Spot Ether ETFs: Should You Invest?

Spot ether exchange-traded funds have cleared their biggest hurdle to trade, though the exact timing of their market debut remains unknown.

In a surprise move, the US Securities and Exchange Commission approved 19b-4 proposals for the first spot ether ETFs in the US on May 23, 2024. It’s the first cryptocurrency to receive such approval since spot bitcoin ETFs burst onto the scene this January.

What Are Spot Ether ETFs?

Spot ether ETFs will directly hold ether, the cryptocurrency that supports the ethereum blockchain. Ether currently trades on cryptocurrency exchanges, like Coinbase COIN, and is the second-largest cryptocurrency to bitcoin. Like spot bitcoin ETFs, spot ether ETFs will be set up as grantor trusts, meaning investors will own a share of the ether held by the trust.

The main difference between spot ether ETFs and spot bitcoin ETFs is the cryptocurrency they hold, otherwise, they should be much the same.

When Will Spot Ether ETFs Start Trading?

While spot ether ETFs jumped the main hurdle to begin trading, we still don’t know when that will be. Estimates run from a couple of weeks to a few months.

Why the delay? Here are some eye-glazing details: The SEC must approve rule change proposals by stock exchanges (Form 19b-4) and the security-specific registration (Form S-1) before spot ether ETFs are listed on an exchange. The 19b-4s have been approved for eight ETFs that are planning to list on the Nasdaq, NYSE Arca, and Cboe BZX exchanges. Now, the SEC must iron out the final details before approving the S-1s. Once approved, the ETFs can begin trading.

Who’s Approved to Offer Spot Ether ETFs?

Spot ether ETF asset managers will look familiar to spot bitcoin ETF spectators: Fidelity, iShares, Bitwise, VanEck, ARK 21Shares, Invesco Galaxy, Franklin, and Grayscale all have spot bitcoin ETFs and approved 19b-4s for a spot ether ETF.

In theory, the original S-1 filings by asset managers created a queue of ETFs awaiting SEC approval, with VanEck in pole position with the earliest filing. While VanEck believes ETFs should be approved in that order (why wouldn’t they), it’s more likely that ETFs from eight asset managers will begin trading at the same time.

WisdomTree and Valkyrie are the two spot bitcoin issuers missing from the spot ether list.

Spot Ether ETFs Poised for Trading

How Spot Ether ETFs Might Shortchange Investors

Staking is at the heart of the SEC’s issue with ether. Cryptocurrencies run on blockchains, which are ledgers validated by peers (bitcoin miners, for example) rather than intermediaries. Bitcoin uses a proof-of-work system that rewards the first miner to validate a block and add it to the blockchain. Unlike bitcoin, ethereum uses a proof-of-stake model after switching from proof-of-work in 2022, commonly known as The Merge. The proof-of-stake model operates more like a lottery system than a competition: Rather than being first to mine rewards, ether holders could “stake” (that is, commit) their ether to be used to update the ledger and receive rewards.

Staking generates passive income for ether investors willing to lock up their coins. The SEC sued Coinbase based on this interpretation, claiming that staked tokens qualify as investment contracts and should therefore be considered securities (Coinbase disagreed). The SEC relies on precedent known as the Howey Test in its conclusion. Where bitcoin fails and ether passes the Howey Test is in the expectation of profits from the efforts of others. Bitcoin miners earn their rewards while staked ether is lent for rewards, almost like interest on a savings account.

The SEC approved these ETF filings only after staking was disallowed for the ETFs. The average annual reward for ether staking is roughly 2-4 percentage points. Unlike bitcoin, holding ether directly could hold a meaningful performance edge over spot ether ETFs for investors willing to engage in staking.

Should You Invest in Spot Ether ETFs?

As to ether’s viability as an investment, ether is a cryptocurrency that should continue to garner investor attention. Ethereum is a major platform that operates using ether as its cryptocurrency. Ethereum’s $450 billion market cap was second only to bitcoin’s $1.3 trillion market cap as of May 29, 2024. No other cryptocurrency was particularly close to its size.

That said, any ether price predictions are guesswork and should be taken with a grain of salt. Ether is also highly volatile, and investors should only invest as much as they are willing to lose.

What’s Next for Spot Crypto ETFs

While the SEC decision-making process around crypto has been mercurial, I don’t expect approval of other cryptocurrencies without them first having a regulated market. So far, that regulated market has been Chicago Mercantile Exchange futures.

Spot bitcoin and ether ETFs were made possible by predecessor bitcoin and ether futures ETFs, the futures held by those ETFs being listed on the CME. But the CME doesn’t currently list any other cryptocurrency futures.

It stands to reason that ETF approval is distant for cryptocurrencies other than bitcoin and ether.