How Ether Futures ETFs Work and How To Invest

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, if ever approved, would 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 would hold crypto directly, have thus far been turned down by the U.S. Securities and Exchange Commission (SEC).

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.

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. ETFs in the U.S. can't yet hold ether, although funds holding ether trade on Canadian exchanges. In January 2024, the SEC approved the first 11 Bitcoin spot ETFs for the U.S. market but hasn't approved comparable ETFs for ether.

BlackRock (BLK) and Fidelity are among the major investment firms that have applied to create spot ether ETFs. However, as we have reported, these applications will not likely be approved soon. 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. Ether's PoS model gives the SEC further reason not to allow spot ether ETFs for now, beyond concerns over the crypto world's propensity for major frauds and market manipulation.

Pros and Cons of Investing in Ether Futures ETFs

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.

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. While the rise in crypto prices has driven up the value of these futures ETFs, the approval of spot ether ETFs could mean investors would have far less need for them.

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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