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Ethereum Futures ETFs, Explained

Last Updated May 24, 2024 12:33 PM
Onkar Singh
Last Updated May 24, 2024 12:33 PM

Key Takeaways

  • Ethereum Futures ETFs offer a regulated and accessible way to invest in Ethereum without directly holding the underlying cryptocurrency.
  • Ethereum Futures ETFs provide diversification benefits, potential hedging opportunities, and a secure investment vehicle within traditional financial markets.
  • However, investors must be aware of the risks associated with Ethereum Futures ETFs, including market volatility, regulatory uncertainties, and tracking errors.
  • Thorough research is essential before investing in Ethereum Futures ETFs, such as comparing factors such as expense ratios, trading volumes, management fees, and historical performance.

What Are Ethereum Futures ETFs

Smart contracts and decentralized apps (dApps) are made possible by Ethereum, which is well-known for its flexible blockchain technology. It has the ability to completely transform a number of industries by offering secure, transparent, and decentralized solutions.

Rather than holding the cryptocurrency outright, Ethereum Futures ETFs are investment vehicles that track the price of Ethereum futures contracts. These contracts are commitments to purchase or sell Ethereum at a predetermined price and later date. 

With the launch of these ETFs, traditional investors now have a familiar and regulated way to follow the price swings of Ethereum without having to deal with the digital asset directly.

Ethereum Futures ETFs were made possible by the approval of Bitcoin ETFs, which began with the ProShares Bitcoin Strategy ETF in 2021. This approval demonstrated the increasing regulatory comfort and investor interest in cryptocurrency-related financial instruments, marking a critical milestone in their adoption.

Investors are drawn to crypto exchange-traded funds (ETFs) because they provide an easier way to invest in digital assets while maintaining the security, transparency, and liquidity of traditional financial markets.

ProShares Ether Strategy ETF is an example of the Ethereum Futures ETFs. By utilizing the infrastructure and legal protections of traditional financial instruments, these funds give investors a new way to get involved in Ethereum’s potential growth.

How Ethereum Futures ETFs Work

Ethereum Futures ETFs are investment funds that allow investors to gain exposure to Ethereum without directly holding the cryptocurrency. These ETFs make investments in Ethereum futures contracts, which are conventional contracts that commit investors to buying or selling a certain quantity of Ether (ETH) at a certain price at some point in the future.

These contracts are standardized in terms of quantity and expiration date, making them tradable on futures exchanges.

Step 1: Open An Account

Open an account with a brokerage or futures exchange that deals in cryptocurrency futures to trade Ethereum futures. This frequently entails accepting the exchange’s terms and conditions as well as fulfilling certain margin requirements.

Step 2: Placing Orders

Based on their forecasts of the market, traders issue orders to purchase (go long) or sell (go short) Ethereum futures contracts. If the price of ETH increases above the contract price, a long position will profit; if the price drops below the contract price, a short position will profit.

Step 3: Margin And Leverage

Trading futures normally requires the use of margin, which is the trader’s deposit of a portion of the contract’s entire value. Exchanges frequently provide leverage, which enables traders to manage a sizable position with a comparatively small initial commitment. But there’s also a greater chance of suffering big losses as a result.

Step 4: Mark-To-Market

Gains and losses on futures positions are computed and settled at the conclusion of each trading day since they are marked-to-market every day. Traders whose positions move against them could be asked to make extra deposits, or what’s known as a margin call.

Step 5: Expiration And Settlement

Ethereum futures contracts have a set deadline for expiration. Depending on the conditions of the contract, the contract is settled at expiration either in cash (the difference between the contract price and the market price) or by physical delivery of ETH. The majority of bitcoin futures are settled in cash.

Step 6: Closing The Position

Before the positions expire, traders have the option to close them at any moment by entering the market in the other direction. A trader having a long position, for instance, can terminate it by selling a futures contract of equal value.

Step 7: Profit And Loss Calculation

The difference between the entry and exit prices, multiplied by the contract size, determines the profit or loss from a futures deal. All commissions and fees assessed by the brokerage or exchange are factored into this computation.

ETH Futures ETFs Vs. Spot ETH ETFs

Ethereum Futures ETFs are investments in futures contracts, which are contracts to purchase or sell Ethereum at a fixed price at a later time. These ETFs speculate on the price of Ethereum rather than holding actual cryptocurrency. On the other hand, spot ETH ETFs hold Ethereum directly, mirroring the cryptocurrency’s current market value. 

While futures ETFs give exposure through the futures market, which may be susceptible to contango and backwardation, which could have a different influence on returns, spot ETFs offer direct exposure to changes in Ethereum’s price.

The below table states the differences between Spot ETH ETFs and ETH Futures ETFs:

Features     Ethereum Futures ETFs   Spot ETH ETFs
Underlying asset Futures contracts provide the foundation of Ethereum Futures ETFs Actual Ethereum is held in spot ETH ETFs
Price exposure ETFs for futures trading subject investors to anticipated future prices Spot ETFs follow the price of the market as it is
Investment mechanism Ethereum’s price is speculative in futures ETFs Purchasing and holding Ethereum directly is the focus of spot ETFs
Market dynamics Market circumstances like contango and backwardation have an impact on futures ETFs Spot ETFs replicate the live market
Management Keeping track of Futures ETFs entails rolling contracts Ethereum must be stored securely for spot ETFs
Liquidity Traded on traditional exchanges Investors can easily access both types as they are traded on traditional stock markets.

Benefits Of Investing In Ethereum Futures ETFs

Ethereum futures ETFs offer various benefits, as explained below:

  • Diversification of investment portfolios: Investors can diversify their portfolios and gain exposure to a top cryptocurrency by purchasing Ethereum Futures ETFs, which lowers total risk and increases possible rewards.
  • Regulated and secure investment vehicle: Because Ethereum Futures ETFs are governed by financial authorities, investing in Ethereum may be done safely and transparently without having to take on the hazards of unregulated markets and direct cryptocurrency ownership.
  • Easier access to Ethereum exposure for traditional investors: It is easier for conventional investors to become exposed to Ethereum thanks to these ETFs, as they eliminate the need for them to handle digital wallets or navigate cryptocurrency markets.
  • Potential for hedging against Ethereum price volatility: Ethereum Futures ETFs provide a risk management tool in the incredibly unpredictable cryptocurrency market by hedging against price volatility. With smart futures contracts, investors can profit from both rising and declining prices.

Risks Of Investing In Ethereum Futures ETFs

While there are possible advantages to investing in Ethereum Futures ETFs, there are also significant risks. When considering adding these ETFs to their portfolios, investors must be aware of the risks involved, which include regulatory uncertainty, tracking errors, market volatility, and circumstances in the futures market.

  • Volatility of the crypto market: The value of Ethereum Futures ETFs can fluctuate significantly because of the very volatile nature of both the Ethereum price and the cryptocurrency industry as a whole. Over brief periods, this volatility may produce significant gains or losses.
  • Potential for contango and backwardation in futures markets: The market circumstances that affect Ethereum Futures ETFs include contango, where futures prices are higher than spot prices, and backwardation, where futures prices are lower than spot prices. The performance of the ETF may be impacted by these circumstances, which may result in losses, particularly if the fund is required to roll over contracts at an unfavorable price.
  • Tracking errors between ETF price and underlying Ethereum futures: When the ETF’s performance diverges from the underlying Ethereum futures contracts it is intended to monitor, tracking mistakes may happen. Fund management costs, the timing of rollovers in futures contracts, and market conditions are some of the factors that can cause tracking mistakes, which can cause disparities between the price of the ETF and Ethereum futures’ real performance.
  • Regulatory risks associated with cryptocurrency investments: Ethereum Futures ETFs may be greatly impacted by regulatory modifications and government actions in the cryptocurrency market. The legality and liquidity of these investment vehicles may be impacted by regulatory actions, trading limitations, and legislative changes, among other hazards.

How To Invest In Ethereum Futures ETFs

The below steps explains how to invest in Ethereum futures ETFs:

Step 1: Opening A Brokerage Account And Funding It

Establish a brokerage account with a company that provides access to cryptocurrency ETFs in order to begin investing in Ethereum Futures ETFs. This entails connecting a bank account, confirming your identification, and submitting personal information. After creating your account, add money to it according to your investment goals.

Step 2: Researching And Selecting The Right ETF

Find the best ETH Futures ETFs by doing extensive research. Take into account elements including the ETF’s track record of success, costs, the standing of the fund management, and the particular investment plan. ProShares Ether Strategy ETF is among the well-liked choices. Choose the Ethereum ETF that most closely matches your investing objectives and risk tolerance by comparing these options.

Step 3: Placing An Order To Buy Shares

After deciding on an ETH ETF, use your brokerage account to place an order. Market orders purchase shares at the going rate on the market, while limit orders only purchase shares at a predetermined price or less. To prevent any mistakes, make sure you check the order information before confirming the transaction.

Step 4: Monitoring Your Investment And Adjusting Your Strategy As Needed

Following your Ethereum Futures ETF investment, keep a close eye on the performance of your money. Watch the cryptocurrency market, shifts in the pricing of futures contracts, and any pertinent news. If necessary, make adjustments to your investing strategy by hanging onto your position, selling some shares, or purchasing more. Remaining knowledgeable and adaptable is essential for effective Ethereum investing tactics.

Factors To Consider When Choosing Ethereum Futures ETFs

Consider the below factors before choosing Ethereum futures ETFs:

  • Expense ratios: Examine and contrast the expense ratios of several ETFs for Ethereum Futures. Reduced expenditures for investors translate into lower expense ratios, which can have a big impact on long-term profits. Make sure you are aware of any related costs, such as the management fee.
  • Trading volumes: Better liquidity is indicated by higher trading volumes, which facilitate share buying and selling without affecting the market price. Higher volume ETFs tend to be more steady and less prone to large price fluctuations.
  • Management fee: Although it varies throughout ETFs, the management charge is a part of the expense ratio. Think at the management fee in light of other expenses and the overall performance of the ETF. Over time, net returns may be enhanced by lower management fees.
  • Performance: Analyze the ETFs for ETH Futures’ past performance. Examine both immediate and long-term performance indicators in order to determine dependability and consistency. Examine the degree to which various ETFs replicate the underlying Ethereum futures contracts.

Conclusion

Ethereum Futures ETFs offer an easily accessible and regulated option to invest in Ethereum without actually holding the coin. They offer the advantages of diversification, the possibility of hedging, and a safe investment vehicle inside conventional financial markets. 

Investors, however, need to be mindful of the risks involved, which include regulatory uncertainties, market volatility, tracking errors, and contango and backwardation in futures markets.

Depending on your investing objectives, risk tolerance, and level of cryptocurrency market knowledge, Ethereum Futures ETFs may or may not be the best choice for you. Before making an investment, careful research is necessary. 

To choose the best ETFs for your portfolio, compare management fees, trading volumes, expense ratios, and performance measures. You may make wise decisions and possibly profit from the expansion and innovation in the crypto market by carefully weighing these elements.

FAQs

Can I trade futures with crypto?

Yes, investors can trade futures with crypto, including Ethereum futures contracts, on various regulated exchanges.

Are there any spot Ethereum ETFs?

Yes, the United States Securities and Exchange Commission (SEC) has approved spot Ether ETFs on May 23, 2024.

Is there a 3x Ethereum ETF?

There are no 3x leverage Ethereum ETFs currently available. However, keep an eye on the developments in this space.

How are Ethereum futures ETFs different from Bitcoin Futures ETFs?

Ethereum Futures ETFs track Ethereum futures contracts, while Bitcoin Futures ETFs track Bitcoin futures contracts; they follow the same principles but are based on different underlying assets.

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