Ethereum ETFs explained: SEC approval and economic relevance

On May 23, 2024, the US Securities and Exchange Commission (SEC) made a historic move by approving the sale of spot Ethereum exchange-traded funds (ETF) in the United States. This decision came after the SEC consolidated proposals from the Nasdaq, NYSE, and CBOE exchanges, which sought amendments to existing regulations to permit the trading of Ethereum-based exchange-traded products (ETPs) and ETFs.

With the green light from SEC, the United States now offers crypto-based ETFs for the two most prominent digital assets, Bitcoin and Ethereum, globally. This decision signifies a pivotal shift in the country’s economic stance, highlighting a broader transition towards integrating digital currencies into the financial mainstream. As a result, other regions are likely to experience a ripple effect, with many countries potentially adopting similar policies to stay competitive and align with the emerging global financial standards set by the US.

Let’s Start from the Beginning: What Are ETFs?

ETF is an increasingly popular type of asset for a wide range of investors. An ETF is essentially a pooled investment of securities that trades on an exchange, similar to stocks. This is what makes exchange-traded funds lucrative for investors:   

• Liquidity. ETFs are traded on all the leading stock exchanges throughout the day, providing flexibility akin to individual stock trading.
• Cost-efficiency. ETFs typically offer lower expense ratios and reduced broker fees compared to securities.
• Diversification. Similar to mutual funds, each ETF unit represents an undivided interest in the underlying assets, offering a diversified investment option.
• Professional management. ETFs provide professional management from renowned providers such as Vanguard, iShares and Invesco, alleviating the need for investors to monitor every security within the fund.
• Market-determined pricing. The ability to trade ETFs at a market-determined price throughout the day adds flexibility and efficiency for investors.
• ‍Indexing approach. Many ETFs are based on popular indexes, ensuring their value tracks the underlying indexes they aim to replicate, with fluctuations aligning with those of the tracked indexes. For instance, HDEX.BH from Hashdex gives exposure to the Nasdaq Crypto Index.

Understanding Spot Ethereum ETFs

Ethereum ETFs provide investors with the opportunity to invest in the performance of Ethereum’s native cryptocurrency without the need to directly own or manage it, bypassing intricacies and risks of storing crypto. This regulated and accessible investment option may be appealing to both traditional investors and those interested in digital assets, offering a convenient way to participate in the crypto market, since ETH is the second cryptocurrency by market capitalization after Bitcoin.

Why ETFs' Approval is Crucial for the Legal Status of Ethereum

Historically, both the Ethereum and Bitcoin blockchains used the energy-intensive Proof-of-Work (PoW) consensus algorithm. But in 2022, Ethereum transitioned to a more energy-efficient Proof-of-Stake (PoS) mechanism by the protocol’s upgrade known as “The Merge,” which cut the network’s energy consumption by 99.95% and made it deflationary, meaning more ETH coins were burned than produced.

Initially, the SEC argued that The Merge made Ethereum more like securities than commodities. This significant change in how ETH coins are created and managed led regulators to assert repeatedly that Bitcoin was the only cryptocurrency that could be classified and tracked as a commodity because of its PoW method.

Thus, the SEC’s approval of the first ETF ETF filing suggests that the cryptocurrency can now be seen as a commodity rather than a security.

What ETH ETFs Did SEC Approve?

The SEC accepted a pretty long list of Ethereum ETFs from some of the largest financial companies in the world: BlackRock, Fidelity, Grayscale, Bitwise, VanEck, ARK Invest, Invesco Galaxy, and Franklin Templeton. These funds will be listed on major US stock exchanges, including Nasdaq, NYSE Arca, and the CBOE BZX Exchange, marking a significant milestone in the integration of Ethereum into traditional financial markets. It may be just the first stage, with more providers offering ETFs on Ethereum in the future.

How Did the Crypto Market React?

The Ethereum (ETH) market witnessed significant volatility and price fluctuations in response to developments surrounding the approval and speculation of Ethereum funds. According to TradingView, ETH’s price fluctuations between May 21 and May 23, 2024, highlighted a substantial price gap over this period.

On May 21, 2024, ETH’s price experienced a sharp increase from approximately $3,000 to about $3,500 until the end of the day, and then continued its upward momentum on May 22, reaching the $3,800 mark by the end of the day. 

On the day of approval, May 23, ETH’s price reached new heights, peaking at nearly $4,000. But, despite initial bullish expectations, Ethereum’s price moved up just a little after the news came out, and then slightly corrected, dropping by around 6% over the next day. This reflects the classic “buy the rumor, sell the news” pattern, which was very similar to the observed reactions for the Bitcoin ETFs approval in January.

The Impact of Ethereum ETFs on the Economy

The approval of Ethereum ETFs signals a significant regulatory shift that underscores the growing legitimacy and integration of cryptocurrencies into traditional financial systems. As regulatory barriers lower, both institutional and retail investors are presented with new opportunities in crypto markets. On the other hand, a more accommodating regulation boosts confidence and stability in the cryptocurrency market, encouraging further adoption, investment, and development.

What’s Next?

Even though the SEC has approved initial regulatory filings for eight Ether ETFs, they will not begin trading until the commission gives the green light to their S-1 filings—a process that could take several months. To put this in context, the SEC took about three months to approve the S-1 filings for the first Bitcoin spot price ETFs after their initial regulatory filings were cleared. 

Nevertheless, the fact that regulators and the traditional financial market embraced instruments that are based on cryptocurrency is the major leap forward for the entire crypto market. At the same time, the approval of ETFs marked the new page in the history of Ethereum and reaffirmed the legal status of its native coin, which opened up new prospects for the ecosystem.

We have no doubt that it will, in fact, drive the adoption of crypto even beyond the financial markets. As the number of crypto users increases, more traditional businesses are accepting cryptocurrencies as the means of payment for goods and services.