On May 23, 2024, the U.S. Securities and Exchange Commission (SEC) approved the trading of Ethereum ETFs, a significant win for cryptocurrency enthusiasts. This decision further solidifies crypto’s growing acceptance within the mainstream financial system, following the SEC’s earlier approval of the first Bitcoin ETFs.

This shift also carries a significant weight for traditional institutions, potentially swaying previous skeptics. Previously, critics had harshly labeled crypto assets like Bitcoin and Ethereum as an “index of money laundering” or a “Ponzi scheme that will soon collapse.”

Furthermore, Ethereum ETF approval is likely to attract institutional investors with substantial resources and influence, who were previously hesitant due to the lack of clear regulations and the complexities of the technology – and we all know what happens to price when demand outpaces supply, right?

Curious to learn more about Ethereum ETFs, the recent talk of the cryptocurrency world?

Whether you’re a crypto newbie or a seasoned investor, this guide will unpack this exciting development and explain how to get involved.

What is Ethereum ETF, and why is it trending?

An Ethereum ETF, or Exchange-Traded Fund, is an investment fund that tracks the price of Ethereum, the second-largest cryptocurrency. This lets investors speculate on Ethereum’s price movements without directly buying and custodying the cryptocurrency and also opens up otherwise strictly regulated financial institutions to buy Ethereum.

If you’ve been following financial news lately, you’ve likely noticed a lot of buzz surrounding Ethereum ETFs. Here’s a breakdown of the key factors driving this trend:

• Institutional Interest: Institutional investors have long been curious, if not divided, about cryptocurrencies – and now, ETFs are the industry’s first significant foray into digital assets. ETH ETFs provide a regulated and familiar investment vehicle for these investors to participate in the cryptocurrency market, finally giving them a simple on-ramp into holding ETH.
• Accessibility: ETH ETFs make accessing the cryptocurrency market easier for traditional investors, which is equally valid for individuals and institutions. Instead of navigating the complexities of cryptocurrency exchanges and P2P marketplaces, investors can buy and sell ETH ETF shares through approved brokerage accounts.
• Regulatory Developments: Following the unprecedented capital inflows across multiple Bitcoin ETFs recently approved by the U.S. Securities and Exchange Commission (SEC), ambitious Wall Street funds are looking further down the list of cryptocurrencies for the next big ETF push, with ETH being the obvious next bet. The success of BTC ETFs is leading to speculation that the ETH ETF will also perform well.
• Rumor-driven Market Speculation: Traders and investors are closely watching for any developments related to ETH ETFs, leading to increased attention and market speculation in the cryptocurrency and investment communities.

How would an ETH ETF work?

There are two main ways an Ethereum ETF can work:

Futures-based ETFs

Futures-based ETFs track the price of Ethereum using futures contracts. These are agreements to buy or sell Ethereum at a specific price on a predetermined future date. The ETF issuer uses these contracts to gain exposure to Ethereum’s price movements without holding the cryptocurrency.

The value of the ETF shares is based on the performance of these futures contracts and how the price of Ethereum moves in the futures market. Trading is limited to the hours of operation of the exchange where the ETF is listed, typically weekdays during business hours.

Spot-based ETFs

In contrast, the Ethereum spot ETF directly tracks the price of Ethereum in real-time by holding the actual cryptocurrency. The ETF issuer purchases and stores Ethereum, and the value of the ETF shares is directly linked to the current market price of Ethereum.

This type of ETF allows investors to gain exposure to Ethereum without the hassle of managing or storing the cryptocurrency themselves. Spot ETFs can be traded 24/7 on cryptocurrency exchanges, providing greater flexibility.

As of July 2024, spot-based ETFs are not yet available for trading in the United States.

Futures-based and spot-based ETFs offer investors a way to gain exposure to Ethereum’s price movements without directly buying and holding the cryptocurrency. Each type of ETF has its advantages and considerations. Investors should carefully evaluate the structure and underlying assets of the ETF before making any investment decisions.

Benefits of Investing in Ethereum ETFs

Here are some of the advantages of investing in Ethereum ETFs:

• Diversification: Investing in an Ethereum ETF allows for portfolio diversification by adding exposure to a different asset class. This diversification can help reduce overall portfolio risk, as the performance of cryptocurrencies often differs from traditional asset classes like stocks and bonds. It’s suggested many institutions like college endowments, pensions, and more will gradually shift a few percent of their portfolios – collectively billions of dollars – into cryptocurrencies over the next decade.
• Accessibility: Ethereum ETFs eliminate the need to manage crypto wallets and make ETH more accessible to those familiar with traditional financial markets. They can be bought and sold through retirement or brokerage accounts, making it easier for investors to access the cryptocurrency market.
• Regulation and Security: ETFs are regulated investment products that offer a layer of security and investor protection. This regulatory oversight can give investors confidence in the ETF’s structure and management.
• Tax Efficiency: Depending on your location, ETFs may offer tax advantages over direct cryptocurrency investments. This can be particularly beneficial for investors seeking tax-efficient ways to add Ethereum to their portfolio.

Risks and Challenges of Ethereum ETFs

While Ethereum ETFs boast potential advantages, they also come with inherent risks. As with any investment, careful consideration of risk factors and thorough research are crucial before investing in Ethereum ETFs.

Here’s a breakdown of some key risks and challenges associated with Ethereum ETFs:

• High volatility: The price of Ethereum is notoriously volatile—as is the case with many other cryptocurrencies—which can impact the investment value of Ethereum ETFs in short periods. Investors should be prepared for significant price fluctuations.
• Regulatory risks: The regulations for cryptocurrencies and ETFs are constantly changing. The regulatory approach in each area can significantly affect the availability and arrangement of Ethereum ETFs. As past events have shown, these regulatory changes can happen quickly and impact these investment products’ trading, listing, and overall feasibility.
• Market risks include market manipulation, liquidity issues, and broader market trends. While ETFs aim to track Ethereum’s price, various market factors can cause discrepancies between the ETF price and the actual price of Ethereum, ultimately affecting the ETF’s performance.
• Technological risks: Ethereum’s underlying technology is still developing, and vulnerabilities or failures in blockchain technology could adversely affect its value and, consequently, Ethereum ETFs.
• Additional fees: Ethereum ETFs come with management fees, which can impact investors’ overall returns. Investors need to consider and understand the fee structure associated with ETF investments.

Comparison with Direct Investment in Ethereum

There are two main approaches to investing in Ethereum: directly buying Ethereum or investing through Ethereum ETFs. Each approach has advantages and disadvantages, and your best choice will depend on your risk tolerance and investment goals. Here’s a breakdown of the key differences between these two options:

Direct Investment in Ethereum

Here are some pros and cons of directly investing in Ethereum.

Pros

• Potential for higher returns: Owning Ethereum directly offers the potential for higher returns, as you benefit directly from any price increases.
• No management fees: Owning Ethereum directly offers the potential for higher returns, as you benefit directly from any price increases.
• There is less risk of market manipulation: There are typically no management fees associated with directly owning Ethereum, as you manage it yourself.
• 24/7 Trading: Cryptocurrency exchanges and marketplaces operate around the clock, allowing you to buy and sell Ethereum whenever possible.
• Direct custody of your funds: by choosing to “be your own bank,” an ETH buyer enjoys supreme agency over their asset, allowing one to buy and sell outside of banking hours, stake ETH for yield, and more.

Cons

• Challenges of direct ownership: You must manage your private keys securely, navigate cryptocurrency exchanges, and know the higher security risks involved. These factors require careful consideration and management.

Ethereum ETF Investment

Now, let’s look at the pros and cons of ETF investments:

Pros

• Diversification and accessibility: Ethereum ETFs offer diversification and accessibility to traditional investors who may not be familiar with cryptocurrency exchanges, wallets, and P2P marketplaces.
• Regulatory compliance and security: In some jurisdictions like the United States, ETFs are regulated investment products, providing security and investor protection. They also comply with specific regulatory standards, offering traditional investors a more familiar investment structure.

Cons

• Limited control: You don’t own the underlying Ethereum; you just share it in the ETF. You cannot transfer it or use it for dApps, and regulators continue to argue out whether you are eligible for yield.
• Trading limitations: Trading is limited to market hours of the exchange listing the ETF. Given the high volatility of cryptos, it can result in missed opportunities for profit-taking.
• Centralization: There’s a concern that Ethereum ETFs could become concentrated in the hands of large institutional investors in the long run, similar to what happens with other securities. This might contradict the decentralized philosophy behind cryptocurrencies.

Whether you invest directly in Ethereum or use Ethereum ETFs depends on your circumstances and investment goals. Consider your risk tolerance, level of comfort with cryptocurrency, and overall investment objectives. Both options offer distinct advantages and disadvantages, so careful evaluation is crucial before making a decision.

How to invest in ETH directly

There are two main ways to directly invest in Ethereum (ETH): through a cryptocurrency exchange or a peer-to-peer marketplace like Paxful.

We’ll use Paxful, a safe and secured peer-to-peer marketplace, as an example to walk you through the steps of buying ETH directly:

Here are step-by-step instructions on how to buy ETH on Paxful.

1. Create an account: Visit Paxful’s website and sign up for an account using your email address and a strong password. You’ll receive a free Paxful account for storing and managing various cryptocurrencies, including ETH, BTC, USDT, and USDC.
2. Verify your account: Complete the account verification process, which may involve providing identification documents to comply with AML requirements.
3. Navigate to the Buy Ethereum page. Once your account is set up and verified, click the “Buy Ethereum” from the Paxful main menu.
4. Choose a vendor: Browse through the list of sellers offering Ethereum for sale. We recommend reviewing the vendor’s terms and reputation before deciding.
5. Initiate a trade: Select a reliable seller and initiate a trade by entering the amount of Ethereum you want to purchase and clicking on the “Buy” button.
6. Complete the trade: Follow the seller’s instructions. This typically involves sending payment via their preferred methods, such as bank transfer, PayPal, or others offered (Paxful supports over 400 methods).
7. Receive ETH in Your Wallet: Once the trade is completed and the payment is confirmed, the Ethereum temporarily held in escrow will be released to your Paxful account.
8. Transfer ETH to a Secure Wallet: For added security, consider transferring the purchased Ethereum to a secure cryptocurrency wallet you control, such as a hardware or software wallet with private key ownership.

Safety on Peer-to-Peer Platforms

Before initiating a trade on Paxful or any peer-to-peer marketplace, exercise caution and conduct thorough research on the seller. This includes reviewing their trading history and feedback from other users and ensuring the trade terms align with your preferences.

Important Disclaimer

Before investing in Ethereum or any cryptocurrency, consider the inherent risks. We recommended the following steps:

• Conduct your research (due diligence) to understand the cryptocurrency market and the specific risks associated with Ethereum.
• If needed, seek professional financial advice to ensure cryptocurrency aligns with your investment goals and risk tolerance.

Ready to start investing in Ethereum? Sign up on Paxful today to access a secure and user-friendly platform for buying and selling ETH.