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One of the seminal events in the history of the exchange traded funds industry occurred in January when the Securities and Exchange Commission (SEC) finally approved spot bitcoin ETFs.
As a group, those funds are assembling impressive asset-gathering resumes and thanks in large part to advisors, some of the new spot bitcoin ETF rank among the most successful rookie ETFs to ever come to market. Not surprisingly, the success of the products and the perception that the SEC has liberalized its views on crypto is sparking questions regarding what’s next.
In late May, the commission answered that question, surprisingly approving spot ethereum ETFs. Eight issuers were approved to bring those products to market, but there are still some kinks to be worked out, meaning it could be weeks or months before spot ethereum ETFs debut.
That gives advisors time in which to assess the merit of these ETFs and examine key differences between bitcoin and ether. Ether is the name for the second-largest digital currency while ethereum refers to the network on which it transacts. Indeed, advisors would do well to gain some working knowledge of ether and how it might or might not be applicable in client portfolios.
Evaluate Ether Plumbing
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.
“Staking generates passive income for ether investors willing to lock up their coins. The SEC sued Coinbase based on this interpretation, claiming that staked tokens qualify as investment contracts and should therefore be considered securities (Coinbase disagreed),” notes Morningstar analyst Bryan Armour. “The SEC relies on precedent known as the Howey Test in its conclusion. Where bitcoin fails and ether passes the Howey Test is in the expectation of profits from the efforts of others. Bitcoin miners earn their rewards while staked ether is lent for rewards, almost like interest on a savings account.”
The removal of the staking component from spot ether ETFs is pertinent because the funds could wind up trailing spot ether prices because staking can act as a return enhancer, albeit a modest one. However, it’s one that could add up over time and the absence of that component cannot be ignored regarding spot ether ETFs. There are other considerations.
“As to ether’s viability as an investment, ether is a cryptocurrency that should continue to garner investor attention,” adds Armour. “Ethereum is a major platform that operates using ether as its cryptocurrency. Ethereum’s $450 billion market cap was second only to bitcoin’s $1.3 trillion market cap as of May 29, 2024. No other cryptocurrency was particularly close to its size.”
Don’t Bother with What’s Next
Clients like to ask what’s next. That’s just human nature. When it comes to the next variety of spot crypto ETFs the SEC may or may not approve, advisors shouldn’t devote time to that endeavor.
The cryptocurrency universe is currently comprised of 10,046 tokens and when the list goes beyond bitcoin and ether, the case for related exchange traded products wanes. Go too far beyond the 20 or 30 largest digital currencies and the usage cases certainly and viability decline.
“While the SEC decision-making process around crypto has been mercurial, I don’t expect approval of other cryptocurrencies without them first having a regulated market. So far, that regulated market has been Chicago Mercantile Exchange futures,” concludes Armour. “It stands to reason that ETF approval is distant for cryptocurrencies other than bitcoin and ether.”
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