The US Securities and Exchange Commission (SEC) recently approved eight spot Ethereum ETFs to be listed on their respective exchanges. Image Credit: Shutterstock

Dubai: The price of the world’s second largest cryptocurrency Ethereum soared in the run up to the US markets regulator approving its latest exchange-traded funds (ETFs) that can now be traded by tracking the price of the digital asset.

The US Securities and Exchange Commission (SEC) recently approved eight spot Ethereum ETFs to be listed on their respective exchanges. Ethereum had already surged 29 per cent over the past week after reports suggested the SEC may have pivoted its stance toward ETF approvals.

What are Ethereum spot ETFs?
Ethereum spot ETFs are exchange-traded funds that track the spot, or current price, of Ethereum.

The decision follows the approval of Bitcoin ETFs in early January, when the US SEC gave its approval on ETFs to track the price of Bitcoin, giving investors an alternative pathway to accessing the world's biggest cryptocurrency.

“Though there were rumours, investors were not expecting the approval of Ethereum ETFs, making it an unprecedented milestone for the cryptocurrency market in gaining acceptance to mainstream financial markets,” said explained Brian Deshell, a UAE-based cryptocurrency trader and analyst.

Are Ethereum ETFs better alternatives to buying Ethereum?

“The high price of cryptocurrencies have made the crypto investment beyond the reach of most investors worldwide. This is why there has been a lot of interest in finding alternatives to invest in Ethereum and reduce the risks that come with directly buying top cryptocurrencies,” added Deshell.

Crypto ETFs are one such alternative. With it, investors can get exposure to cryptocurrencies without having to go through the trouble of setting up a wallet or dealing with erratic exchanges. But they are not without risks, flag industry experts. But what are they?

How do crypto ETFs work?
ETFs are portfolios that allow investors to bet on multiple assets, without having to buy any themselves. Traded on stock exchanges like shares, their value depends on how the overall portfolio performs in real time. So, ETF portfolios that contain crypto holdings are referred to as crypto ETFs.

By buying shares of a cryptocurrency ETF, you can gain exposure to the price movements of the cryptocurrency like Bitcoin or Ethereurm. “However, investors looking to utilise ETFs to access cryptocurrencies are not necessarily getting what they wanted,” added Deshell.

“Investors should be convinced that by investing in a regulated product like a Bitcoin ETF, their money will be safe. However, it’s not proven to be effective as a means to exponentially grow your money in the crypto market. Moreover, there has hardly been any progress in approvals until now.”

What is all this hype around spot ETFs?
Asset management firms are applying for approval for what is called ‘spot ETFs’. While some ETFs already contain crypto indirectly, a spot ETF will buy the cryptocurrency directly, "on the spot", at its current price, throughout the day – proving useful for traders eyeing quick gains.

Crypto ETF always mean a safer investment? Not always

“Why investors are not convinced with crypto ETFs as an investment is because they are not able to profit as much as those who buy crypto directly. Ethereum ETFs do not own Ethereum itself as regulators are concerned that Ethereum, like Bitcoin, is traded on non-regulated exchanges,” added Deshell.

“Instead, crypto ETFs own companies and other ETFs that are related to cryptocurrency in general. There is also the added risk of ETFs trading on the market, which adds to their volatility. In that case, mutual funds fare better as they are not traded directly on a stock exchange.”

Although a crypto ETF isn’t a direct investment in cryptocurrency, it’s still risky due to the exposure to crypto, opined Brody Dunn, an investment manager at a UAE-based asset advisory firm, who went on to explain why.

“Those that may have been waiting to invest in crypto ETFs and thought that this was the thing that’s going to make it incredibly safe for them, without really doing the due diligence, that’s where the concern is,” cautioned Dunn.

Image Credit: Shutterstock

Big investors may profit more from some crypto ETFs

Though Dunn notes that the introduction of a Bitcoin ETF is good for the overall Bitcoin and crypto market, he warns that it may not benefit investors individually. What this means is that bigger investors (i.e. institutional investors) stand to benefit.

“A crypto ETF like Bitcoin is going to drive more of that institutional money in, but they’re going to make a ton of money,” he added. “It does help the market, but what about the average investor? It’s supposed to help them, but that’s not necessarily what is happening here.”

Crypto experts like Deshell, along with some others in the crypto community, agree with Dunn. Some argue that the major firms involved in a potential cryptocurrency ETF investment, including hedge funds and providers, would benefit more than individual investors. This applied to Ethereum too.

“Direct exposure is the best way for a new investor to get into cryptocurrencies, but that’s not without risks,” Dunn added. “Bitcoin or Ethereum ETF is just a product to help hedge funds and other middlemen make more money, and newbie investors shouldn’t be buying without understanding.”

Bottom line: Good to buy crypto ETFs after they are launched?

“If you don't want to actively manage your crypto investment, but you want a way to diversify your portfolio with a high-risk, high-reward asset, a crypto ETF is a better option than buying the cryptocurrency directly,” said Deshell.

According to a recent survey by eToro with retail investors in the UAE, over 74 per cent respondents agreed that the prospect of an Ethereum ETF will significantly influence their decision to increase, decrease or maintain their current Ethereum allocation.

Among the several benefits of crypto ETFs, the key perks are low cost of ownership, being able to diversify your crypto investments, while having somebody with knowledge of the market to manage them, which also enables you to save time picking crypto tokens.

“Also, owning crypto ETFs saves investors from costs like network charges and transaction fees. An ETF provider is responsible for the safety of the fund, offering a sense of security to investors. These are factors that should drive you to invest. But it isn’t always that straight-forward,” he said.

“Crypto ETFs are now observed to amplify volatility in prices and create risks for investors if the fund is a large share of the market. Recent trends suggest that ETFs can exacerbate price movements and create additional volatility when they have a large footprint in the underlying asset.”

Regardless, whether you invest in the Bitcoin or Ether ETF or in the cryptocurrencies directly, industry experts have widely recommended that you only invest what you can afford to lose, especially when it comes to non-tangible physical assets. Only then such risks can pay off.