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Pooja Kadia
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  • On May 23, 2024, the US Securities and Exchange Commission (SEC) gave a green light to spot Ether exchange-traded funds (ETFs) in the United States. 
  • An Ethereum exchange-traded fund (ETF) is a financial product that exposes investors to Ether (ETH), Ethereum’s native coin, in regulated U.S. exchanges.
  • These ETFs are subject to trading day restrictions like any other instrument in traditional financial exchanges.

On May 23, 2024, the US Securities and Exchange Commission (SEC) gave a green light to spot Ether exchange-traded funds (ETFs) in the United States. This comes nearly four months after the SEC approved Bitcoin ETF in January 2024 earlier this year. Both these achievements mark a pivotal moment for the entire crypto industry and give a regulatory nod to leading digital assets.

In this article, we look at what Ethereum ETF is, how it functions, and the pros and cons of Ether ETF.

Ethereum ETF Explained

Exchange-traded funds (ETF) refer to the funds that track a specific index and are traded on exchanges. Ethereum ETF is a financial product that exposes investors to Ether (ETH), Ethereum’s native coin, within the regulated markets in the United States (U.S.). 

This means that Ethereum ETF allows investors to participate in the asset without actually purchasing or managing the underlying cryptocurrency. Like Bitcoin ETF, these financial instruments are traded on regulated stock exchanges such as the New York Stock Exchange (NYSE). Investors can buy and sell shares of these stocks during market hours.

The approval and trading of Ether ETF will allow a broader spectrum of investors, who have now stayed away due to regulatory complications and technicalities, to participate. Up until the approval of spot ETH ETF, the only available Ethereum ETF in the U.S. was the futures ETF, which first debuted in October 2023. 

For context, crypto futures are financial contracts that allow investors to agree to buy or sell an asset at a predetermined price at a later date. ETH futures ETF offers users exposure to futures contracts and not the asset directly. On the other hand, spot Ether ETFs track the asset’s current price via direct holdings.

How Do Ether ETFs Function?

Ethereum ETFs function within the regulatory framework of conventional financial markets, allowing access to a regulated and secure means for traditional investors to diversify their portfolios with crypto investments.

These ETFs constitute shares traded on regulated stock markets, making them available to institutional and retail investors.

What is the difference between spot ETH and Ethereum ETF?

The key difference between spot and ETF lies in ownership. Spot allows investors to directly hold and manage their Ethereum by using a medium such as a centralized exchange. With Ether ETF, investors hold shares that track the real-time price of Ether. These shares represent ownership of the underlying asset held by the fund.

These ETFs are also subject to trading day restrictions like any other instrument in traditional financial exchanges. This means that they don’t share the perks of operating 24/7 like in the cryptocurrency market. Instead, Ethereum ETFs are limited to a Monday through Friday trading schedule.

Pros and Cons of ETH ETF

Some of the merits of Ether ETF include the following:

  • Accessibility—The Ethereum ETF is accessible to both retail and institutional investors, allowing them to gain exposure to ETH within a regulated environment.
  • Regulation – They operate within a regulatory framework, which makes them attractive to institutional investors.
  • Simplicity and low operational risks– These financial instruments expose investors to the value of ETH while eliminating the complexities and technical challenges of storing and managing digital assets.
  • Diversification - It allows investors to diversify their investment portfolio with a new asset class.

Some of the drawbacks of Ether ETF include:

  • Tracking error—While spot Ether ETFs are programmed to track the underlying asset's price, minor variations or tracking errors may still occur.
  • Price volatility – Compared to conventional asset classes, the underlying cryptocurrency – in this case, ETH – is still subject to high volatility.
  • Centralization - These ETFs may result in concentration of ETH ownership as institutional investors may purchase large quantities of assets. This may result in centralized control over Ethereum’s decentralized network.

What’s Next?

The U.S. SEC's inclination towards approving Ether futures ETFs, spot Ether ETFs, and spot Bitcoin ETFs potentially creates possibilities for more crypto ETFs. Despite the delayed verdict on spot ETher ETFs, the Commission finally approved the applications on May 23, 2024. More specifically, the agency green-lighted the 19b-4 filings from BlackRock, VanEck, Fidelity, ARK 21Shares, Grayscale Investments, Franklin Templeton, and Bitwise. 

The approval allows the issuers to list and trade spot Ether ETFs on their respective exchanges. However, these firms still require the Commission to approve their fine-tuned Form S-1 defining investor disclosures before they can officially begin trading. BlackRock, for instance, updated its registration statements for its iShares Ethereum Trust (ETHA) with the SEC on May 29. The other issuers are expected to roll in their updated statements soon. Due to a lack of set deadlines, it is unclear how long it would take for the SEC to approve the statements before the issuers can begin trading.

Frequently Asked Questions

Will Ethereum get an ETF?

The Ethereum futures ETF was listed in October 2023 in the U.S. financial exchanges. In addition, the SEC approved the spot Ether ETF on May 23, 2024.

Will the Ethereum ETF be approved?

Companies such as ARK 21Shares, Hashdex, and VanEck were approved on May 23, 2024, to create and launch spot Ethereum ETFs. While the SEC has already approved spot Ether ETFs, the issuers are expected to fine-tune their S-1 registration statements before the US SEC can officially allow them to begin trading.

It is highly recommended to conduct thorough research prior to making any financial decisions. Please note that this article's purpose is solely for educational purposes and the author and the organization, M2, do not influence the reader's investment or trading choices.

Pooja Kadia

With over 7 years of experience working for more than 200 web3 projects, Pooja is a content strategist and growth specialist for blockchain and Web3 companies. Her work has been published across leading publications which have garnered over 1 Million views. Her extensive experience in this field enables her to simplify complex blockchain concepts, making them easily understandable for diverse audiences.

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