Ether futures exchange-traded funds (ETFs) hold derivative contracts but don't trade in ether (ETH) tokens directly. This allows investors more comfortable with regulated U.S. exchanges to engage in this market. Unlike spot cryptocurrency ETFs, which hold ETH directly, ether futures ETFs hold contracts tied to the crypto token's value and have shares that trade on regulated exchanges.
A type of exchange-traded product, ether futures ETFs allow investors who don't have crypto wallets or are leery of unregulated crypto exchanges to speculate or hedge on ether's price moves. Futures are agreements to buy or sell ether at a specific price in the future, allowing the ETF to track ether’s price indirectly. Spot ether ETFs, which hold crypto directly, were effectively approved by the U.S. Securities and Exchange Commission (SEC) in May 2024, and they began trading on U.S. exchanges in July 2024.
Key Takeaways
- Ether futures ETFs offer exposure to the price moves of the ether cryptocurrency.
- These funds simulate ether's changes in price, employing futures contracts to do so.
- The first nine ether futures ETFs were approved in October 2023.
- Like the cryptocurrency itself, 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 Ether Futures ETFs
Investing in an ether futures ETF offers 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. While the crypto exchange itself doesn't fall under the SEC's purview and thus is unregulated—the SEC hasn't yet ruled that ether is a security—the funds are.
Nevertheless, ether futures ETFs have risks, such as the potential for price discrepancies (common to all ETFs tracking an asset), rapid price volatility (common to crypto), and potential issues with liquidity (common to more newly traded assets). As such, you need to conduct due diligence before buying shares in an ether futures ETF.
How Does an Ether Futures ETF Work?
ETFs buy securities that become their holdings. They then sell fractionalized shares on exchanges representing shares of their portfolios. In this case, they hold ether futures contracts, which are based on the expected price moves of the cryptocurrency native to the Ethereum blockchain. Ether futures are standardized agreements to buy or sell ether at a preset price on a future date and trade on regulated exchanges like the CME Globex.
These ETFs roll over contracts as they expire to maintain their holdings in ether futures. Shares in them trade on regulated stock exchanges, making them accessible to retail and institutional investors.
One important trait of ether futures ETF, common to all such funds, 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.
The Ethereum blockchain plays a crucial role in decentralized finance (DeFi) and non-fungible tokens. Its digital tokens serve several purposes within the ETH ecosystem, including enabling transactions and powering smart contracts. The network has transitioned to a proof-of-stake (PoS)consensus model, which means it uses far less energy than Bitcoin. While bitcoin miners must outcompete one another, "validators" on the ETH platform are randomly selected to confirm and validate transactions. This system randomizes who gets to collect fees rather than using a competitive rewards-based mechanism like proof-of-work.
Though that might be better for the climate, it could make ether more like a security, in which case ETH would have to meet the same transparency and other regulations companies face when listing their shares. This was among the reasons ETH ETFs were held up in the U.S., not being effectively approved until May 2024, months after it approved the first 11 Bitcoin spot ETFs for the U.S. market.
BlackRock (BLK) and Fidelity are among the major investment firms that applied and received approval from the SEC to create spot ether ETFs, which began trading in July 2024.
The SEC was notoriously skittish in approving bitcoin ETFs—a 2023 appeals court ruling seemed to force its hand—having turned down many applications before 2024.
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 regulated exchanges, 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: Given their relatively low assets under management, these ETFs are less likely to always have enough liquidity.
- Crypto's unregulated platforms: While ether futures ETFs are regulated, the crypto tokens whose value they track are traded on exchanges that are not.
- Price volatility: The underlying cryptocurrency, ether, is more volatile than traditional asset classes.
- Expense ratios: These ETFs often have higher expense ratios than other non-crypto ETFs.
- Spot ETF rivalry: They could prove less attractive given the approval of spot ETH ETFs.
The Outlook for Ether Futures ETFs
Ether futures ETFs like the VanEck Ethereum Strategy ETF (EFUT) and the ProShares Ether Strategy ETF (EETH) had a lackluster performance in the first month after they launched, but their values increased substantially once spot bitcoin ETFs were approved and the value of ETH spiked. In their first six months of trading after their October 2023 debuts, EFUT's value was up about 78% while EETH's was up 105%.
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?
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 DeFi.
Is Ether a Security?
Whether ether should be classified as a security has been debated among regulators, legal experts, and the cryptocurrency community. The SEC hasn't yet labeled ETH a security, and its go-ahead for spot ETH ETFs in May 2024 makes that far less likely.
Where Can Investors Acquire Ether Directly?
Investors can buy ether directly on platforms like Coinbase, Kraken, and Binance. You can do so with bank transfers, credit cards, or other cryptocurrencies. You can also seek out
decentralized exchanges such as Uniswap or SushiSwap for peer-to-peer trading.
The Bottom Line
An ether futures ETF allows investors to gain exposure to ether without directly owning the cryptocurrency. These ETFs invest in ether futures contracts. Traded 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. They are also more efficient tax-wise. However, they also expose investors to risks such as ether’s price swings and potentially low liquidity. 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.
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