Blog: What is Ethereum spot ETF?
Ethereum is the largest decentralized platform on the market based on blockchain technology. It is possible to build various decentralized applications (DApp), smart contracts and new cryptocurrencies on top of this platform. Ethereum spot ETFs offer especially investors who are used to traditional investment products an easy and accessible way to invest in this ecosystem. In this blog, we look at what Ethereum spot ETFs are and how they can affect the cryptocurrency market.
Ethereum as an investment
Ethereum is one of the most significant and largest projects in the cryptocurrency world. Unlike Bitcoin, which is designed to act as a digital currency and store of value, Ethereum is built to provide a broad platform for the development of decentralized applications (DApps) and smart contracts. This makes Ethereum much more than just a cryptocurrency; it is a versatile ecosystem that supports a wide range of different innovations and projects.
Ethereum's blockchain has been particularly popular, especially among app developers, which is reflected in the fact that many of the cryptocurrencies on the market are built on top of it. Ethereum serves as the central platform for many of the largest DeFi-services (decentralized finance), NFTs (non-fungible tokens) and digital worlds (Metaverse) projects on the market. This makes it a vital piece in numerous blockchain-based solutions.
When talking about Ethereum as an investment, we often refer to a cryptocurrency called ether (ETH). Ether is the fuel of the Ethereum ecosystem, used as a means of payment for network transactions and execution of smart contracts. In other words, using the Ethereum blockchain requires ether. When the use of the Ethereum platform increases, the demand for ether also increases, which is naturally also reflected in the development of ether's value. Thus, ether is an attractive investment target, especially for those who believe in the growth and development of the Ethereum ecosystem and its innovations.
Although Ethereum is by far the largest and most popular platform protocol in the cryptocurrency market, it has gained several significant competitors in recent years. However, Ethereum still has a considerable lead due to its long history and robust ecosystem. Improvements brought by Ethereum's major 2.0 update, such as the move to a more energy-efficient proof-of-stake consensus mechanism, have further improved the network's efficiency and attractiveness to investors. The continuous development of Ethereum and the growing popularity of innovations built on top of it make it a very attractive investment target.
What are futures and spot ETFs?
The Ethereum ETF as a whole includes two types of ETF funds. These are Ethereum futures and spot ETFs. In the investment market, future refers to a derivative contract in which the investor undertakes to buy and sell the target asset of the future (e.g. ether) at a certain time. There are several different Ethereum futures ETFs on the market, but what they have in common is that, unlike spot ETFs, they are not directly linked to ether's price development. When investing in an Ethereum futures ETF, the investor invests in derivatives that follow the price of ether instead of ether. In practice, this means that the investor benefits from ether price changes without direct ownership. This offers investors the opportunity to take advantage of Ethereum price fluctuations without the need to manage physical cryptocurrency.
The Ethereum spot ETF offers investors the opportunity to invest in ether at its spot price. This is significantly different from the previously described futures ETF, where investors speculate on the current spot price of ether instead of the future price. In the case of the Ethereum spot ETF, the ETF shares always contain a corresponding amount of real ether tokens. So it's not just derivatives that follow the price of Ethereum.
ETF products that follow the price development of cryptocurrencies can be seen as a more approachable alternative, especially for larger institutional customers, compared to traditional crypto investing. ETF funds are also mostly very cost-effective from the investor's point of view, as they do not require active portfolio management. In addition, ETF trading is familiar to investors, as their shares can be bought and sold in a similar way as, for example, stocks.
What is Ethereum spot ETF?
The Ethereum spot ETF is an exchange-traded fund that directly tracks the spot price of Ethereum's ether token (ETH). This means that the fund directly owns ether, and its value reflects the market price of ether in real time. The Ethereum spot ETF offers investors the opportunity to invest in ether without having to directly purchase and manage the cryptocurrency themselves. This makes investing in Ethereum easier, especially for larger institutions and investors who are used to investing in traditional investment products such as stocks and mutual funds.
In general, Ethereum spot ETFs make Ethereum more accessible to the general public and institutional players. In particular, it is easier for institutional players to participate in the market when the ETF issuer and its partners handle the purchase and storage of ethers on their behalf.
Even though investing in ETFs contains many good points, it is still possible to identify clear weaknesses compared to investing in cryptocurrency directly. The biggest strengths of direct cryptocurrency investing compared to ETF investing are the often lower cost structure of direct cryptocurrency investing, more flexible trading hours and the fuller utilization of the technology offered by Ethereum.
Bitcoin spot ETFs broke several records in the first months, and the expectations of cryptocurrency experts are very high for Ethereum spot ETFs as well. It will be interesting to see how popular Ethereum ETFs become compared to Bitcoin spot ETFs. Ethereum's market cap is currently about a third of Bitcoin's market cap, so the popularity of fresh spot ETFs is not expected to rise to the level of Bitcoin's counterparts.
Ethereum spot ETF and its effects on the market
At best, Ethereum spot ETFs can change the dynamics of the cryptocurrency market. One of the key impacts is that they make investing in Ethereum even easier and more accessible to a wider audience. This is especially important for institutional investors, who can now participate in the market without having to worry about the safe custody of ether. In addition, Ethereum spot ETFs can also increase market liquidity and stability.
The high demand for the Ethereum spot ETF would naturally also be reflected in the price of ether, because the issuers of ETFs have to purchase ether from the market to cover the demand for the ETF. The resulting price movement may in turn attract more investors and accelerate the price development even more. At the same time, it can also strengthen Ethereum's position as the second largest currency in the cryptocurrency market. Ultimately, Ethereum spot ETFs also serve as a good example for potential spot ETFs of other cryptocurrencies. This development can open up new investment opportunities and promote the acceptance of cryptocurrencies in traditional financial markets.
Summary
Ethereum spot ETFs open up new opportunities for both private and institutional investors. They make investing in Ethereum easy and safe without the need for direct cryptocurrency management. The Ethereum spot ETF is also a huge deal for the entire Ethereum ecosystem and its position in the eyes of investors. The success of Ethereum spot ETFs can at best encourage the development of similar products for other cryptocurrencies as well. This can contribute to the wider acceptance and integration of cryptocurrencies into traditional financial markets.
Mikko Soon
Head of Northcrypto Private
Last updated: 25.07.2024 14:00
