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Bitcoin ETFs, basically a way for regular folks to invest in Bitcoin without actually buying the coin itself, took the financial world by storm earlier this year. They launched in January this year, and as per Fortune, they have amassed a staggering $54 billion until now. Bitcoin’s price has soared 47% in the same time period. Now, Spot Ethereum ETFs are getting their moment in the spotlight. Ethereum ETFs have just launched, and as per Bloomberg they’re already seeing a trading volume of over $1 billion in a single day.
If you are new to Crypto, terms like Ethereum and ETFs can sound like alien language. Don’t worry; we’ll take it from the top and try to keep it as simple as possible.
What is Ethereum
Ethereum (ETH) is the second most popular cryptocurrency after Bitcoin. As per Forbes, Ethereum’s market capitalization represents over 17% of the INR 1 lakh crore global crypto market.
Unlike Bitcoin (BTC), which primarily functions as a digital currency and store of value, Ethereum is a decentralized computing platform built on blockchain technology.
Imagine a world where anyone can create their own digital applications, which can handle everything from simple payments to complex financial transactions. That’s Ethereum.
At the heart of Ethereum is the blockchain, a digital ledger that records transactions across many computers. This technology ensures everyone has the same information, making it secure and transparent.
Ether, Ethereum’s digital currency, powers these applications.
Ether (ETH) offers multiple avenues for value creation. It serves as a digital currency, facilitating peer-to-peer transactions without intermediaries.
ETFs: Your Basket of Investments
An ETF is basically a bundle of stocks, bonds, or other assets wrapped up into a single package. Unlike mutual funds, you can buy and sell ETFs throughout the trading day, just like regular stocks. This makes them super accessible and easy to trade.
Because they hold a bunch of different investments, ETFs can help you spread your risk. Plus, there’s an ETF for almost everything – from tech stocks to gold.
Unlike the ETFs mentioned above, an Ethereum ETF is essentially an investment fund that tracks one investment, the price of Ether, the underlying cryptocurrency of the Ethereum blockchain. Instead of diving headfirst into complex exchanges and digital wallets, you can invest in Ethereum through a familiar vehicle: an ETF. This means you can buy and sell Ethereum exposure like any other stock on a regulated exchange. By tracking the price of Ethereum, these funds allow investors to participate in its potential growth while adhering to established financial regulations. This combination of accessibility, regulation, and exposure to Ethereum’s value could possibly make these ETFs attractive for those seeking to diversify their portfolios. However, since these ETFs invest in just cryptos they are prone to volatility as cryptocurrency is inherently volatile
Spot and Futures Ethereum ETFs
There are two primary types of Ethereum ETFs: spot ETFs and futures ETFs.
Spot Ethereum ETFs
A spot Ethereum ETF directly holds Ethereum tokens within its portfolio. This means investors are purchasing a share of the ETF, which represents a fraction of the Ethereum held by the fund. This structure offers direct exposure to Ethereum’s price movements, making it a popular choice for investors seeking a more straightforward investment.
Futures Ethereum ETFs
A futures Ethereum ETF invests in Ethereum futures contracts rather than holding the underlying asset. These contracts are agreements to buy or sell Ethereum at a specific price on a future date. This approach lets investors speculate on Ethereum’s price without directly owning the cryptocurrency.
Key Differences:
- Direct Ownership: Spot ETFs hold actual Ethereum, while futures ETFs hold derivatives.
- Price Exposure: Spot ETFs offer direct exposure to Ethereum’s price, while futures ETFs involve speculation on future price movements.
- Complexity: Spot ETFs are generally considered simpler, while futures ETFs involve understanding derivatives.
- Risk Profile: Both types carry different risks. Spot ETFs are subject to the cryptocurrency market’s volatility, while futures ETFs involve the complexities of the derivatives market.
How Spot Ether ETFs Work
Spot Ether ETFs offer investors a direct way to gain exposure to Ethereum’s price movements without the complexities of owning the cryptocurrency itself.
Here’s a breakdown of how they operate:
- Physical Backing: The ETF issuer purchases and holds actual Ether tokens as the underlying asset.
- ETF Shares: Investors buy and sell shares of the ETF on traditional stock exchanges. Each share represents a fractional ownership of the ETF’s Ether holdings.
- Price Tracking: The ETF’s price closely follows the real-time price of Ethereum.
- Creation and Redemption: To maintain the ETF’s net asset value (NAV) in line with the price of Ether, authorized participants (typically large institutional investors) can create or redeem ETF shares.
By investing in a spot Ether ETF, investors benefit from the convenience of traditional stock market trading while gaining exposure to the cryptocurrency market.
List of approved Spot Ethereum ETFs
Several major financial firms are racing to launch Ethereum ETFs. Here are eight spot ETFs approved by the SEC.
| Fund Name & Ticker | Fee | Fund Fee Waiver Promotions |
| Grayscale Ethereum Mini Trust (ETH) | 0.15% | Fee waived for first six months or $2 billion in assets |
| Franklin Ethereum Trust (EZET) | 0.19% | Fee waived until Jan 31, 2025, or $10 billion in assets |
| VanEck Ethereum Trust (ETHV) | 0.20% | Fee waived for first 12 months or $1.5 billion in assets |
| Bitwise Ethereum ETF (ETHW) | 0.20% | Fee waived for first six months or $500 million in assets |
| 21Shares Core Ethereum ETF (CETH) | 0.21% | Fee waived for first six months or $500 million in assets |
| Fidelity Ethereum Fund (FETH) | 0.25% | Fee waived until Dec 31, 2024 |
| iShares Ethereum Trust (ETHA) | 0.25% | Fee reduced to 0.12% for first $2.5 billion in assets |
| Invesco Galaxy Ethereum ETF (QETH) | 0.25% | N/A |
Benefits of Ethereum ETFs
Simplicity and Security
A significant advantage of Ethereum ETFs is their simplicity. Unlike directly investing in cryptocurrencies, which requires setting up a digital wallet, finding an exchange, and navigating complex trading platforms, investors can buy and sell ETF shares through their existing brokerage accounts. This streamlined process makes crypto investing more accessible to a wider range of investors.
Moreover, Ethereum ETFs offer enhanced security. Cryptos are unregulated products and are also prone to cyber-attacks. Also, when you invest directly in crypto, you are given private keys for your holdings; if you lose them, you might lose your investments. With ETFs, investors don’t need to worry about safeguarding private keys or dealing with the risks associated with cryptocurrency wallets and exchanges. ETFs provide a regulated custody solution, protecting investors’ assets.
Expanding Access and Legitimizing Crypto
Ethereum ETFs democratize access to the cryptocurrency market by eliminating the complexities often associated with crypto exchanges and digital wallets. Traditional investors can now gain exposure to Ethereum through their familiar brokerage accounts, welcoming a broader audience into the crypto fold.
Moreover, listing Ethereum ETFs on major stock exchanges bestows a much-needed stamp of legitimacy on the cryptocurrency market. This integration fosters a crucial connection between established finance and the burgeoning digital asset ecosystem.
Boosting Liquidity and Stabilizing the Market
By introducing Ethereum ETFs, market liquidity receives a substantial boost. Investors can now buy and sell significant amounts of Ethereum with a lower impact on prices. This increased liquidity benefits everyone, from individual traders to institutional investors.
Additionally, the broader participation facilitated by ETFs can potentially dampen Ethereum’s price volatility. A more stable market environment encourages long-term investment and growth.
Enhancing Investor Protection
Ethereum ETFs provide a familiar and regulated framework for managing crypto-related risks. Unlike direct cryptocurrency holdings, ETFs operate under strict regulatory oversight, ensuring transparency and investor protection through robust disclosure requirements and surveillance. This stands in stark contrast to the often unregulated nature of cryptocurrency markets.
Diversification and Innovation
Ethereum ETFs empower investors to diversify their portfolios by incorporating a new asset class. This diversification strategy can mitigate risks associated with traditional investments without exposing investors to the full volatility of the underlying cryptocurrency.
The introduction of Ethereum ETFs also serves as a catalyst for innovation in the financial services industry. These instruments pave the way for developing new financial products and strategies, offering investors greater flexibility to achieve their investment goals.
Driving Adoption and Fostering Growth
Ethereum ETFs have the potential to accelerate the mainstream adoption of Ethereum and its groundbreaking technologies like smart contracts and decentralized applications (dApps). Increased investor interest and capital flowing into the Ethereum ecosystem should fuel further development and innovation.
By creating a bridge between traditional finance and the crypto world, Ethereum ETFs may be unlocking the full potential of this transformative technology.
Disadvantages of Ethereum ETFs: A Deeper Dive
While Ethereum ETFs offer a convenient entry point into the cryptocurrency market, they come with several drawbacks:
Higher Costs
- Expense Ratios: Ethereum ETFs typically have higher expense ratios than traditional ETFs. This means you pay the fund manager a larger percentage of your investment.
- Trading Fees: Brokerage commissions and other trading fees can further erode your returns.
- Indirect Exposure: ETF investors don’t own the underlying assets, unlike buying crypto directly. You’re essentially betting on the fund manager’s ability to generate returns.
- Restricted Investment Strategies: ETFs follow specific investment strategies, limiting your ability to customize your exposure to different cryptocurrencies or market conditions.
- Crypto Volatility: The underlying cryptocurrency market is highly volatile, which can significantly impact the ETF’s price.
- Regulatory Uncertainty: The crypto industry is still evolving, and regulatory changes can impact ETF performance and even lead to fund closures.
Loss of Staking Rewards
Ethereum, unlike Bitcoin, offers a unique perk for holders: staking. By locking up your ETH, you can help validate transactions and earn rewards. Think of it as your crypto savings account. Currently, the staking yield hovers around 3-5%.
Most Ethereum ETFs, however, don’t allow staking. This means you’re missing out on a possible 3-5% annual return. While ETFs offer convenience and regulatory clarity, they come with this significant opportunity cost. Currently, 28% of the ETH in circulation is staked.
Unlock Tax Benefits with Crypto ETFs
Ethereum ETFs are taxed at just 12.5% compared to 30% tax on direct Eth investments.Ethereum ETFs can offer significant tax advantages for Indian investors compared to directly holding Ethereum. Here’s how investing in Ethereum ETFs can help you reduce your tax bill.
Capital Gains Tax
Capital gains refer to the profit made from selling an asset at a higher price than you bought it. The tax rate on this profit varies based on the asset and the holding period.
- Direct Ethereum Investment:
- Any profit made from selling Ethereum is considered a capital gain.
- India levies a flat 30% tax on all cryptocurrency capital gains, regardless of how long you’ve held the asset. This means that whether you hold Ethereum for a year or ten years, the profit will be taxed at 30%.
- Another significant drawback is that any losses incurred on Ethereum cannot be offset against gains from other investments or income.
- Spot Ethereum ETF Investment:
- The tax treatment depends on how long you hold the ETF.
- Short-Term Capital Gains (STCG): If you sell the ETF within 12 months of buying it, the profit is considered short-term capital gain. It’s taxed based on your income tax slab, which can be lower than the flat 30% rate for direct Ethereum investments.
- Long-Term Capital Gains (LTCG): If you hold the ETF for more than 12 months, the profit is considered long-term capital gain. The tax rate is 12.5% without indexation, which is significantly lower than the 30% tax on direct Ethereum.
- Loss Offset: A key advantage of ETFs is that losses incurred on ETF investments can be offset against other capital gains, reducing your overall tax liability.
Tax Deducted at Source (TDS) and Tax Collected at Source (TCS)
- Direct Ethereum Investment:
- A 1% TDS (Tax Deducted at Source) is applied to every cryptocurrency transaction within India. This means 1% of the transaction amount is directly withheld as tax.
- Spot Ethereum ETF Investment:
- There’s no TDS on ETF investments.
- However, if you invest in a spot Ethereum ETF through the Liberalized Remittance Scheme (LRS) by sending money abroad, a 20% TCS (Tax Collected at Source) is levied on outward remittances exceeding Rs. 7 lakh in a financial year. This tax is collected at the time of remittance and can be adjusted against your overall tax liability.
Liberalized Remittance Scheme (LRS)
- LRS allows Indian residents to invest in foreign assets, including spot Ethereum ETFs, up to a limit of USD 250,000 per financial year.
- When using LRS, you must comply with the scheme’s regulations and report the investment to the Reserve Bank of India.
Tax Advantages of Spot Ethereum ETFs
Lower Tax Rates
- Potential for lower tax bills: Unlike direct Ethereum investments which are taxed at a flat 30% regardless of holding period, spot Ethereum ETFs offer a more favorable tax treatment.
Loss Offset
- Tax Harvesting: If you incur losses on your spot Ethereum ETF investment, you can offset these losses against any capital gains you’ve made from other investments. However, you can do this if you invest in Crypto currency directly.
- Tax savings: By offsetting losses, you effectively reduce your overall tax liability. This can be particularly beneficial in years when you have substantial capital gains from other sources.
Note: Before investing consult your tax advisor to understand the impact of buying Ethereum ETFs on your tax bill.
Beyond Price: The Broader Implications of Ethereum ETFs
Following SEC approval, analysts believe that an Ethereum ETF will not only boost Ethereum’s price but also significantly impact the broader cryptocurrency landscape. Here are certain changes that can probably happen in the cryptocurrency industry.
Institutional investors are poised to enter the crypto market en masse, drawn by the familiar regulatory framework of ETFs. Their substantial capital and risk management expertise could stabilize the volatile cryptocurrency market.
Simultaneously, retail investors will gain easier access to Ethereum through traditional brokerage accounts, democratizing crypto investment. This increased participation could fuel market growth and broaden the investor base.
Beyond market dynamics, ETF approval could serve as a catalyst for regulatory clarity. The SEC’s green light would establish a precedent for crypto-related financial products, potentially shaping the future regulatory landscape.
Moreover, the success of Ethereum ETFs is likely to spur innovation within the broader crypto ecosystem. Financial institutions and technology firms may develop new crypto-focused products and services.
In conclusion, while the potential price appreciation of Ethereum is a significant factor, the broader implications of ETF approval for market structure, investor participation, and regulatory development are equally important.
Disclaimer: This blog is for informational purposes only. Neither the information contained herein, nor any opinion expressed, should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by VF Securities, Inc.to be valid when published. Any person placing reliance on the blog does so entirely at his or her own risk, and does not accept any liability as a result. Securities markets may be subject to rapid and unexpected price movements, and past performance is not necessarily an indication of future performance. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding investment in securities markets.
