A Milestone in Cryptocurrency Investment
The recent approval of the Ethereum Spot ETF marks a significant milestone in the evolving landscape of digital assets. This pivotal development follows the approval of the Bitcoin Spot ETF in January, heralding a new era for digital assets in traditional finance.
As a part of our continued exploration into how crypto and traditional finance are merging, the Coast team took a deep dive into digital asset ETFs and what they mean for the future of DeFi.
“With the ETH ETF approval, we are clearly seeing an increase in positive sentiment across the full spectrum of retail, institutional, and political.” said Jeff Embry, Managing Partner at Globe3 Capital. “We expect to see more and more digital asset adoption, and investment products come out over the next few years as crypto goes mainstream. The Bitcoin ETF cracked the door open, and the ETH ETF has kicked it wide open. The train has left the station.”
The introduction of these ETFs represents a critical step towards mainstream acceptance and integration of cryptocurrencies into the broader financial ecosystem.
What is an ETF?
Before we dive into the significance and impact that these recent approvals will make, it’s important to understand what an ETF is and how these differ from direct investments.
An Exchange-Traded Fund (ETF) is a type of investment fund and exchange-traded product that holds assets such as stocks, commodities, or bonds. ETFs are traded on stock exchanges much like individual stocks, making them accessible to a wide range of investors. The approval of digital asset ETFs allows investors to gain exposure to digital assets without directly purchasing them.
Additionally, ETFs reduce the complexities associated with managing cryptocurrencies through self-custodial wallets, and allow investors to gain exposure to the asset in tax-sheltered accounts, such as ROTH IRAs.
Jeff Embry of Globe3 Capital communicated this well: “Until now, it has been hard for retail investors to buy, store, secure, and ultimately extract value from digital assets, especially in tax deferred accounts. The introduction of digital asset ETF’s allows the retail investor to invest in this new asset class just like they would invest in the stock market. It helps level the playing field while getting introduced to a new, often confusing asset, and as most crypto natives know, once you start learning about this revolutionary technology you want to know more.”
It’s important to note that Bitcoin Futures ETFs have existed since October 2021. However, there is a substantial difference between “Futures” and “Spot” ETFs.
Spot vs Futures ETFs
A Spot ETF directly tracks the current market price of an underlying asset, like a cryptocurrency, by holding the actual asset or its equivalent. The funds who issue these digital asset ETFs must purchase the respective asset (in this case Bitcoin or Ether) equivalent to the value of the fund itself.
In contrast, a Futures ETF tracks the price of futures contracts, which are agreements to buy or sell the asset at a future date for a predetermined price, without holding the asset itself.
This means Spot ETFs reflect the immediate value of the asset, while Futures ETFs depend on the prices of future agreements.
The Journey of Bitcoin ETF
In January, the financial world witnessed the approval of the first Bitcoin Spot ETFs. This approval did not come without its challenges, however.
Regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), have historically been cautious about approving cryptocurrency-based financial products. Concerns over market manipulation, custodial issues, and investor protection have been cited as primary concerns.
However, the successful launch and performance of the Bitcoin ETF have set a precedent. The SEC's approval of the Ethereum ETF reflects increased regulatory comfort and confidence in the cryptocurrency market's maturity and stability.
Bitcoin ETF Inflows
The Bitcoin ETFs have been the fastest growing ETFs in history. The contrast is striking as compared to ETFs released in the past. The following graph published by Chainalysis reveals that the Bitcoin ETFs have far outpaced the gold ETFs adoption when released:
More than $58 billion, accounting for approximately 875,000 Bitcoin, is being held in these funds as of the time of writing.
The world’s largest asset managers like BlackRock, Fidelity, etc. are now recommending allocations to their clients into digital asset ETFs.
Larry Fink, CEO of BlackRock said of Bitcoin on CNBC, "It's no different than what gold represented over thousands of years. It is an asset class that protects you."
The above chart demonstrates the significant capital volume within Bitcoin ETFs since their inception. These ETFs have attracted substantial investments from both retail and institutional investors. This influx of capital highlighted the growing appetite for cryptocurrency exposure within traditional investment frameworks.
The Arrival of Ethereum ETF
Building on the momentum of the Bitcoin ETF, the recent approval of the Ethereum ETF extends the same investment opportunities to the second-largest cryptocurrency by market capitalization.
“The recent approval of an Ethereum ETF represents a significant milestone for the digital asset industry, partly because it creates easier access for the average person,” said Eric Tomaszewski, a Financial Advisor at Verde Capital Management. “In addition, it creates a regulatory framework for institutional adoption, which is a market estimated to be in excess of 100 trillion globally.”
Ethereum, known for its smart contract capabilities and extensive decentralized application ecosystem, pioneered innovations like the “tokenization” of real world assets, decentralized finance (borrowing, lending, and derivatives), and unique decentralized operational structures.
Ethereum's blockchain technology supports a vast array of decentralized applications (dApps) and smart contracts, making it a cornerstone of the decentralized finance (DeFi) and non-fungible token (NFT) innovation environment.
One potential concern regarding institutional inflows of capital is the potential for Ethereum to become more centralized over time. Eric Tomaszewski mentions this as a risk to be aware of:
“That said, risks are still present and we need to keep the following in mind. There is a concern that spot ETF approvals could potentially create large enough players who could significantly influence validator power over time. The same applies for counterparty, centralization and concentration risks.
Bigger picture though, the launch of the ETF furthers the legitimacy of the asset class and the overall acceptance which will ultimately encourage more attention and inflows. This is a big win for validation of the digital asset space and future inclusion in diversified portfolios.”
Broader Implications for the Cryptocurrency Market
The approval of cryptocurrency ETFs has broader implications for the entire digital asset market:
Market Maturity: Regulatory approval of ETFs is a sign of market maturation. It indicates that cryptocurrencies are evolving from speculative assets to recognized financial instruments. Combined with continued prosecution of bad actors, we believe the foundation for the industry is well under development.
Innovation and Development: Increased investment in cryptocurrencies can drive further innovation and development within the space, particularly in areas like DeFi, NFTs, and blockchain technology. The industry is hopeful that the entrance of the ETH ETFs will begin to pave the way for increased regulatory clarity and stability within the blockchain industry. Many companies over the past few years have opted to move operations outside of the U.S. out of concern that lack of regulatory clarity might impact their ability to operate in the future.
The Delta
The approval of the Ethereum ETF is a significant milestone in the integration of cryptocurrencies into the mainstream financial market. Following the successful launch of the Bitcoin ETF, the Ethereum ETF opens new avenues for investment and demonstrates growing regulatory acceptance. This development validates cryptocurrencies as legitimate assets, will reduce volatility, and strengthen confidence as builders across the industry continue to innovate within the blockchain industry.
As we look ahead, the continued evolution of cryptocurrency ETFs will likely spur further advancements and adoption within the digital asset ecosystem, solidifying their role in the future of finance.
For more on our perspective and how Coast is helping to build this future, see more at https://www.getcoast.io/.
