How Ether Futures ETFs Work and How To Invest

An ether futures exchange-traded fund (ETF) is an investment vehicle that enables exposure to ether (ETH), the native cryptocurrency of the Ethereum blockchain, through futures contracts. Unlike spot cryptocurrency ETFs, which hold ether directly, an ether futures ETF invests in ether futures contracts that trade on regulated commodity exchanges.

An ether futures ETF enables investors to speculate on the price moves of the native cryptocurrency of the Ethereum network. Unlike traditional ETFs that hold the underlying assets, these ETFs hold ether futures contracts. These contracts are agreements to buy or sell ether at a specific price in the future, allowing the ETF to track ether’s price indirectly.

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. Additionally, these ETFs are regulated, offering a layer of protection.

However, they also carry specific risks, such as the potential for price discrepancies because of the futures-based structure, rapid price volatility, and problems of liquidity issues. As such, you should take caution and conduct due diligence before making shares in an ether futures ETF part of your portfolio.

How Does an Ether Futures ETF Work?

In a typical exchange-traded fund, the fund buys securities that become its holdings. The ETF then offers fractionalized shares on exchanges.

An ether futures ETF buys futures contracts based on the price of ether, the cryptocurrency native to the Ethereum blockchain. The ether futures contracts are standardized agreements to buy or sell ether at a predetermined price on a future date and trade on regulated exchanges like the CME Globex. The ETF sells shares as fractionalized exposure to these futures contracts, which are rolled over as they reach their expiration dates to maintain exposure to ether.

These ETFs trade on stock exchanges, making them accessible to retail and institutional investors.

In the United States, there are no ETFs that invest directly in ether, although there are some that trade in Canada. In January 2024, the Securities and Exchange Commission approved the first 11 Bitcoin spot ETFs for the U.S. market, but none have been approved to invest in ether at the time of writing.

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 the regulatory frameworks of their markets, 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: These ETFs are less likely to offer sufficient liquidity, given their relatively low amount of assets under management (AUM).
• Price volatility: The underlying cryptocurrency, ether, is more volatile than traditional asset classes.
• Expense ratios: These ETFs often will have higher expense ratios than other non-crypto ETFs.

Status and Outlook of Ether Futures ETFs

Ether futures ETFs like the VanEck Ethereum Strategy ETF (EFUT) and the ProShares Ether Strategy ETF (EETH) had lackluster performances in the first months after they launched, but their values increased substantially over the following months. As of Jan. 2024, EFUT has reported lifetime gains of 26% and EETH gained 36% since inception.

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.

The Bottom Line

An ether futures ETF is a financial instrument that allows investors to gain exposure to ether without owning the cryptocurrency directly. These ETFs invest in ether futures contracts. Trading 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, often with tax efficiencies. However, they also expose investors to risks such as ether’s price swings and the potentially low liquidity of these ETFs. 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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