Earlier in August, I reported on the expected launch of Ether-based strategy ETFs that would utilize futures contracts for exposure. Industry experts had circled October on their calendars as the likely debut month for these new funds.
Fast forward to today, and these predictions have proven accurate. From September 29th to October 2nd, well-known fund managers, ProShares and Bitwise among them, officially introduced several Ether futures ETFs. Some of these funds also incorporate Bitcoin futures, broadening their appeal.
Now trading on the NYSE ARCA, these new ETFs warrant a closer look, as it's essential for potential investors to know what these ETFs entail and how they might fit into a diversified portfolio. Let's break down these new products and their possible use cases.
A brief recap of Ether and Ether futures
Ether is the native cryptocurrency of the Ethereum platform. Many are familiar with Bitcoin, but Ether stands out as the second largest digital currency.
What sets Ethereum apart is its dual nature: not only does it facilitate cryptocurrency transactions like Bitcoin, but it also allows developers to create and deploy "smart contracts" and decentralized applications.
This means that while Bitcoin operates primarily as a digital currency, Ethereum, and by extension Ether, functions both as a digital currency and a platform for building applications that run on a blockchain.
When someone interacts with a smart contract on the Ethereum platform, they typically use Ether to pay for that interaction. This transaction fee is commonly called "gas" in the Ethereum ecosystem.
Now as with most assets, Ether also has a derivatives market, mostly consisting of futures. When you buy an Ether future, you're locking in a commitment to buy Ether at a specific price on a certain date.
The primary use cases for Ether futures among traders and investors are hedging and speculation. Hedging with futures acts as a form of protection against adverse price movements. On the other hand, speculation allows investors to make profit from predictions on Ether's future price movements without owning the cryptocurrency directly.
Understanding the new Ether ETFs
Because the legality of a spot Ether and Bitcoin ETF (one where the ETF actually holds the underlying cryptocurrency) is still in limbo with the SEC, current cryptocurrency ETFs in the U.S. are limited to holding Ether or Bitcoin futures only.
Enter the new Ether ETFs from Bitwise and ProShares. Currently, the providers have a total of five funds between them, all listed on NYSE ARCA:
The pure-play Ether futures ETFs from both providers are the Bitwise Ethereum Strategy ETF (AETH) and ProShares Ether Strategy ETF (EETH) respectively. Both hold a portfolio of monthly Ether futures contracts, collateralized by cash equivalents like Treasury bills. AETH charges a 0.85% net expense ratio, while EETH charges a higher 0.95% expense ratio.
Both providers have also launched hybrid strategies that marry Bitcoin and Ether futures, such as the Bitwise Bitcoin and Ether Equal Weight Strategy ETF (BTOP) and the Bitcoin & Ether Equal Weight Strategy ETF (BETE). As their name suggests, these ETFs hold a portfolio of 50% each in Ether and Bitcoin futures respectively, providing indirect exposure to the two dominant cryptocurrencies in a single ticker.
ProShares also offers a market-cap weighted variant, the Bitcoin & Ether Market Cap Weight Strategy ETF (BETH).Unlike BETE, BETH holds Bitcoin and Ether in a proportion corresponding to each one's market share, with Bitcoin being significantly larger.
An important distinction to understand with these new ETFs is that they are not equivalent to a direct investment in Ether itself.
When someone buys Ether directly, they own a piece of the actual cryptocurrency and can hold it, use it for transactions, or interact with the Ethereum network's various functionalities.
On the other hand, investing in an ETF that deals with Ether futures means investing in a fund that has positions in contracts on the future price of Ether, rather than the cryptocurrency itself.
This adds a layer of abstraction and complexity. With an ETF, the investor is essentially placing their trust in the fund manager's ability to navigate the futures market effectively. Additionally, the performance of the ETF may not perfectly mirror Ether's price movements due to the intricacies of futures contracts, associated fees, and the strategies employed by the ETF.
Finally, while Ether can be held indefinitely, futures contracts have expiration dates, which can introduce additional considerations like roll costs when transitioning from an expiring contract to a new one, much like what existing commodities futures ETFs deal with.
This content was originally published by our partners at ETF Central.