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The “next big thing” in cryptocurrency exchange traded funds is expected to arrive this Tuesday with the debut of ethereum ETFs. For those not in the know, ethereum is the platform on which the digital currency known as ether – the second-largest asset in the space – was born.
The debuts of ether ETFs isn’t the seminal event that spot bitcoin ETFs provided, but it does show regulators’ increasingly willingness to allow the marriage of the more credible cryptocurrencies and the ETF wrapper. In crypto terms, ether is in fact legitimate. Confirming as much, it had a market value of nearly $419 billion as of late July 22.
Additionally, the crop of ether ETF issuers includes some of the biggest names in the industry. Think BlackRock, Fidelity, Grayscale and VanEck, among others. That provides some credibility to the ETFs and ether itself, but what really matters to advisors is the relevance of this cryptocurrency in client portfolios and the underlying investment case.
That exercise includes assessing differences between bitcoin and ether. One of the marquee differences between bitcoin and ether is that the former operates on what’s known as a proof-of-work concept while the latter uses proof-of-staking. Staking is one of the issues the SEC took with spot ether ETFs and as such, the funds won’t have that feature.
Understanding Ether
Ethereum is a decentralized platform backstopping smart contracts and distributed applications (dApps) – a trait that speaks to fraud prevention and utility.
“The Ethereum Virtual Machine (EVM) is central to its operations, differentiating it from other digital currencies,” according to VanEck research. “The EVM, a sandboxed virtual stack embedded within each Ethereum node, executed bytecode and smart contracts – self-executing contracts with terms directly written into code, operating without downtime, censorship, or fraud. This innovation shifts the paradigm from traditional contracts requiring intermediaries to automated, trustless transactions.”
The above is an example of why technological advancements are highly relevant to investors considering ether. That goes along with basics such as the macroeconomic environment, market sentiment and regulatory shifts. Said another way, many of the same dynamics that are applicable to traditional asset classes are pertinent in the ether conversation. Speaking of old guard assets and the comparisons with ether, there are risk/reward factors to be evaluated.
“Comparing Ethereum with traditional investment options such as stocks, bonds, or even other cryptocurrencies is crucial for understanding its unique risk and reward profile,” adds VanEck. “While Ethereum offers high growth potential, it also comes with higher volatility and risks, particularly regulatory and technological challenges.”
Is Ether Buy-Worthy?
The point of this space is not to give specific buy and sell recommendations. Due diligence is required and that’s true with ether.
Advisors and investors attempting to better evaluate the digital currency’s merits would be well served focusing on applications, market share and technological advantages.
“Ethereum's platform supports numerous other cryptocurrencies. Its influence is clear when you consider that, as of September 2023, 10 of the top 20 cryptocurrencies are based on or linked to Ethereum,” concludes VanEck. “Ethereum’s versatility extends beyond cryptocurrencies to DeFi, games, and major organizations integrating blockchain technology.”