A word about ETFs is technically not new, but the buzz about ETFs has increased over the last year, and this is because of their potential impact on the cryptocurrency market. ETFs in cryptocurrencies enable more people to access these cryptocurrencies easily and bring more people into the market. Crypto ETFs started with Bitcoin ETFs, which debuted in Canada in March 2021, and on the New York Stock Exchange in October 2021. Ethereum futures ETFs may be next on the line, but to understand what they are, we would first take a look at traditional ETFs and Ethereum Futures.
What Are ETFs And How Do They Work?
An ETF or “Exchange Traded Fund” is a kind of basket of investment securities that works similarly to mutual funds and can be bought and sold on the stock market through brokerage accounts just the way you would do for normal stocks and can be traded at any time during the day. They are designed to keep track of the price of a single asset or a diverse collection of assets.
So how does it work? As already stated, ETFs are baskets of investment securities. Now imagine one of these baskets has gold, and you want to purchase gold as an investment but have just $700. This would probably get you just over 10 grams of gold which would be quite an impractical purchase. Purchasing a gold ETF instead will allow you to buy a share of that basket of gold without actually owning gold. The share you bought can be traded on exchanges for a profit.
Exchange-Traded Funds In Crypto
Just as ETFs track the price of a single asset or group of assets, Cryptocurrency Exchange Traded Funds track the price of an individual crypto token or a group of tokens and provides a means of investing in cryptocurrency that involves low ownership costs, and provide investors with a way of investing in cryptocurrency without having to spend all the time and go through all the learning processes involved in cryptocurrency trading.
Crypto ETFs allow potential investors the opportunity to invest in crypto while not having to manage these crypto-assets themselves. Cryptocurrency Exchange Traded Funds are of two kinds:
- The first kind is more straightforward and is essentially backed by actual cryptocurrencies. The asset management firm the investor chooses to use will be involved in buying the crypto and offering the ownership of these crypto tokens to the public in the form of shares. This means that the investors can now own and trade the crypto tokens for a profit through this asset manager without the costs and risks of truly owning and trading crypto.
- The second kind, though, is a variant that provides an alternate way of gaining exposure to a crypto asset by keeping track of secondary contracts and financial instruments that derive their value from a primary fundamental crypto asset. Futures contracts are one of the most popular derivatives, with many ETF proposals submitted to the Securities and Exchange Commission geared towards tracking the price of crypto futures on exchanges.
Ethereum is the second-largest cryptocurrency by market cap. It is also the second most popular one, achieving household name status as far as cryptocurrencies are concerned. It is well known for its smart contract capabilities and support for DeFi applications which provide numerous financial services without the need for regular financial third parties like banks and other financial institutions.
Ethereum futures are a type of financial instrument tied to Ethereum. It essentially is an agreement to purchase or sell Ethereum at a specified price on a specified date. It is generally used to manage risks by locking in prices. They allow investors to seize the benefits of change in the price of Ethereum. Investors can either go long or go short if they expect a spike in the prices or a fall, respectively.
Ethereum futures allow investors who do not hold Ethereum to make assumptions about the price changes and earn some profits. These investors can open a position using USDT, and any profits earned or losses incurred will be in USDT.
Ethereum Futures ETF
An Exchange Traded Fund for the Ethereum futures derivative invests in Ethereum futures, which means that they invest in agreements to sell or buy Ethereum at a later date for a price that has been agreed upon.
Investors who will be going through asset management firms to buy these Ethereum ETFs will be able to invest in the Ethereum cryptocurrency without actually holding Ethereum.
The establishment of Exchange Traded Funds for Ethereum allows individuals who are new to investing in crypto a more straightforward and lower-risk method of investment.
However, the share prices of Ethereum futures ETFs will mirror the changes in the price of the Ethereum futures contracts rather than that of Ethereum itself. This means that the price of the Ethereum futures ETF will rise if there is a rise in the price of its futures contracts. The price drops with a corresponding drop.
Are There Ethereum Futures ETFs Already?
Physically backed Ethereum ETFs already exist on exchanges in Canada, with funds like Purpose ether ETF (ETHH), Evolve ether ETF (ETHR), and CI Galaxy ether ETF (ETHX) leading the way. However, funds that invest in ether futures are still subject to approval by the SEC.
The most recent application to the United States Securities and Exchange Commission for Ethereum futures ETF was made by Kelly Strategic Management in late November last year with no approval yet. Though, the sudden withdrawal of previous applications by Proshares and VanEck may point to resistance by the SEC.
What Are The Potential Benefits of An Ethereum Futures ETF?
- People will be able to invest in Ethereum at a very low cost.
- It provides individuals who want to profit from Ethereum an opportunity to do so without having to bother about the issue of storage of assets like ether or USDT. It takes away the risk of losing funds through wallet hacks.
- Since these Ethereum ETFs are being traded on exchanges, they will be regulated by the government through the Securities and Exchange Commission, thus further protecting the investors from risks. In Canada, the Canadian Investor Protection Fund can provide cover in case the asset management firm holding the investor’s ETF assets becomes insolvent.
Despite Ethereum being a beneficial cryptocurrency with many functionalities to explore, especially in the DeFi and NFT spaces, some people may lack the time and the knowledge that is required to own the cryptocurrency regularly.
This, however, doesn’t mean that these individuals shouldn’t profit from Ethereum. With the establishment of ETFs, they can do this at low costs and have regulatory protection from the government.