Wrong ETF. Why management companies need future funds for Ethereum

Why management companies need futures ETFs for Ethereum cryptocurrency

We tell you why, despite the low excitement, the first exchange-traded funds for Ethereum may be a bet for the future, and what management companies see as the price of the second-largest cryptocurrency

In the U.S., the battle for pioneer status in the market of exchange-traded funds (exchange-traded funds, ETFs) focused on leading crypto-assets is unfolding. While the first such funds, both those already operating and those awaiting regulatory approval for launch, were related exclusively to Bitcoin, since the beginning of the fall, new ETFs that allow investors to speculate on the price of the second-largest cryptocurrency have become the focus of attention.

In the context of the cryptocurrency market, ETFs give investors the ability to follow the price movement of coins without having to hold them themselves. Instead of dealing with exchanges and wallets on their own, an investor can buy ETF shares through regular brokerage accounts. This is a more familiar form of investing for many clients of management companies or pension funds in the United States.

The U.S. Securities and Exchange Commission (SEC) has given the go-ahead for the creation of several types of bitcoin ETFs, particularly those based on futures contracts. Futures-based ETFs do not provide direct ownership of the cryptocurrency and do not involve delivery (i.e., buying it on the market), unlike so-called spot ETFs. Instead, they track futures contracts that forecast its price at a future date. It was futures funds for Ethereum that several market players launched on Oct. 2 at once.

ProShares, Bitwise, and VanEck, among others, debuted their own Ethereum funds after previously receiving approval to launch them from regulators. A few hours before the U.S. market opened and trading in the funds began, the price of the ETH cryptocurrency rose by almost 5%, but already during the trading session it went down, and over the course of the day, it fell even lower, losing all of its growth.

ETH/USD
1 655 +0,8 (0,05%)

The launch of the first Ethereum-linked ETFs came two years after the first bitcoin futures ETF - Bitcoin Strategy ETF from ProShares, whose shares are traded on exchanges under the ticker BITO - was launched in the United States. At that time, the launch took place at the peak of excitement around the crypto market, when the rate of bitcoin and other cryptocurrencies reached historical records. Now the situation is somewhat different: the crypto business is experiencing tangible pressure from regulators around the world, and the volume of trading on crypto exchanges has fallen to a 3-year low.

The cumulative trading volume in the new ETFs has totaled less than $2 million in a 24-hour period, a marked contrast to when ProShares' bitcoin futures ETF was launched in 2021. Back then, the fund's assets at launch reached $1 billion fairly quickly. The company was unable to sustain that momentum going forward, and inflows into the ProShares ETF slowed over time.

An ETF, but not a futures ETF

It's likely that even if activity in new Ethereum-ETFs remains relatively low, the companies launching them will still promote them to investors. Bloomberg analysts estimate that the open interest in ETH futures is roughly 20% of the bitcoin futures market. If Ethereum ETFs take up at least a portion of that volume, demand for them could be $100 million to $200 million.

The new crypto funds emerged amid investors' expectations of spot, rather than futures-based cryptocurrency ETFs. It is the spot ETF that will give investors access to the cryptocurrency itself, and at its current market price. The need to provide the underlying asset in a spot ETF should force management companies to actually buy cryptocurrency. Investing in a futures ETF is effectively just betting on the later price of the asset without any market impact.

Grayscale has successfully capitalized on the news backdrop surrounding the launch of futures funds and announced that it has applied to convert its own investment trust for Ethereum into a full-fledged spot ETF. Its trust is now the world's largest Ethereum investment product with nearly $5 billion under management.

The company has similar trusts for bitcoin, Litecoin, ZCash, and other cryptocurrencies, and has been suing the SEC for several years, challenging the regulator's refusal to convert its bitcoin trust into an ETF. In August, a federal judge's ruling forced the Commission to reconsider its position, which was seen in the cryptocurrency community as a positive precedent. This is probably what motivated Grayscale to make another attempt, but now for its Ethereum trust.

ProShares, Bitwise VanEck, and several other management companies, including financial heavyweights BlackRock and Fidelity Investment, are also awaiting the SEC's decision on whether to launch their own full-fledged spot bitcoin ETFs. But the chief U.S. exchange regulator has already postponed a decision on each of them multiple times, and it still has time to evaluate applications until 2024. Until a decision is made, investors are forced to trade futures contracts or buy the cryptocurrency directly.

Betting on "ether"

In general, existing crypto products have not generated significant interest among U.S. investors, even though, according to the same Bloomberg, all five of the most successful ETFs in 2023 are related to cryptocurrencies. Each of them showed notable growth, but collectively their turnover this year amounted to less than $30 million.

But despite the relatively low performance, investor interest in Ethereum could flare up if its prices recover to previous highs, especially since many of them prefer ether to Bitcoin as they see many options for using its blockchain as infrastructure for other projects and financial services.

Back in May, a few months before the launch of its Ethereum-ETF, VanEck analysts published a large report in which they shared the results of their research into the technical component of the Ethereum blockchain and its prospects. Based on their own calculations and justification for the demand for the ETH cryptocurrency as "fuel" for future infrastructure, they predicted a range of future prices for the coin.

According to their estimates, by 2030, the price of ETH in the "base" scenario will be at $11,848, and in the "bullish" scenario, the coin will cost more than $51 thousand. At the same time, in the worst-case scenario and the lack of proper demand, the ETH rate, according to their estimates, can fall to almost $300.