In a move that was considered nearly impossible at the beginning of 2024, US regulators have approved the first exchange-traded funds (ETFs) that invest directly in Ethereum, the world’s second-largest cryptocurrency after Bitcoin. Eight issuers received approval from the US Securities and Exchange Commission in July. They were also among those involved in the launch of ETFs that deal directly in Bitcoin in January.
Cryptocurrency enthusiasts celebrated the historic move, but expectations were not promising for the massive inflow of investments into Ethereum funds as they did with the Bitcoin ETFs. According to estimates from Citigroup, Ethereum funds are expected to see between $4.7 billion and $5.4 billion in investments within six months of their launch. Despite these expectations, the currently available Ethereum funds recorded a net outflow of $405 million in investments during their first three weeks of trading. The exit is largely due to the Grayscale Ethereum Trust, which has transitioned from a closed structure to an exchange-traded fund, prompting some investors to exit to take advantage of the opportunity.
As for BlackRock’s Ethereum Fund, it has recorded a net inflow of $900 million to date, the highest among the funds in the group. However, this value appears much lower when compared to the company’s Bitcoin ETF, which crossed the $1 billion threshold in less than a week of trading.
What is Ethereum? Ethereum is the digital currency used in the Ethereum network, one of the most commercially used blockchain networks. Blockchains are decentralized electronic ledgers that record transactions and provide proof of ownership when using cryptocurrencies, and are described as a major innovation in the world of crypto.
What prompted the SEC to approve Ethereum funds?
The SEC’s approval of Ethereum ETFs highlights a shift in US regulatory approaches to the digital asset sector. This development is due to several key factors:
1: Legal Victory in 2023: The digital asset sector’s major legal success in 2023 helped pave the way for approval of these new products. This victory may have removed some of the regulatory hurdles that had been holding back the launch of ETFs.
2: Clarity on Ethereum’s Status: The decision also reflects greater clarity on Ethereum’s status with the SEC. Previously, the SEC has tended to block the expansion of cryptocurrencies on the grounds that many of these assets could be classified as securities and should therefore be regulated under the same regulations as stocks, bonds, and other tradable assets.
3: Statements from SEC Chairman Gary Gensler: Although SEC Chairman Gary Gensler describes many digital assets as unregistered securities, he has avoided making any definitive statements about Ethereum’s status. In contrast, Gensler considered Bitcoin a commodity rather than a security, highlighting the difference between digital assets in terms of regulatory classification.
4: Regulatory differences between Bitcoin and Ethereum: The primary difference between Bitcoin and Ethereum from the SEC’s perspective lies in the way cryptocurrencies are deposited. Depositing funds into a common pool and receiving a return on that deposit may meet the definition of a security in the eyes of some regulators. As a result, applications for Ethereum ETFs that include cryptocurrency staking have had difficulty getting approval.
5: Issuer waivers: To overcome these hurdles, fund issuers have pledged to keep the Ethereum they purchase for the ETFs separate from Ethereum staking programs, and have also confirmed that they will not invest in derivatives tied to Ethereum. These waivers likely played a role in the SEC’s decision to approve the funds.
What happened when Ethereum ETFs were approved?
When Ethereum ETFs launched, the event was not as hype-driven and successful as the initial Bitcoin ETF launch. Here are the highlights:
1: Bitcoin ETFs’ Big Hit: When Bitcoin ETFs launched, they were a hit based on key trading metrics like investment flows and trading volume. Bitcoin’s price surged to record highs, and the Bitcoin ETFs launched by BlackRock and Fidelity were the only two to attract more than $3 billion in their first 20 days of trading.
2: Ethereum ETFs Launch: In contrast, the launch of Ethereum ETFs was much quieter. As of mid-August, Big One was the top fund inflow, followed by Fidelity by a large margin, with Fidelity’s net inflows totaling $342 million since its launch. 3: Gradual Investment Recovery: Despite a quiet start, investment has begun to pick up significantly. The nine Ethereum funds group recorded their first positive week of net inward investment at the close of the market on August 9, indicating increased investor interest and improved fund performance in recent times.
The response to Ethereum ETFs remains less intense than Bitcoin ETFs, but the recovery that has begun to emerge could be evidence of growing investor interest.
What to expect? Experts expect Ethereum ETFs issued by major companies such as BlackRock and Fidelity to attract the largest volume of investment and assets over the next year. According to their forecasts, investments flowing into Ethereum funds could be around 20% of investments flowing into Bitcoin ETFs, estimated at between $5 billion and $6 billion.
