Ether ETFs Cleared for Trading: Key Issues to Know

U.S. regulators have officially cleared the way for spot exchange-traded funds (ETFs) linked to the cryptocurrency ether to begin trading. Ether is the virtual currency of the Ethereum blockchain and is the world's second-largest cryptocurrency. Trading is expected to begin July 23.

Eight asset managers received the go-ahead to launch ETFs tied to the spot price of ether from the U.S. Securities and Exchange Commission (SEC). Ether will be the second cryptocurrency approved for spot ETFs after regulators cleared ETFs linked to spot bitcoin in January.

With that policy change, the SEC modified its listing rules to allow exchanges to list and trade shares of cryptocurrency ETFs, shifting how cryptocurrency is viewed by the investing public and bringing it closer to mainstream acceptance. For years, SEC leaders had warned of the risks of the largely unregulated crypto markets, previously turned away numerous crypto-based investment applications, and levied fines on alleged crypto scams.

Despite the potential risk, cryptocurrencies have grown in popularity: There are thousands of cryptocurrencies that have been trading for several years as well as a few other ETFs linked to ether futures. The SEC allowing ether ETFs to be listed on established, regulated exchanges potentially opens up a new crypto inroad for investors who might otherwise not want to hold spot ether. Bitcoin-based ETFs have grown to almost $61 billion in total assets under management, though that's still a fraction of the overall $9.5 trillion assets in U.S. ETF funds.

Like bitcoin ETFs, ether funds are listed on traditional exchanges like the New York Stock Exchange and the Nasdaq^®. However, crypto is still crypto, and it remains very different from traditional assets like stocks and bonds, so it's important to be fully aware of the unique risks. 

Here are a few basics.

Bitcoin, ether, and other cryptocurrencies, also referred to as coins, are virtual, digital currencies secured through one-way cryptography.

Many are based on what's known as blockchain technology, a distributed ledger of all transactions that's decentralized and can't be changed under most circumstances. Unlike traditional currencies, such as the U.S. dollar, cryptocurrencies are not controlled by any central government or authority.

Cryptocurrencies enable online payments to be made directly from one party to another through a worldwide payment system, without the need for a central third-party intermediary like a bank. Similar to physical gold, a cryptocurrency's value stems from a combination of its perceived scarcity and the perception that it can be a store of value, an anonymous means of payment, or a hedge against inflation. 

While bitcoin and ether are both digital assets, there are some key differences with the platforms. Bitcoin launched in 2009 as currency that uses blockchain technology and is seen as a store of value. The Ethereum network, which launched in 2015, is more than just its native currency, ether. The network's blockchain can be used to develop decentralized applications and for smart contracts, and using ether fuels those operations.

The listing of bitcoin-based ETFs helped drive a short-term rally in crypto prices earlier this year. However, since that rally faded, ether traded around $3,422 in mid-July, down 24% from a high of almost $4,500 in March. Bitcoin has traded down almost 13% to around $64,378 from an all-time high of almost $73,836 in March.

As of July 2024, there were almost 10,000 cryptocurrencies, according to Investing.com. Ether is one of the most actively traded cryptocurrencies, with an overall market cap of almost $412 billion. 

Ether ETFs will be available to trade July 23 on schwab.com and the thinkorswim^® platform, where spot bitcoin ETFs are already available to trade. For more on trading cryptocurrency, visit schwab.com/cryptocurrency. 

ETFs, which trade on exchanges like shares of stock, have grown rapidly since the first of these funds launched in the early 1990s. There were more than 3,100 U.S.-based ETFs with combined assets totaling more than $8 trillion at the end of 2023, according to the Investment Company Institute. ETFs can also offer ways to invest in certain assets, such as commodities and real estate, that individual investors may otherwise have difficulty accessing.

Similar principles apply to ether ETFs and the inaugural spot bitcoin ETFs. 

Investors can now buy shares in these ETF products, and based on the structure of the fund, they can track the underlying cryptocurrency's movements. Assuming the ETF has sufficient "liquidity"—ample numbers of buyers and sellers in the market day after day—an investor would be able to enter or exit a position in a spot ether or bitcoin ETF with relative ease, just as they would with stock shares. (ETF shares could also be sold "short" if an investor believes the price of the underlying asset may decline, albeit with unlimited risk potential.)

It's important to remember that because these are new ETFs, the market's liquidity may or may not be deep enough to enable quick and efficient trade execution investors have come to expect with stocks. A market lacking liquidity could lead to unusually wide bid/ask spreads and difficulty executing trades, especially in volatile markets.

Crypto-linked futures contracts traded on CME Group offer mixed signals in terms of trader interest. During the first half of 2024, an average of 5,548 ether-based futures contracts changed hands each day, up 4.7% from the same period in 2023, according to CME data. By contrast, bitcoin futures' activity was much stronger, averaging 14,708 contracts a day through June of this year, up 34.7% from the same period last year. (Futures contracts, similar to cryptocurrencies, also pose unique risks and are not appropriate for many investors.)

Despite the SEC allowing trading of spot bitcoin and ether ETFs, cryptocurrencies in general still lack a regulatory structure like the SEC provides for the U.S. stock market. That means investors are entirely responsible for the security of any cryptocurrency holdings.

In recent years, the SEC noted that with cryptocurrencies, there is "substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation."

Additionally, cryptocurrency prices and prices for any related securities can be volatile and prone to sharp and unexpected price swings. Before putting money into any asset, investors should consider their risk tolerance, do their homework, and make sure any crypto-based investments are appropriate for them and in alignment with their long-term financial goals. ETFs have their own distinct risks and potential drawbacks as well that investors should carefully consider. It's also advisable to study an ETF's prospectus and understand its investment objectives.

Schwab continues to monitor cryptocurrencies as regulations and technology evolve. While some traders have made money on the change in price of ether, bitcoin, or other cryptocurrencies (and others have lost money), we suggest most investors continue to treat them as a speculative asset primarily for trading with money outside a traditional long-term portfolio.