Understanding the SEC’s Ethereum ETF approval

Some personal investors are fully immersed in crypto. They know how to use digital wallets, securely store their recovery phrases, and take full custody of their assets, just as the industry's pioneers envisioned. They have chosen to invest in the long-term benefits of digital assets.

Others are afraid of managing their own crypto and may thus not benefit from one of the best-performing assets over the last decade. They may be investing through professional brokerages that don’t typically embrace direct ownership of crypto assets. 

Exchange-traded funds (ETFs) offer a solution by allowing traditional investors to gain exposure to digital assets like Bitcoin (BTC) or Ethereum (ETH) without directly holding them. This guide explores the U.S. Securities and Exchange Commission’s 2024 approval of Ethereum ETFs and its implications for investors.

What is an Ethereum ETF?

ETFs are financial instruments that track the value of an asset, index, or commodity. They're available on stock exchanges and traded like traditional stocks. 

The Ethereum ETF is designed to track the price of Ethereum (ETH), the second-largest cryptocurrency by market cap. It allows investors to gain exposure to ETH, the native token of the Ethereum blockchain, through conventional brokerage firms.

Many investors view ETFs as a convenient alternative to directly investing in the crypto market. For those investors nervous about the risks associated with self-custody (managing keys, storing recovery phrases, etc), ETFs provide a way to gain exposure to ETH. 

Types of Ethereum ETFs

After the Ethereum ETF approval date in 2024, they became available in multiple variations. Here are the options:

• Spot Ethereum ETFs: Spot ETFs reflect the current price of the assets they track. Spot Ethereum ETFs will, as a result, track the price of Ethereum. Investments in these spot ETFs will rise and fall with the actual cost of Ethereum.
• Futures Ethereum ETFs: Futures contracts are agreements to purchase an asset at a predetermined price. A Futures Ethereum ETF holds a basket of futures contracts and trades them as a security on regulated exchanges. The Securities and Exchange Commission (SEC) strictly regulates Futures ETFs, adding a layer of transparency and protection for investors.

When were ETH ETFs approved?

The SEC approved futures Ethereum ETFs in May 2024, followed by several spot Ethereum ETFs in July 2024. Firms such as BlackRock, Fidelity, Franklin Templeton, Grayscale, and VanEck have filed for Ethereum ETF approval. The approval process involves the SEC reviewing a series of forms, as detailed below:

1. Approval of the 19b-4 forms: The SEC requires exchanges to file Form 19b-4 to propose the details and structure of their ETF offerings. In May 2024, the SEC reviewed and approved these forms for at least eight organizations planning to offer Ethereum ETFs. The SEC requested expedited revisions from several organizations before granting final approval.
2. Approval of S-1 registration forms: S-1 forms are registration statements filed by institutions that have already had their 19b-4 forms approved. These legally required disclosures provide additional information the SEC deems necessary to ensure transparency and investor protection. This stage often involves multiple discussions between regulators and the exchanges filing the registration forms.

Pros and cons of buying Ethereum versus Ethereum ETF

Whether buying Ethereum directly or investing in an ETF that tracks its price, investors should be aware of the benefits and risks of each option. With the approval of Ethereum ETFs, U.S. investors now have both avenues available.

Pros of buying Ethereum directly

• 24/7 market access: The crypto market never sleeps. Traders can buy digital assets like Bitcoin (BTC) and Ethereum (ETH) at any time, without the constraints of traditional market hours.
• Complete ownership: Purchasing Ethereum directly allows traders to have full ownership of the asset. This offers the financial freedom of holding the keys to a digital hardware or software wallet.
• No intermediaries: Blockchain technology eliminates go-betweens in transactions. Ethereum's recent transition to a proof-of-stake (PoS) model (aka the Merge) ensures decentralized verification by independent validators.

Cons of buying Ethereum directly

• Market volatility: Direct exposure to market swings can be risky, as there are no mechanisms to halt trading during significant price drops.
• Custodial responsibility: Self-custody requires managing digital storage devices and safeguarding recovery phrases. Any loss or exposure of these phrases can result in loss of assets.

Pros of investing in Ethereum ETFs

• Regulated environment: The SEC regulates stock exchanges, offering safety and rules that specify trading hours and price limits.
• Simplified custody: ETFs eliminate the need to manage digital wallets or recovery phrases, as the exchange handles custody of the underlying asset.

Cons of investing in Ethereum ETFs

• Market hour limitations: ETFs trade only during market hours, which excludes weekends and holidays, limiting trading opportunities to 251 days per year. 
• Management fees: Investing in an Ethereum ETF involves paying management fees, which can be as high as 1.5% annually, in addition to any transactional fees.
• Lack of direct ownership: ETF investors do not directly own Ethereum. Instead, the asset is held by the firm offering the ETF, contrasting with the direct ownership available through direct purchase.

How will the approval of Ethereum ETFs impact investors?

The anticipation surrounding the approval of Ethereum ETFs has been high, with many analysts making bullish Ethereum price predictions. However, the immediate benefits to investors extend beyond potential price gains. Here are some key advantages:

• Asset diversification: Traditional investors have had limited access to the crypto market. With the approval of an Ethereum ETF, they can now diversify their portfolios with digital assets through regulated brokerage firms. This diversification helps spread risk across different asset classes.
• Crypto exposure: Adding crypto assets to an investment portfolio can balance a stock-heavy allocation, allowing investors to benefit from high-performing crypto assets like Ethereum (ETH) without directly holding them.
• Regulatory assurance: Ethereum ETFs provide the security of a regulated environment. The SEC's oversight of ETFs ensures increased transparency and investor protection compared to directly holding cryptocurrencies, which operate in a less regulated space.

How are ETFs taxed?

ETFs offer several tax advantages because they are often more tax-efficient than mutual funds, mainly due to their structure, which typically results in fewer capital gains distributions. However, understanding the specific tax rules is crucial to maximizing these benefits – especially when tax season arrives.

Tracking every trade to optimize a tax return can be complicated, but having the right tools helps. CoinTracker records each transaction and generates a comprehensive tax report in minutes, simplifying the process. Start for free and discover why millions of investors trust CoinTracker to optimize their returns each year.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.