BlackRock, the world’s largest asset manager, just filed an application to list an ETF that will hold ether, the native asset for the Ethereum blockchain, and directly track its underlying spot price. Ether immediately surged on the news, jumping almost 10% from $1,880 to briefly over $2,100 before starting to give back some of the gains.
The immediate surge in price mirrors a rally that affected bitcoin in June when BlackRock similarly filed an application to list a spot bitcoin ETF. ETFs stand for exchange-traded products, and they offer a convenient way for investors to buy exposure to an asset without having to directly procure it. This property is especially appealing to crypto investors, many of which are turned off by the technological and security challenges that come with buying the actual asset.
In the case of bitcoin, it surged more than 20% in June, as many industry watchers felt that an asset manager with the clout and reputation of BlackRock would not file an application without an expectation of success. It is worth noting that to date no spot crypto application has ever been approved by the Securities and Exchange Commission for any asset (and it has not been approved since despite growing optimism). As a result, while bitcoin is up 45% since that date, it has not been a smooth ride. In fact, the asset nearly gave up all of its gains in the fall before rallying once again in October.
Outlook and Implications
The first thing to remember is that a BlackRock spot ether ETF is months away at the earliest and there is no guarantee that it will ever list. The SEC has up to 240 days to decide whether or not to approve a product, which could push any potential start date all the way back until next fall. In addition, it is important to note a key distinction between the regulatory statuses of bitcoin and ether that could cause additional delays.
While virtually every interested party, including the SEC is in agreement that bitcoin is not a security, and it does not fall under its jurisdiction, ether’s outlook is cloudier. In fact, SEC Chairman Gary Gensler has prevaricated on the subject multiple times, including during a high-profile showdown with the Chairman of the House Financial Services Committee Patrick McHenry (R-NC) over whether he believes ether to be a security. Notably, the token was not cited as an unregistered security in any of the lawsuits brought by the SEC against exchanges like Coinbase or Binance, and the industry is still trying to read the tea leaves of this omission.
While this distinction may not directly decide whether or not ether can be wrapped in an ETF, such a debate could still slow down the process. If exchanges need to delist the token, it could harm global liquidity and oversight, and make the market more vulnerable. It is also likely that the SEC would want to see how a spot bitcoin ETF trades before approving products that track other assets. All of this means that after a week or two of excitement, which could be sustained if/when copycat applications suddenly come out of the woodwork, ether’s price is likely to continue along the same trajectory that it has been on, which has been sluggish.
Let’s explore in more detail.
Ethereum occupies a unique place in the world of crypto, as it straddles the line between being a safe haven/store of value token and a higher beta/more volatile play on the crypto industry on the whole. This means that its value proposition combines properties as a safe haven while also having qualities of a growth asset. This hybrid model has been borne out in recent years as ether has outperformed bitcoin but trailed high-profile alternative tokens such as Solana’s SOL or Binance’s BNB.
However, the script flipped in 2023 as excitement over a spot bitcoin ETF has grown. Now investors see bitcoin as the best way to inch back into crypto after a brutal 2022. Ethereum has lagged significantly behind BTC in terms of price and furthermore core fundamentals such as network usage and active participants has not moved much in a year.
All of this means that the outlook for ether was lackluster in the coming months before the application. Although it is starting to move slightly upwards on bitcoin’s coattails, its realized volatility on a monthly basis is the lowest that it has been in almost five years. Ether’s implied volatility (expectations of future volatility) trails bitcoin trails bitcoin even in this bullish market.
Investors should be cautious about making big purchases of ether on account of this news. The price is already starting to retract, and nothing about the announcement changes any fundamental properties of ether or its trajectory.
Still, ether’s prominent place in the world of crypto makes it an important component to any portfolio. But it must be done responsibly. Therefore, most ether traders may want to focus their immediate attention on generating gradual long exposure to the spot market, where there are a few options. Centralized exchanges are the most common way to purchase spot ether. But, because a centralized party controls these exchanges, they come with risks. For example, it is impossible to verify that assets are actually there unless/until you try to take them out. This lack of transparency is one of the reasons for the FTX implosion. There are efforts to mitigate this risk, such as proof of reserves, but they are not perfect nor widespread. Exchanges can also be more expensive for retail traders. For instance, Coinbase charges almost 300 basis points for a simple purchase.
Despite their name, the seven ETH futures-based exchange-traded funds actually track the underlying spot price of bitcoin. These can be purchased directly from a retail brokerage account and do not require holders to hold and safeguard crypto. However, these can come with hidden ‘rollover costs’ in addition to expense ratios. Rollover costs relate to the extra costs that come from having to purchase higher priced monthly futures contracts every 30 days. They eventually get passed onto the consumer. Fortunately, these costs could be minimized during periods of lower volatility.
If you want to get more adventurous, a long/short strategy where one goes long on ether and short some of its smaller competitors such as Solana’s sol, Cardano’s ada, and Algorand’s algo tokens may be appealing. However, note that historically these assets have been tightly correlated in both bull and bear markets. If one wants to take even more risk, consider using leverage with futures or options contracts or purchase shares in an ETF designed to multiply ether’s returns (though please note that the accelerated returns can go in both directions). To hedge, one can also short ether directly or purchase shares in an ETF such as the ProShares Short Ether Strategy (SETH: Nasdaq) that bets against ether’s upward price movement.
Finally, if one is interested in ether at a potential discount, consider shares in the Grayscale Ethereum Trust (ETHE: OTCQX). These shares currently trade at an 18% discount to NAV. The catch is that right now they are irredeemable for the underlying ether. However, if Grayscale is able convert ETHE into an ETF, which it applied to do in October, then it could be possible to pick up a slight premium on top of any spot price gains.