand how the launch of the first ETF on Ethereum went, how the activity of such exchange-traded funds on cryptocurrencies affects the value and prospects of the “digital silver” and what impact the ETH ETF on the market can be observed by the crypto community today.

As it was

On July 23, 2024, spot Ethereum ETFs from eight issuers were launched for the first time in the United States. This day marked the beginning of a new chapter in the history of cryptocurrency investing.

Within the first few hours, trading volumes broke all records, surpassing the $500 million mark. In addition, they reached at least $1 billion per day during the first few days. For the first time in history, shares of exchange-traded Etherium ETFs were listed on major U.S. exchanges alongside prominent global companies. 

Cryptocurrency ETFs in the U.S. have been through an obstacle course on their way to approval. The SEC rejected application after application for more than a decade. The traditional financial systеm did not want to allow digital assets into the regulated legal space, and the SEC found thousands of reasons for rejection: risks of money laundering and manipulation, high volatility and questionable liquidity, improperly drafted documents, and so on ad infinitum. 

And if bitcoin was classified as a commodity by the SEC, albeit with a squeak, ether is still under discussion. Different regulators and jurisdictions classify Ethereum as they see fit: as a security, a currency or a commodity. All these discrepancies are caused by the PoS (Proof-of-Stake) consensus algorithm supported by smart contracts on the Ethereum network, rather than by work done, as with the PoW (Proof-of-Work) consensus algorithm on which Bitcoin is based. After the approval of the Spot Bitcoin ETF, SEC officials continued to argue that ETH was still more of a security, so the approval of an ETH ETF was in doubt for several more months. By early summer, however, the situation changed, the tide turned in favor of the crypto market, and the long-awaited approval was granted.

In an interesting coincidence, the green light for the Ethereum ETF came almost simultaneously with Joe Biden’s refusal to run in the November presidential election. How these two events are connected is not known for sure. However, some opinion leaders in the crypto industry perceived them as one and began to be even more enthusiastic about Donald Trump as the president who will be able to create the most optimal conditions for the digital asset sector. 

What Ethereum ETFs are available today?

There are currently 25 ETH ETFs available worldwide, 9 of which are based in the United States, with the rest in Europe, Canada, Brazil and Switzerland. In the U.S., Ethereum ETFs have been approved for the following investment companies:

• BlackRock — iShares Ethereum Trust (ETHA);
• Grayscale — Grayscale Ethereum Mini Trust (ETH) and Grayscale Ethereum Trust (ETHE);
• VanEck — VanEck Ethereum Trust (ETHV);
• Fidelity — Fidelity Ethereum Fund (FETH);
• Bitwise — Bitwise Ethereum ETF (ETHW);
• Franklin Templeton — Franklin Ethereum ETF Fund (EZET);
• 21Shares — 21Shares Core Ethereum ETF (CETH);
• Invesco Galaxy — Invesco Galaxy Ethereum ETF (QETH).

What is an ETH ETF?

The operating mechanisms of all ETFs are virtually identical. They are managed by reputable investment companies, hold the underlying assets with qualified cryptocustodians and employ proven market makers to smooth out price fluctuations and provide ETH liquidity.

This tool was created to popularize cryptocurrency among institutional investors, and ETH ETFs should be another factor in bringing the classical financial systеm closer to blockchain technology.

Ethereum ETF (Exchange-Traded Fund for Ethereum) is an investment fund whose shares are traded on public exchanges and whose value is linked to the price of the ETH cryptocurrency. This instrument provides an opportunity to invest in digital assets not directly, but through securities. By buying ETF shares, investors have the opportunity to capitalize on the price fluctuations of the digital asset. By buying shares instead of cryptocurrency per se, the investor avoids the need to monitor the crypto market and ensure safe custody of the digital asset. All they need to do is contact a broker or make a quick transaction on a familiar platform. 

A great advantage of such funds is that they operate in a clear legal environment, and the regulatory requirements for ETFs are described in detail in the current financial legislation. By contrast, cryptocurrency legislation is still in its infancy and involves certain risks.

The main objective of Ethereum ETH is to attract investors who have no experience in investing in cryptocurrencies, but want to benefit from this asset class.

Advantages of Ethereum ETF

1. Accessibility. Traditional stock exchanges provide investors with familiar tools for investing and trading. There is no need to acquire special knowledge and skills.
2. Ease of management. ETF takes care of risk management when investing and storing cryptocurrencies.
3. Legality. The legal framework of the traditional financial market is applied, which increases the security of transactions for investors. 
4. Portfolio diversification. The Ethereum ETF provides additional opportunities to diversify investment portfolios, reduce risks and increase returns.  
5. Additional liquidity. ETH ETFs increase the liquidity of crypto assets by providing additional tools in the form of buying and selling shares on the stock market.

Risks of Investing in ETH ETFs

1. Volatility. ETFs smooth out the price fluctuations of cryptocurrencies, but do not completely eliminate them.
2. High management fees. For long-term investments, the amount of the fund’s fees can play a significant role and negatively impact returns.
3. Uncertainty about cryptocurrency regulation. Risks from future changes in cryptocurrency legislation are difficult to calculate in advance. 
4. Weak link between ETFs and decentralized finance (DeFi). The lack of direct rights to own cryptocurrency deprives investors of the opportunity to take advantage of all the financial benefits of DeFi instruments.
5. Lack of staking mechanism. Ethereum ETFs do not offer staking. Issuers sought SEC approval to add staking to the ETF mechanism. The commission denied the request on the grounds that it takes several days to withdraw ETH from the blockchain, which is contrary to accepted requirements for rapid redemption of shares. So the funds are now in the process of finding a solution, but the likelihood of staking instruments being implemented in ETFs before the end of this year is negligible. The resulting ill-gotten gains could discourage potential investors.

What are the predictions?

Prior to the launch of the ETH ETF, crypto enthusiasts anticipated the hype, while analysts were more cautious. The average Ethereum price forecast by market professionals was around 25% for the year. Demand may be lower than expected, the initial inflow may be unrepresentative, the full picture will be formed not earlier than in a few months, and therefore the main recommendation of analysts is to consider ETH ETFs as a long-term investment and not to wait for a quick rise in price. By the way, the total value of assets under management of ETH ETFs is only about 2.5% of Ethereum’s market capitalization.

In particular, Wintermute, a major market maker that provides liquidity to more than 50 classic and cryptocurrency exchanges, predicts that Ethereum ETFs will attract $3.2 billion to $4 billion in the first year of trading. That is, they estimate a potential increase in the price of Ethereum by no more than 25% by the end of 2024.

At the same time, while analysts are discussing the prospects of the second most capitalized cryptocurrency, financial giant BlackRock seems to have decided to make Ethereum ETFs mainstream. The company is not stingy with PR and is actively investing money in promoting its new product iShares Ethereum Trust (ETHA), colorfully describing to potential retail investors all the strengths, utility and potential profitability of the ETH-ETF. And everyone knows that the guys at BlackRock know how to sell and don’t waste money.

Anyway, at the time of writing, the price of Ethereum is almost back to its spring level of $2,577.

Experts tend to believe that the main reason for the decline is the policy of Grayscale, the main competitor of BlackRock. Grayscale Ethereum Trust’s high fees force investors who prefer long-term strategies of investing in ETH ETFs to withdraw their funds. Grayscale’s ETHE fees are incomparably higher than other funds. They are 2.5% of assets under management per year, while competitors charge 0.15-0.25%. Some even offer a commission-free service for the first few months or a year.

If we talk about the most optimistic forecasts, they come to an average of $5-6 thousand per coin.  Ardent supporters of Ethereum in general predict that digital silver will overtake bitcoin in market capitalization within five years. For example, the founder of 1confirmation Nick Tomaino thinks so. In his opinion, Ethereum is not yet fully understood, but it is being developed by the most talented developers in the world, financial instruments based on ETH have no analogues, and it is on its blockchain that the new generation of the Web-3 Internet will be built.

ETH market liquidity after launch of spot ETFs

According to CoinDesk, the average market depth of 5% for Ethereum pairs has dropped by 20% since the launch of the ETFs. This decrease is indicative of reduced liquidity and increased sensitivity to large orders. 

This situation is fundamentally different from that of bitcoin ETFs, where the launch of ETFs had a positive impact on liquidity.

Experts are looking for reasons, but so far unfavorable market conditions and the summer, when there is an annual decline in trading activity, have been cited as negative factors. 

Conclusion

It is still difficult to assess the impact of the symbiosis of blockchain technology and ETFs on the cryptocurrency market. Experts refrain from making clear predictions, as at least one year should pass since the launch of ETH ETFs in order to conduct relevant analysis and make a reasonable assessment of their growth prospects.

In any case, spot ETFs on Etherium have stimulated confidence and the arrival of traditional investors in the crypto industry. And the steady accumulation of the world’s second cryptocurrency on the balance sheets of major investment funds and an improving regulatory climate will help strengthen ETH in the future.

Thank you for your attention. Invest safely and profitably!

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