Here's everything you need to know about spot Ethereum ETFs

The U.S. Securities and Exchange Commission is set to approve a host of new spot Ethereum ETH -0.71% ETFs on Tuesday. Up to eight funds are expected to start trading , enabling retail investors and institutions, including some that cannot otherwise own digital assets, to purchase the second-largest cryptocurrency by market capitalization.  

Ethereum is far and away the most mature blockchain built specifically for decentralized applications. Launched in 2015, it has one of the highest developer counts and routinely ranks among the most active chains. Its native token, ether, or ETH, has a $400 billion market cap and is the only token besides bitcoin to have futures contracts trading on the CME exchange. 

The SEC’s approval of spot ETH exchange-traded funds is seen as a legitimizing force for the cryptocurrency and could potentially drive up its price. Spot bitcoin ETFs, which launched in the U.S. in January after protracted regulatory hamstringing, have been a breakout success — with the 11 funds amassing a nearly $60 billion market cap to date — and many market participants and watchers think ETH ETFs could see similar interest among retail and institutional investors.

“I think these ETF products significantly validate the legitimacy of crypto as an asset class,” Kraken Head of Strategy Thomas Perfumo told The Block. “The same people who called crypto ‘rat poison’ five years ago are now the people who are creating products around it. There is real demand behind this — you can't ignore it anymore.”

Additionally, experts like VanEck Head of Digital Assets Research Matthew Sigel think the approval of ETH ETFs could open the door to similar products for other cryptocurrencies. VanEck was the first firm to file to launch an ETF tracking Solana, though most market commentators say those are unlikely to go live anytime soon.

What is an ETH ETF?

Spot ETH exchange-traded funds track the price of Ethereum’s native token.

ETFs are a relatively new type of investment product, which first hit the market in the early 1990s. They have since become some of the most popular financial products. These funds, which trade on exchanges like NYSE and Nasdaq, enable investors to gain exposure to securities or commodities and often have lower fees and expense ratios than buying individual stocks.

In other words, crypto ETFs are an easier way for average investors to introduce assets like ether and bitcoin into their retirement accounts and for institutions to construct crypto trading strategies. This could drive demand for ETH — potentially driving its price up — because ETFs are a more familiar onramp than crypto-native exchanges or peer-to-peer transfers for many.

How much ETH will the funds accumulate?

Estimates for ETH ETF capital inflows vary considerably. Perfumo predicted $750 million to $1 billion of net inflows per month for the first five to six months. That is on target with Citigroup’s projection of between $4.7 billion and $5.4 billion over the first six months of trading. However, the bank said ETH ETFs will see only 30% to 35% of the bitcoin spot ETF inflows.

For reference, bitcoin has jumped nearly 50% since the spot BTC +0.34% funds launched, setting an all-time high above $70,000. There have been over $12 billion in net inflows between the spot bitcoin funds.

Bitwise, one of the firms that will launch an ETH ETF, is significantly more bullish, predicting $15 billion of ETH ETF inflows by May 2025. Traders have bought over $20 million in ether call options on the expectation that the funds will drive ETH’s price up to fresh highs. It’s worth pointing out bitcoin dropped immediately following the launch of spot BTC ETFs.

“At our $22k price target, ETH market cap would be $2.5 trillion, roughly the size of Google today,” Sigel said in an email.

Who buys crypto ETFs?

Exchange-traded funds are popular financial products across the board. While many institutional investors — like Steven Cohen's Point72 Asset Management, Paul Singer's Elliott Investment Management and the Israel Englander-run Millennium Management — have bought spot bitcoin ETFs, the market has been dominated by retail traders.

As of May, when financial firms filed their 13Fs forms , a little under 1,000 firms with at least $100 million in assets reported buying bitcoin ETFs, according to Bitwise research at the time. Yale University and Princeton University also reported to hold bitcoin ETFs as part of their endowments.

While that is a significant number of firms — Bloomberg’s James Seyffart has said the bitcoin funds have been more popular than expected — Bitwise found that retail traders generated 80% of the assets under management.

Ethereum appeals to a different sort of investor than bitcoin, which is sometimes called “hard money” or an inflation hedge. ETH also has lower brand recognition. Either way, the ETH funds will likely attract a wider pool of investors than today, bolstering liquidity and broadening network adoption.

Who is launching ETH ETFs?

Eight firms are expected to receive SEC approval on or after Tuesday, once the SEC approves their S-1 filings that disclose pertinent information about how the funds are constructed. This includes ARK 21 Shares, BlackRock, Fidelity, Franklin Templeton, Grayscale, Hashdex, Invesco and VanEck — all of which also have spot bitcoin ETF products.

Of those firms, at least four have tapped Coinbase as a custodian. VanEck is using Gemini as clearing infrastructure, or where the matching of the orders will take place, and custodian while Fidelity, which has deep experience in bitcoin markets, is self-custodying its ether.

The funds will be listed on the Nasdaq, Cbose BZX Funds and NYSE Arca.

What is the ETH ETF ‘fee war’?

Similar to how competition issuers drove down management costs for the bitcoin funds, the prospective issuers appear to be engaged in a fee war . According to the current S-1 filings, Franklin Templeton will charge a 0.19% management fee, VanEck 0.20%, 21Shares 0.21% and Invesco 0.25%.

Grayscale is again charging the most (its spot bitcoin ETF is at 1%), at 2.5% for its flagship ETHE product, though a smaller “mini fund” will charge the lowest at 0.15% like its bitcoin mini fund.

BlackRock’s iShares fund will launch with a 0.25% expense ratio but plans to drop that to 0.12% when it reaches $2.5 billion in assets. Bitwise promises to charge no fee for six months up until it reaches $500 million.

Will there be staking?

Ethereum is secured by a process called staking, which rewards anyone willing to lock up ETH needed to validate transactions. It’s a form of passive income that currently pays out an estimated 3.2% APR . Staking can be done individually (i.e., solo staking, which requires 32 ETH) or through a third party, like a liquid staking protocol or exchange.

While many firms initially proposed staking the underlying ETH in their funds to earn revenue and pay out rewards to buyers, the SEC raised concerns about the practice. As part of the approval process, firms including Ark, Fidelity and Grayscale removed the staking component of their funds, which would have helped differentiate them from bitcoin ETFs.

In several enforcement actions, the SEC has stated that staking violates securities laws. For example, the SEC sued Coinbase in June 2023 over its staking-as-a-service product. SEC Chairman Gary Gensler has insinuated that ether itself is a security despite the Commodity Futures Trading Commission approving ETH futures contracts, making it a commodity.

However, SEC Commission Hester Pierce has said staking may not be permanently out of the equation. VanEck, for instance, stakes most of its ETH in its listed funds in Europe without issue, Sigel said. He added that it may require a change in administration to get approval.