header banner
Default

Workings of Ether Futures ETFs and Investing Advice


An ether futures exchange-traded fund (ETF) is an investment vehicle that enables exposure to ether (ETH), the native cryptocurrency of the Ethereum blockchain, through futures contracts. Unlike spot cryptocurrency ETFs, which hold ether directly and have not yet been approved by the U.S. Securities and Exchange Commission (SEC), an ether futures ETF invests in ether futures contracts that trade on regulated commodity exchanges.

An ether futures ETF enables investors to speculate on the price moves of the native cryptocurrency of the Ethereum network. Unlike traditional ETFs that hold the underlying assets, these ETFs hold ether futures contracts. These contracts are agreements to buy or sell ether at a specific price in the future, allowing the ETF to track ether’s price indirectly.

Key Takeaways

  • Ether futures ETFs offer you the chance to gain exposure to the price moves of the ether cryptocurrency.
  • Ether futures ETFs seek to simulate the price changes of ether, leveraging futures contracts to do so.
  • Fund managers purchase these contracts and bundle them into a fund.
  • The first nine ether futures ETFs were approved in October 2023.
  • Like the value of the ether currency, these ETFs are highly volatile.
  • The benefits of ether futures ETFs include regulatory compliance, diversification, ease of access, and potentially lower operational risks.

Investing in an ether futures ETF has benefits and risks.

The main advantage is its ease of access: You can buy and sell shares of the ETF on traditional stock exchanges, making it convenient if you’re unfamiliar with cryptocurrency or the Ethereum blockchain. Additionally, these ETFs are regulated, offering a layer of protection.

However, they also carry specific risks, such as the potential for price discrepancies because of the futures-based structure, rapid price volatility, and problems of liquidity issues. As such, you should take caution and conduct due diligence before making shares in an ether futures ETF part of your portfolio.

How Does an Ether Futures ETF Work?

In a typical exchange-traded fund, the fund buys securities that become its holdings. The ETF then offers fractionalized shares on exchanges.

ETFs can’t yet provide funds whose holdings consist of ether or any other cryptocurrency, which they would then securitize as shares for investors. The SEC has thus far rejected all proposals for these funds, called spot crypto ETFs, though the regulatory and legal landscape is moving fast—seemingly in the direction of their acceptance.

An ether futures ETF buys futures contracts based on the price of ether, the cryptocurrency native to the Ethereum blockchain. The ether futures contracts are standardized agreements to buy or sell ether at a predetermined price on a future date and trade on regulated exchanges like the CME Globex. The ETF sells shares as fractionalized exposure to these futures contracts, which are rolled over as they reach their expiration dates to maintain exposure to ether.

These ETFs trade on stock exchanges, making them accessible to retail and institutional investors. One key feature of the ether futures ETF, and of ETFs in general, is the expense ratio. This is a fee charged by the ETF provider, which can be higher than the costs of directly buying and holding ether yourself.

Pros and Cons of Investing in Ether Futures ETFs

Pros

  • Regulatory compliance

  • Diversification

  • Accessibility

  • Lower operational risks

Cons

  • Liquidity concerns

  • Price volatility

  • Higher expense ratios

Investors should be aware of the pros and cons before buying shares in ether futures ETFs:

Pros

  • Regulatory compliance: Ether futures ETFs are offered within the regulatory frameworks of their markets, making them more palatable to institutional investors.
  • Diversification: When reviewing your portfolio and its asset classes, cryptocurrencies like ether could offer some diversification.
  • Accessibility: Ether futures ETFs are easily accessible to retail and institutional investors on traditional exchanges.
  • Lower operational risks: You don’t need to negotiate the complexities of holding and securing ether directly.

Cons

  • Liquidity concerns: These ETFs are less likely to offer greater liquidity, given their relatively low amount of assets under management (AUM).
  • Price volatility: The underlying cryptocurrency, ether, is more volatile than traditional asset classes.
  • Expense ratios: These ETFs often will have higher expense ratios than other non-crypto ETFs.

Status and Outlook of Ether Futures ETFs

As of October 2023, ether futures ETFs like the VanEck Ethereum Strategy ETF (EFUT) and the ProShares Ether Strategy ETF (EETH) have had declines in value since their inception. Perhaps awaiting spot crypto ETFs that seem to be on the horizon, investors have shown muted interest in ether futures ETFs thus far.

The SEC’s willingness to approve ether futures ETFs could pave the way for more cryptocurrency-based financial products. The performance of ether futures ETFs is likely to be influenced by broader trends in the crypto market, including technological advances and regulatory changes.

What Is Cryptocurrency?

VIDEO: Ether futures ETFs hit the market
CNBC Television

A cryptocurrency is a digital or virtual medium of exchange that deploys cryptography for security and operates independently of a centralized authority like a government or bank. Some uses for cryptocurrencies are for investments, in transactions, to facilitate smart contracts, and for decentralized finance (DeFi).

Is Ether a Security?

VIDEO: PREPARE: The Ethereum & Bitcoin ETFs Explained
Andrei Jikh

The classification of ether as a security has been a matter of debate among regulatory bodies, legal experts, and the cryptocurrency community. As of October 2023, ether is not considered a security by U.S. regulators. That said, some securities simulate ether’s price moves, such as ether futures ETFs.

Given the evolving nature of the cryptocurrency landscape and regulatory frameworks, it is crucial for investors to stay updated on legal developments that could affect ether’s classification.

Where Can Investors Acquire Ether Directly?

VIDEO: Bitcoin Futures ETFs: What To Know Before Investing
projectfinance

Investors have numerous ways to buy ether directly. Platforms like Coinbase, Kraken, and Binance enable you to buy ether using bank transfers, credit cards, or other cryptocurrencies. You can also seek out decentralized exchanges such as Uniswap or SushiSwap for peer-to-peer trading of ether.

The Bottom Line

An ether futures ETF is a financial instrument that allows investors to gain exposure to ether without owning the cryptocurrency directly. These ETFs invest in ether futures contracts. Trading on traditional exchanges, these ETFs offer the ease of stock-like trading and are regulated, providing a layer of security for investors.

Investing in ether cryptocurrency futures ETFs has benefits and risks. On the upside, these ETFs offer a more straightforward and regulated way to speculate on ether’s price moves, often with tax efficiencies. However, they also expose investors to risks, such as ether’s price swings and the potentially low liquidity of these ETFs. Finally, since these ETFs use futures contracts to track ether prices, there might be discrepancies between the ETF share price and its value in ether.

Sources


Article information

Author: Logan Blevins

Last Updated: 1702198805

Views: 956

Rating: 4.7 / 5 (32 voted)

Reviews: 93% of readers found this page helpful

Author information

Name: Logan Blevins

Birthday: 1979-05-05

Address: 3696 Rasmussen Plains Apt. 019, East Edgar, IL 01574

Phone: +4874937361115009

Job: Taxi Driver

Hobby: Magic Tricks, Chess, Aquarium Keeping, Rock Climbing, Poker, Running, Survival Skills

Introduction: My name is Logan Blevins, I am a candid, spirited, persistent, Gifted, receptive, valuable, unwavering person who loves writing and wants to share my knowledge and understanding with you.