Today, nine spot Ethereum ETFs debuted on the open market for trading. This provides another way for investors to invest in Ethereum, and a way for many investors who haven't to been able to previously invest in Ethereum to now gain exposure to the asset.
Before proceeding with a discussion about spot Ethereum ETFs, it's important to understand that investing in spot Ethereum ETFs is similar to investing in actual Ethereum. Therefore, it's still important to understand what Ethereum is. The previous Escient Financial Insights article Ethereum – The Who, What, When, Why, and How provides a great summary and overview of Ethereum.
What is a Spot Ethereum ETF?
A spot Ethereum ETF is an investment fund that invests in Ethereum. These funds actually take cash that's invested in the fund and go to an exchange and buy ether (ETH), the actual main token asset of the Ethereum network. It's an alternative way to invest in Ethereum without actually going to an exchange (such as Coinbase) and buying actual ether yourself.
Up until now, U.S. investors only had access to Ethereum inside an ETF with futures ETFs. Futures are contracts that speculate on the future price of an asset. In this case, the performance of those futures ETFs would be based on how well the investment managers of those funds are able to trade Ethereum futures contracts. With the Ethereum futures ETFs there's an increased chance that they wouldn't be able to track the price of Ethereum accurately. With spot Ethereum ETFs, since the funds actually buy and hold actual ether, they should track the performance of Ethereum very accurately.
Where Can You Buy or Invest in a Spot Ethereum ETF?
Spot Ethereum ETFs open up investing in Ethereum within a variety of accounts. Essentially, any account that allows you to invest in an ETF could theoretically invest in a spot Ethereum ETF. This includes taxable brokerage accounts, traditional IRAs, Roth IRAs, Solo 401(k)s, and even employer-sponsored retirement accounts (such as 401(k)s, 403(b)s, etc.) as long as the manager and sponsor enables it as an option. It's important to note that it's possible not all broker-dealers will allow trading of these spot Ethereum ETFs at this time.
If you decide that Ethereum is the right investment for you, but you would rather invest in actual Ethereum instead of through an ETF, check out the previous Escient Financial Insights article How and Where to Make Your First Purchase of Cryptocurrency.
Does a Spot Ethereum ETF Mean There is Less Risk?
It's important to understand that there are different kinds of risk associated with any investment. Investing in a spot Ethereum ETF may reduce some risks related to investing in Ethereum specifically, but does not necessarily reduce all risk, and could actually increase the overall risk of an investment portfolio. Many of the investment managers that are now offering spot Ethereum ETFs (as well as the custodians they are using) are well-known and trusted, but Ethereum itself is still a highly volatile asset that will likely continue to experience large swings in it's price over shorter periods of time, especially when compared to many traditional assets.
While there is a chance that there could be less volatility with Ethereum over time, spot Ethereum ETFs buying up a lot of the Ethereum supply could reduce liquidity in the asset. That would mean that there is less ether on the open market available for buying and selling. Reduced liquidity could actually increase volatility, which would result in large price swings over short periods of time.
One of the risks that Ethereum ETFs could solve is the risk involved with the custody of Ethereum. There have been issues with some centralized exchanges in the past where investors lost some of all of their Ethereum or other crypto assets due to mismanagement of the centralized exchange. Some investors have also lost their Ethereum or other crypto assets due to there own mismanagement while self-custodying their assets (i.e. forgetting a seed phrase, losing a backup, or sending to a wrong address). With Ethereum ETFs, there could be less risk with a qualified and trusted custodian holding the Ethereum within the fund. It's important to note here, however, that the majority of the approved spot Ethereum ETFs are using Coinbase for the custody of their Ethereum, which is a centralized exchange. Coinbase is the first and currently still the only publicly-traded centralized crypto exchange.
Ethereum May Do Better as a Long-Term Investment
Ethereum has historically had high volatility over short periods of time, but over longer periods of time (such as 4 to 5 years) has generally seen positive performance and returns. If that trend continues, then Ethereum should be a better investment for long-term goals versus short-term goals. Note that past performance should not be taken as a predictor for future performance.
Ethereum also has more competition that some other cryptocurrencies, such as Bitcoin. With increased competition, there is a possibility that a better alternative could come along, reducing the use of Ethereum, and this reducing the prospects for long-term performance. It's important to be aware of changes in the crypto industry and market to ensure investments are still inline with outlooks and goals.
Should You Invest in Spot Ethereum ETFs?
Whether or not you should invest in one or more spot Ethereum ETFs really depends on your goals, your current financial situation, your risk tolerance, your need for risk, and more. It's important to evaluate your goals and your current financial situation. Are you already on track to achieve your goals? Are you comfortable with the risk that Ethereum could introduce to your portfolio, especially the short-term risk? If you might come up short with achieving your goals, would an investment in Ethereum potentially improve the probability of success?
Those questions, and more, are important to ask and evaluate before developing and implementing any investment strategy. Investing in spot Ethereum ETFs, or actual Ethereum or other crypto assets, may be right for one investor, but not another. Every individual investor is different and needs to evaluate their own financial plan to determine the right investments for them. This is what Escient Financial does when it delivers personalized financial plans and personalized investment advice to its clients.
Investing in Ethereum does have its risks, as does investing in crypto in general. The previous Escient Financial Insights articles Should You Invest in Crypto? It's not a Simple Answer. and Cryptocurrency Pitfalls provide a good general overview of the advantages and disadvantages, as well as risks and other things, that should be considered before investing in Ethereum or cryptocurrencies.
Investors are still able to invest in Ethereum directly as well. That brings up the question of investing in Ethereum in an ETF in a brokerage account versus investing in Ethereum directly. Investing in Ethereum directly does have some advantages. For example, depending on where you keep your ether there may be no or less annual fees compared to the expense ratio of the ETFs. You also have the ability to hold actual Ethereum instead of something that represents Ethereum, which keeps you more in line with the original thesis of crypto and one of the original reasons for its creation.
Which Spot Ethereum ETFs Should Be Invested In?
As of today, there are nine spot Ethereum ETFs that have been approved by the SEC that have begun trading in the markets. Each has its own advantages and disadvantages. They have different amounts of assets under management, different histories, different experience, different fees, and are traded on different exchanges. Any investor investing in any fund should review the prospectus of the fund to determine if the fund is right for them. Escient Financial is here to provide fiduciary advice to clients so they can make the right choice for their investments, including which assets to invest in and where to invest in them.
How Much Should You Invest in Spot Ethereum ETFs?
The amount of money that any investor should invest in spot Ethereum ETFs (or any investment for that matter) should be dictated by their financial plan, investment thesis, and investment policy statement. It will be a different amount for every investor, and will depend on many factors, including goals, financial situation, risk tolerance, and need for risk exposure. Escient Financial takes great care in providing investment advice to clients that aims to achieve their goals and keeps their risk level at a comfortable level.
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This content is developed from sources believed to be providing accurate information. The information in this material is not intended as investment, tax, or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Digital assets and cryptocurrencies are highly volatile and could present an increased risk to an investors portfolio. The future of digital assets and cryptocurrencies is uncertain and highly speculative and should be considered only by investors willing and able to take on the risk and potentially endure substantial loss. Nothing in this content is to be considered advice to purchase or invest in digital assets or cryptocurrencies.
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