The race to launch a spot (physically backed) Bitcoin ETF has largely overshadowed another development that is poised to intertwine the cryptocurrency and ETF industries – the likely impending debut of the first U.S.-listed Ether strategy (futures-based) ETF.
According to a report from Bloomberg, SEC sources indicate that the government may allow several ether futures exchange traded funds to launch in October," says Ron Geffner, partner at Sadis & Goldberg. "If the ETFs launch, they would be the first U.S.-listed ETFs tied to Ether, the second most valuable cryptocurrency by market cap."
Notably, several heavyweights in the asset management arena, some with previous experience operating Bitcoin futures ETFs, such as ProShares, VanEck, Roundhill, Volatility Shares, Direxion, Bitwise, and Valkyrie, have all recently thrown their hats into the ring, filing prospectuses for such offerings.
This emerging shift signals a potential convergence of traditional finance and the rapidly evolving world of cryptocurrency. If approved, these Ether strategy ETFs could also represent a nuanced change in the SEC's stance towards cryptocurrency.
Over the past year, the regulatory body has been notably stringent, acting against major brokerage platforms such as Coinbase (NASDAQ:COIN) and Binance. Approval for these ETFs could indicate the SEC's growing comfort and perhaps a more accommodating approach to the integration of digital assets within traditional financial frameworks.
Here's all you need to know about these pending Ether future ETFs.
A Brief Overview of Ether
Ether, often just called Ethereum after the platform it runs on, is a type of digital currency or cryptocurrency. Like its more famous sibling Bitcoin, it's a decentralized currency, meaning it isn't governed by any central authority or government.
Here's how it works: Ethereum operates on a blockchain, which is a kind of digital ledger. Within this blockchain, developers can create applications. These applications, known as "smart contracts", execute automatically when certain conditions are met. Ether is the 'fuel' or 'gas' used to power these contracts. So, when someone wants to run an application or make a transaction on the Ethereum platform, they use Ether.
What's it used for? Beyond facilitating smart contracts on the Ethereum platform, Ether can be used as a general digital currency for buying goods and services, much like its larger cousin, Bitcoin. It's also often held as an investment, with the hope that its value will increase over time.
Traditionally, investing in Ether meant buying the cryptocurrency directly. Investors would open a digital wallet, purchase Ether from an exchange, and store it in their wallet. It's an investment that carries a fair amount of risk given the cryptocurrency's price volatility but has attracted many for its potential for high returns.
Understanding Ether Futures ETFs
When we discuss Ether futures ETFs, we're venturing into a territory that's distinct from traditional spot Ether investments. Unlike spot Ether, where an investor directly purchases the cryptocurrency, these ETFs are designed to track futures listed on prominent exchanges like the CME.
Rather than directly holding Ether, these ETFs safeguard their collateral in cash-equivalent instruments. This includes assets like Treasurys, commercial paper, and repurchase agreements. But what exactly are the futures these ETFs employ?
In simple terms, a future is a contractual agreement to either buy or sell an asset, in this context, Ether, at a specific date in the future for a price that's agreed upon today. This means investors aren't really buying Ether on the spot; instead, they're speculating on its future price. This speculative nature and the volatility of Ether's price introduce a range of inherent risks.
One of the primary considerations with Ether futures ETFs is the phenomena of contango. In futures markets, contango is observed when future prices surpass spot prices. This scenario can lead to potential losses for investors, especially when they're rolling over futures contracts.
Another challenge is the tracking error. Ideally, an ETF should reflect the performance of Ether futures accurately. However, discrepancies can arise, known as tracking errors, where the ETF's performance doesn't perfectly match that of its underlying assets. This can be due to a variety of factors, from management strategies to the effects of contango or backwardation.
Furthermore, the very nature of the cryptocurrency market presents challenges. Unlike traditional markets, cryptocurrencies, including Ether, operate 24/7. In contrast, ETFs are confined to regular market hours. This difference in operating hours can lead to potential price mismatches between the ETF and Ether, especially during periods of high volatility.
Lastly, we can't ignore the associated costs. Managing an ETF incurs costs, and these are passed onto investors in the form of management fees. Additionally, the very nature of futures contracts, with their set expiration dates, means there's a need for regular rollovers. This introduces turnover costs, which can impact the overall returns.
This content was originally published by our partners at ETF Central.