The US Securities and Exchange Commission (SEC) approved the first Ethereum-based futures ETFs in the USA. This makes the second-largest cryptocurrency by market capitalization more accessible to institutional investors. However, these products come with some disadvantages, as indicated by the relatively weak trading volume so far.
Almost two years ago, the crypto industry achieved a milestone when the first Bitcoin ETF (Ticker: BITO) was approved in the United States, opening the door to a broader investor base—a significant endorsement for the asset class. Now, various Ethereum ETFs are launching, marking the next digital asset. However, the disadvantages of these futures-based funds, coupled with a more pessimistic market environment compared to two years ago, have left investors with somewhat disappointing trading volumes.
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Eight Ethereum ETFs are entering the market
These new entries include the VanEck Ethereum Strategy ETF (EFUT), Bitwise Ethereum Strategy ETF (AETH), Bitwise Bitcoin and Ether Equal Weight Strategy ETF (BTOP), and three funds from ProShares, including the ProShares Ether Strategy ETF (EETH). Half of these products focus solely on Ethereum exposure, while mixed Ethereum and Bitcoin ETFs have also been approved. The Valkyrie Bitcoin Strategy ETF (BTF) has been a pure Bitcoin fund for two years but will now also include Ether.
Until now, the SEC had not allowed the trading of such funds. It wasn't until August that some analysts recognized an increased likelihood of approval for various Ethereum ETFs, as reported by CVJ.CH. This approval could be an indication of cracks in the SEC's previously crypto-hostile stance towards digital assets, especially after experiencing setbacks in its legal battles with Grayscale and Ripple.
Disadvantages of the products lead to low trading volume
Despite being a milestone for the second-largest cryptocurrency by market capitalization, the first day of trading was unremarkable. The pure Ethereum ETFs from issuers ProShares and VanEck generated only $865,000 and $415,000 in trading volume, respectively. For comparison, the ProShares Bitcoin ETF (BITO) achieved a record volume of over $1 billion on its first day of trading. Of course, these product launches took place in entirely different market conditions. However, the weak start of the Ethereum ETFs may also be attributed to the inherent issues with futures-based products.
As previously explained by CVJ.CH in its coverage of the BITO ETF, futures-based funds often underperform compared to direct investments, especially when more investors take bullish positions on the asset (contango). The issuer must roll over the underlying futures contracts at their expiration into the next futures contract and pay the potential premium of the following contract. These additional costs ultimately impact the ETF investor. As a result, BITO achieved a year-to-date price performance of +55.76% compared to the +67% of the spot markets.
Investors are, therefore, eagerly awaiting an SEC decision on the first spot-based Bitcoin ETF from applicants like BlackRock, Fidelity, and others. Ultimately, approval could pave the way for a spot Ethereum ETF as well. Recently, the crypto conglomerate Grayscale applied to convert its $5 billion ETH trust into a spot ETF.
