Table of Contents
- Grasping Ethereum as an Investment
- Staking: Pondering the Significant Question
- Global Landscape of Ethereum ETFs
- Impact of an Ethereum ETF on ETH Price
- Prospects of Staking Rewards in U.S. Ethereum ETFs
- Exploring Supplementary Investment Avenues
- Key Insights for Investors
Comprehending Ethereum as a Viable Investment
Following the introduction of bitcoin spot ETFs, attention is now focused on the possibility of an Ethereum ETF.
If approved, this development would mark a significant milestone for Ethereum, providing investors with a convenient means to incorporate Ethereum into their portfolios without the need to manage crypto wallets – essentially bringing ETH accessibility to a broader audience.
However, Ethereum ETFs will differ substantially from bitcoin ETFs. Ethereum introduces rewards through staking yields, akin to dividends in traditional finance, a feature absent in bitcoin. Additionally, ETH serves a practical purpose beyond its investment potential, being essential for executing transactions on the Ethereum network.
In this comprehensive guide, we will navigate through the intricacies of Ethereum ETFs, placing particular emphasis on the pivotal question: Is investing in them a prudent choice?\
Staking: Addressing the Pivotal Inquiry
The significant inquiry regarding Ethereum ETFs revolves around the handling of staking rewards.
Since Ethereum transitioned to a Proof-of-Stake consensus mechanism, staking has become a fundamental process: participants lock up their ETH, which is then utilized to validate new transactions, and in return, they receive “staking rewards” (For a more in-depth understanding of staking, refer to our beginner’s guide).
Validators for each new data block in the Ethereum algorithm are chosen based on the amount of crypto one has staked. The likelihood of being selected increases with the amount staked. When chosen, the validator is rewarded with newly minted crypto for their validation efforts, commonly referred to as “yield.”
Staking yields are often likened to dividends in traditional finance. While dividend yields represent a share of profits distributed by corporations, staking yields are rewards granted for participating in the validation process.
Historically, staking has exhibited more volatility compared to dividends but has, on average, yielded higher rewards.
Global Presence of Ethereum ETFs
While the approval of a US Ethereum ETF by the SEC is still uncertain, Ethereum ETFs have been operational in Canadian and European markets for several years.
Notable funds such as the CI Galaxy Ethereum (Ticker: ETHX.B) and 3iQ Ether Staking ETF (Ticker: ETHQ) were introduced in April 2021 for the Canadian market. Meanwhile, the 21Shares Ethereum Staking ETP and the VanEck Ethereum ETN were launched in March 2019 and March 2021, respectively.
A study by CoinGecko indicates that Europe dominates the global Ethereum ETF landscape, holding a market share of over 81.4% with $4.6 billion in Assets Under Management (AUM). Canada follows as a distant second, with a 16.6% market share and $949 million AUM.
Concerning staking, various Ethereum ETFs have different approaches. Some spot ETH ETFs offer Ether staking rewards, while others do not. For instance, 21Shares’ fund presently provides a yield reward of 1.48%, where they handle the staking on behalf of investors and distribute a percentage of the returns. It stands out as one of the largest crypto asset ETFs by market capitalization, boasting a total AUM of $380.5 million.
Despite staking being a significant advantage for Ethereum, it has drawn attention from the SEC due to potential centralization concerns. The ability to stake implies a level of centralization, given that substantial contributors now play a role in maintaining Ethereum’s infrastructure.
The likelihood of Ethereum ETFs offering staking rewards in the near future seems slim, particularly with the SEC scrutinizing platforms providing centralized staking services, as evidenced by its actions against platforms like Kraken.
What Impact Could an Ethereum ETF Have on the Price of ETH?
Although a potential Ethereum (ETH) ETF could have positive implications for Ethereum in the long run, there is likely to be notable price volatility before the funds become available. One potential trading strategy to consider is adhering to the classic adage: “Buy the rumor, sell the news.”
In this approach, investors seek to leverage market movements by initiating a position based on a rumor and closing it once the news is confirmed. In the context of an Ethereum ETF, this would involve buying ETH at present and selling it after the approval of the Ethereum ETF, the occurrence of which is uncertain.
Drawing parallels from recent examples in the tech stock realm, the focus on Artificial Intelligence (AI) in 2024 has generated substantial buzz. Tech companies have capitalized on this interest by integrating AI into their product offerings. Nvidia ($NVID), a leading chip maker globally, experienced considerable gains in 2023, attributed to providing essential AI processing power for these companies.
Leading up to its Q4 2023 earnings announcement, Nvidia witnessed single-day surges reaching up to 8.5%. On the day of the announcement, with positive news, the stock surged by 10% before market hours but retraced by the end of the day. The following day, the decline continued, with $NVID closing down by -2.4%.
This pattern aligns with the principle of “Buy the rumor, sell the news.”
Similarly, in the week leading up to the approval of the bitcoin ETF, there were single-day gains of up to 6.9%. However, merely two days after the announcement, bitcoin experienced a decline of -7.7%, and within a week, it dropped by as much as -21.6% from its peak.
Bitcoin prices exhibited a discernible upward trend from 2019 to 2024, with a notable surge in 2023, particularly in Q4, just before the approval of the bitcoin ETF in late January 2024.
As for the potential introduction of U.S. Ethereum ETFs, the prospect of incorporating staking rewards adds complexity. Developing a rewards-bearing ETH ETF in the United States requires issuers to adhere to regulatory frameworks set by the SEC. The regulatory body has already expressed concerns regarding staking as an investment product. Consequently, the initial wave of issuers may opt for a straightforward architecture, tracking Ethereum’s price without offering rewards.
A general guideline suggests that if an ETF does not offer rewards, individuals might be better off purchasing and staking ETH independently.
Moreover, ETF providers face challenges as staking yields are influenced by factors beyond their control, such as price volatility, trading volume, and technical glitches. While the rewards remain fixed over time, changes in the staked capital, driven by network demand and investor participation, significantly impact rewards.
Another consideration is the potential impact on the overall market and strategic investment opportunities. Futures-based ETH ETFs, like the VanEck Ethereum Strategy ETF and the ProShares Ether Strategy ETF, offer an alternative for investors seeking exposure to Ethereum’s future price, in contrast to spot Ethereum ETFs that track the cryptocurrency’s current price.
Investors can also directly purchase and hold ETH, either through a cryptocurrency exchange or a wallet, allowing them to benefit from potential price appreciation while avoiding performance or management fees. Holding ETH independently also provides the opportunity to stake Ethereum and earn yield rewards, either through solo staking or utilizing a staking-as-a-service.
Investing in platforms like Coinbase ($COIN), equipped with the infrastructure and expertise to offer staking services, is another strategic option. Coinbase’s existing staking services, regulatory compliance, and infrastructure make it a potential beneficiary of Ethereum ETFs.
In conclusion, the approval of a spot Ethereum ETF is viewed as positive for ETH holders in the long term, although short-term price gains and the likelihood of approval remain uncertain. Savvy investors can currently buy and stake ETH through services like Earn on Coinbase, and while an Ethereum ETF would offer convenience, it might entail giving up some or all staking rewards. Ethereum, as the leading smart contract blockchain, is considered a compelling investment in the crypto space, irrespective of the awaited ETF approval.