First spot ether ETFs are set to go

Regulators have given approval for the first US exchange-traded funds that directly invest in Ether, the world’s second-largest cryptocurrency, as indicated by filings and statements from asset managers. Since the early 2024 surge in Bitcoin prices, the U.S. Securities and Exchange Commission (SEC) has demonstrated even greater reluctance to approve similar funds for Ethereum, following its rejection of 20 spot Bitcoin ETF proposals between 2018 and 2023.

21Shares AG, Bitwise Asset Management Inc., BlackRock Inc., Invesco Ltd., Franklin Templeton, Fidelity Investments and VanEck were among the issuers to receive US Securities and Exchange Commission assent, the documents indicated Monday. The SEC didn’t immediately return requests for comment. Several major asset managers like BlackRock, Fidelity, and VanEck, alongside crypto-focused firms such as Bitwise, 21Shares, and Grayscale, are among the companies competing to launch Ether funds. Grayscale, in particular, is in the process of transforming its Ethereum Trust, which holds billions in assets, into two separate ETFs with varying fee structures.

What are spot ether ETFs?

"Spot Ether ETFs" refer to exchange-traded funds (ETFs) that invest directly in physical Ether (ETH), the cryptocurrency used on the Ethereum blockchain. These ETFs hold actual Ether tokens rather than derivatives or futures contracts based on Ether's price. The term "spot" indicates that these ETFs track the real-time market price of Ether and aim to replicate its performance closely.

Spot Ether ETFs provide investors with a straightforward way to gain exposure to Ether without needing to directly buy and hold the cryptocurrency themselves. This approach can appeal to investors looking to diversify their portfolios with digital assets while benefiting from the liquidity and regulatory oversight that ETFs typically offer in traditional financial markets.

Spot Ethereum ETFs will directly hold Ether, the cryptocurrency that powers the Ethereum blockchain. Ether is currently traded on cryptocurrency exchanges such as Coinbase (COIN) and ranks as the second-largest cryptocurrency after Bitcoin. Similar to spot Bitcoin ETFs, spot Ethereum ETFs will be structured as grantor trusts, allowing investors to own shares representing ownership of the Ether held by the trust.

How spot ether ETFs will impact the markets?

According to JPMorgan analyst Nikolaos Panigirtzoglou's late May report, Ether ETFs are expected to attract only a fraction of the inflows that Bitcoin has seen. Citi echoed a similar sentiment recently, forecasting that ETF inflows for Ether would reach approximately 30% to 35% of Bitcoin's levels. This projection translates to an estimated $4.7 billion to $5.4 billion in inflows over the next six months, as reported by CoinDesk.

Both banks underscored similar factors to support their views. They highlighted Bitcoin's first-mover advantage and emphasized that Ether's functionality, such as staking, would not be accessible through ETFs, which could constrain demand.Specifically, ETF investors will miss out on opportunities like ether staking, where tokens are locked up to earn yields.

In late June, Steno Research projected ether to reach $6,500 this year on strong inflows:
"The market's outlook on the upcoming Ethereum spot ETFs is overly pessimistic. We anticipate a net inflow of $15 to $20 billion within the first year, as Ethereum possesses qualities that appeal to Wall Street," the firm said. “This should drive its value significantly higher, not only in dollar terms but also relative to Bitcoin.”

Should You Invest in Spot Ethereum ETFs?

The absence of staking capabilities in US Ether ETFs significantly diminishes their attractiveness. Staking has emerged as a profitable method for investors to earn rewards by locking up their Ether. The inability to stake within ETF structures reduces their appeal, particularly among institutional investors who may opt to avoid ETF fees and stake independently. This trend is underscored by the strong demand for staked Ether products in Germany, indicating that investors highly value the ability to participate in staking activities.

Regarding Ether's potential as an investment, it remains a cryptocurrency that continues to attract investor interest. Ether serves as the primary cryptocurrency for the Ethereum platform, a significant blockchain network. As of July 19, 2024, Ether boasted a market capitalization of $420 billion, ranking second only to Bitcoin's $1.3 trillion market cap. No other cryptocurrency came close to these figures in size.

Investing in spot Ethereum ETFs provides a regulated and accessible avenue for investors. These ETFs allow investors to participate in the price fluctuations of ETH without the need to directly hold the cryptocurrency. As of the first half of 2024, only futures-based Ethereum ETFs are currently available. However, it's essential to note that predicting Ethereum's price movements involves uncertainty and should be approached cautiously. Ethereum is known for its high volatility, making it crucial for investors to only commit funds they are prepared to potentially lose.

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