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Understanding Ethereum as an Investment

After the introduction of bitcoin spot ETFs, all eyes are on a potential Ethereum ETF.

If approved, it will be a huge moment for Ethereum, allowing investors to easily add Ethereum to their portfolios without having to manage crypto wallets: it will bring ETH to the masses.

However, Ethereum ETFs will look much different than bitcoin ETFs. Ethereum offers rewards in the form of staking yields, similar to dividends in the traditional financial world, which bitcoin doesn’t have. ETH also has utility outside of its investment potential – you need it to run transactions on the Ethereum network.

In this guide, we’ll walk through Ethereum ETFs from start to finish, with particular attention to that key question: should you invest in them?

Staking: The Big Question

The big question on Ethereum ETFs is, “How will they deal with staking rewards?”

After Ethereum transitioned to a Proof-of-Stake consensus mechanism, staking has become a core function: participants lock up their ETH, which is then used to validate new transactions, and they are paid back in “staking rewards.” (Learn more about staking in our beginner’s guide.)

The Ethereum algorithm selects validators to check each new data block based on how much crypto you’ve staked. The more you stake, the higher your chance of being selected. If selected, the validator receives newly minted crypto as a reward for their work, also called “yield.”

In this way, staking yields are often compared to dividends in the traditional finance space. Where dividend yields are a share of profits distributed by corporations, staking yields are rewards given for participating in the validation process.

Historically, staking has proven more volatile than dividends, but yielding higher rewards on average.

Ethereum ETFs Around the World

While SEC approval for a US fund remains in the air, Ethereum ETFs have been running in Canadian and European markets for several years.

Funds like the CI Galaxy Ethereum (Ticker: ETHX.B) and 3iQ Ether Staking ETF (Ticker: ETHQ) were launched in April of 2021 for the Canadian market, while the 21Shares Ethereum Staking ETP and the VanEck Ethereum ETN were launched in March 2019 and March 2021, respectively.

A CoinGecko study reveals that Europe dominates the global Ethereum ETF scene with a market share of over 81.4% and $4.6 billion AUM. Canada is a not-so-close second with a 16.6% market share and $949 million AUM.

So, how do these Ethereum ETFs deal with staking? Some spot ETH ETFs provide Ether staking rewards, while others do not.

For example, 21Shares’ fund currently offers yield rewards at 1.48%: they do the staking for you, then pay you a percentage of the return. It’s also one of the largest crypto asset ETFs by market cap, with a total AUM of $380.5 million.

While staking remains a crucial advantage of Ethereum, it has also raised some red flags in the eyes of the SEC. The capability to stake demonstrates a degree of centralization, given that large pockets of contributors now maintain its infrastructure.

We likely won’t see staking rewards offered by Ethereum ETFs anytime soon, with the SEC coming down on platforms that provide centralized staking-as-a-service, like Kraken.

How Will an Ethereum ETF Affect ETH Price?

While a potential ETH ETF is most likely a good thing for Ethereum long-term, there’s much price action to expect before the funds hit the market. One potential strategy is the old trading adage: “Buy the rumor, sell the news.”

In this strategy, investors look to capitalize on market movements by opening a position based on a rumor, and closing it once news is verified. (In other words, they would buy ETH now, then sell after the Ethereum ETF is approved – which may or may not happen!)

Let’s take a look at more recent examples from tech stocks.

In 2024, AI is one of the buzziest topics in tech stocks. Many tech companies are already capitalizing on this influx of interest by incorporating AI into their product line. Nvidia ($NVID), the world’s leading chip maker, was undoubtedly a benefactor in 2023, since it provides much of the AI processing power required by these companies.

In the days leading up to its Q4 2023 earnings announcement, Nvidia saw single-day surges as much as 8.5%. On the day of the announcement, after receiving positive news, the stock surged 10% before opening hours, but fell flat by the end of the day. The day after, the decline continued, as $NVID closed down -2.4%.

“Buy the rumor, sell the news.”

In the week leading up to the bitcoin ETF approval, we saw single-day gains of up to 6.9%. Only two days after the announcement, bitcoin tumbled -7.7% and even lost as much as -21.6% from its peak within a week.

Bitcoin prices from 2019-2024. Note that the bitcoin ETF was approved in late January 2024. There is a clear upswing in prices through 2023, especially in Q4 immediately preceding the ETF approval announcement.

Will U.S. Ethereum ETFs Offer Staking Rewards?

Creating a rewards-bearing US-based ETH ETF is no walk in the park. Issuers must provide a framework that fits the SEC’s regulatory frameworks. As mentioned above, the SEC has already offered some concerns against offering staking as an investment product.

On top of that, it may not be rational for issuers to run their validator nodes, given the regulatory risks. We’ll likely see the first batch of issuers have a “plain vanilla” architecture, simply tracking the price of Ethereum without offering rewards.

Rule of thumb: If no rewards are offered, you’d be better buying and staking ETH yourself.

Another downside for ETF providers is that the yield is determined by factors not always in their control. Price volatility, volume, and technical glitches affect how much reward is given when staking. Remember that while the rewards are fixed over time, the amount of staked capital changes, so demand from both the network and investor’s end plays a large role in rewards.

Rule of thumb: If rewards are offered, it may be easier to buy an Ethereum ETF, especially if they offer low fees. The fund will manage the technical headache for you, and you can hold Ethereum directly in your brokerage account.

Additional Investing Opportunities

Given the positive outlook for spot ETH ETFs, how will this impact the overall market, and what strategic investments should investors look to make?

Futures ETH ETFs

Apart from investing in platforms, an investor could also gain exposure by buying and holding futures-based ETH ETFs, like the VanEck Ethereum Strategy ETF and the ProShares Ether Strategy ETF, both available to US investors. In a futures ETF, you are betting on the future price of Ethereum, unlike the spot Ethereum ETFs, which – if approved – will track the price of Ethereum directly.

Buy and Hold ETH

The simplest and most direct way to gain exposure to the potential price appreciation is to buy and hold ETH. Whether through a crypto exchange or a wallet, you could hold Ethereum and take on the volatility risks but never have to pay performance or management fees.

A distinct advantage of holding your ETH is the ability to stake Ethereum and earn yield rewards. Whether by solo staking or using a staking-as-a-service, the decision is ultimately yours – which is more than you’ll get when investing via ETFs.

Invest in Coinbase ($COIN)

Coinbase, which has the infrastructure and know-how to offer staking services, could be a significant beneficiary of Ethereum ETFs for three reasons:

1. Infrastructure: Coinbase has the resources and knowledge to make it a go-to for institutions looking for staking rewards partnerships, including running the validator nodes. (Coinbase is already the custodian of choice for all the U.S.-based spot bitcoin ETFs.)
2. Regulatory Compliance: Coinbase has a long history of commitment to compliance, making it an ideal partner for institutions.
3. Existing Staking Services: Coinbase already has staking services in place in the form of the Earn on Coinbase platform. Coinbase has the resources and experience to simplify the staking process for increased user engagement and revenue.

Investor Takeaway

We believe the approval of a spot Ethereum ETF would be great news for ETH holders in the long-term, though it’s hard to predict the short-term price gains – or whether the approval will happen at all!

Savvy investors can buy and stake ETH right now, using a service like Earn on Coinbase. What an Ethereum ETF will offer is simplified buying and selling, though investors will give up some (or all) of their staking rewards in return for the convenience.

Long-term, we’re believers in Ethereum because it’s the number one smart contract blockchain in the world. It has a sustainable competitive advantage. And while it does not have a traditional management team, it has a capable figurehead in Vitalik Buterin, supported by a strong community.

You don’t need to wait for an Ethereum ETF: in our view, it’s one of the best investments in crypto, right now.

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• Source: https://www.bitcoinmarketjournal.com/ethereum-etfs/