On Monday, the inaugural exchange-traded funds (ETFs) with a focus on Ethereum, the second-largest cryptocurrency, made their debut. These ETFs offered individual investors the opportunity to gain exposure to Ethereum through their brokerage accounts. However, initial reception from smaller investors was tepid, as most of the Ethereum ETFs, which are based on futures contracts, concluded the day in the red. According to data from Dow Jones Market Data, these seven funds collectively saw trading volumes of less than $7 million.
These new Ethereum ETFs, launched by notable providers like ProShares, VanEck, and Bitwise Asset Management, are entering a highly competitive market. Analysts and investors anticipate intense competition, primarily based on factors like cost and marketing.
Eric Balchunas, a senior ETF analyst at Bloomberg Intelligence, expressed doubts about the prospects of many of these funds, stating, “A lot of these funds are going to struggle to get assets. There’s probably only room for one standout performer in this race.”
The cryptocurrency industry has long looked to ETFs as a means of attracting more investment into the asset class. For many retail investors, trading digital tokens directly poses logistical and legal challenges. Consequently, regulatory authorities have, thus far, permitted only products linked to Bitcoin and Ethereum futures contracts.
Major asset managers such as BlackRock and Fidelity Investments are closely monitoring the Securities and Exchange Commission (SEC) for approval to launch ETFs that would hold physical Bitcoin. However, the SEC has recently delayed decisions on some pending applications, pushing the deadline to January 2024. The agency has also postponed the review of applications by VanEck and Cathie Wood’s Ark Invest to launch ETFs based on physical Ethereum.
Notably, a federal court has expressed skepticism about the SEC’s stance. In an August ruling, a panel of judges rejected the SEC’s rationale for denying Grayscale Investments’ proposal to convert its Bitcoin trust into a physical Bitcoin ETF, citing unequal treatment of similar products.
The SEC faces a mid-October deadline to decide on its course of action, which includes potential appeals to the Supreme Court, approval of Grayscale’s application, rejection on alternative grounds, or a reconsideration of its prior approval of Bitcoin futures ETFs, though the latter is seen as unlikely.
On Monday, Grayscale filed paperwork with the SEC to convert its $5 billion Ethereum trust into a physical Ethereum ETF.
It’s worth noting that the environment for these initial futures-based Ethereum ETFs differs markedly from the debut of the first Bitcoin ETF by ProShares during the peak of the cryptocurrency bull market. Bitcoin prices have since experienced significant declines, coinciding with the troubles faced by major crypto firms and the rise in U.S. interest rates, which has reduced interest in speculative investments.
Out of the seven different futures-based ETFs launched on Monday, only one, a Valkyrie Investments fund that initially focused on Bitcoin futures and expanded to include Ethereum, saw a 3.9% increase in value.
On the same day, the price of Ethereum, the native token of the Ethereum blockchain, dipped slightly to below $1,700, while Bitcoin, the largest cryptocurrency, saw a 3% rise and remained below $28,000, according to CoinDesk data.
As with all futures-based products, these ETFs can be affected by discrepancies between the futures market and the underlying assets they track. Additionally, they may incur hidden costs because when a futures contract nears expiration, the funds must sell the current contract and purchase a later-dated one. If the next month’s contract is more expensive, this process can result in hidden costs for ETF investors.
Many financial advisers are not inclined to recommend these products, as they generally prefer their clients to own the underlying security rather than engage in futures trading, according to Ric Edelman, a veteran of wealth management and a cryptocurrency advocate.