If the US SEC approves the Ethereum futures ETF, what impact will it have?

Original: DLNews

Compilation: Wu said blockchain

• The SEC is about to approve an ethereum futures ETF.
• Investors traded $12.5 billion worth of ethereum futures contracts in July.
• U.S. futures products may increase demand for Ethereum.

While Bitcoin futures ETFs have existed for almost two years, Ethereum has yet to have a futures ETF — and that may be about to change.

Bloomberg reported on Thursday that the SEC is preparing to approve the sale of an ETH futures ETF. ETH is the token used in the Ethereum blockchain network and is the second largest cryptocurrency by market capitalization.

That's good news for the dozen or so companies that have been eager to launch an ethereum futures ETF. They include Bitwise, Roundhill, and ProShares, among others. Some funds may be approved as early as October, Bloomberg reported. In addition, funds seeking investors may slash management fees in order to grab market share as quickly as possible.

Surge in demand

Ethereum's futures ETF may also bring new hope to DeFi investors who have encountered frequent hacks and thefts in the crypto space this year. According to the K33 Institute, futures products could “increase the influx of U.S. demand for Ethereum.” That means more volume and more activity.

The emergence of an ETH futures ETF may also boost confidence that the SEC is open to the numerous applications for bitcoin spot funds filed by asset managers such as BlackRock.

This will be a big deal because ETFs offer investors an affordable way to bet on the performance of stocks, commodities, and perhaps cryptocurrencies. In addition, ETFs traded in securities markets tend to be highly liquid.

It is hoped that a Bitcoin ETF will eventually bring the asset class into the mainstream, and with it other cryptocurrencies.

Unlike spot ETFs, futures ETFs will offer investors an opportunity to bet on what the price of ETH will be in a few months. These products are technically derivatives and are tailored for institutional investors rather than retail traders.

That's why the SEC, and Gary Gensler, may approve their sale even as the agency continues to review applications for spot bitcoin ETFs.

Strong market

While ETH supporters may like the news, a futures ETF for the token could follow the same trajectory as a bitcoin ETF, analysts said. That could worry investors.

Nate Geraci, president of investment advisor ETFStore, told DL News that two years after its launch, the bitcoin futures-linked ETF still has less than $1.5 billion in total assets under management.

Still, the market for Ethereum futures contracts remains strong. In July, investors traded more than $12.5 billion in ethereum futures traded on CME, according to data from Coinglass. That's likely well below the all-time high of $34 billion set in November 2021, but monthly volumes have consistently topped $10 billion this year.

Fee Wars

The SEC approval is likely to spark a race among asset managers to attract investors. That means a fee war is coming.

Roundhill is one asset manager vying for an ethereum futures ETF, and could grab a chunk of the market if its fees are any attractive. Bloomberg Intelligence analyst James Seyffart tweeted that the asset manager disclosed a 0.19 percent management fee for its funds.

"Compared to 0.95% for ProShares' bitcoin futures ETF, that's very low," Seyffart said. It could be “significantly lower” than VanEck’s bitcoin futures product, which charges a 0.76% fee.

ETFStore's Geraci said he thought the fee would be lower than 0.4%, but it could be "much lower than that." "Fee competition will be fierce," he concluded.

Not as simple as Bitcoin

How investors value the size of an ethereum futures ETF compared to bitcoin futures is important, Geraci said. Ethereum is not as simple as Bitcoin.

As the linchpin of the Ethereum network — and by extension most of the DeFi ecosystem — Ethereum is more of a software game. Its value proposition lies in providing users with financial utility, whether for payments, loans, loan collateral, or the purchase of NFTs. By contrast, Bitcoin is now widely viewed as a speculative asset.

CoinShares said last year that investors should look at the two digital assets in a completely different way.

“Ethereum should be valued differently, giving it a certain utility demand, whereas Bitcoin is a currency and should be valued through money demand models,” wrote research associate Marc Arjoon.

In other words, Arjoon believes that ethereum is a closer match for tech companies than it is for bitcoin. As such, its correlation with Nasdaq will “probably surpass bitcoin over time as investors understand its intricacies.”

The conclusion is: Ethereum's futures ETF may be decoupled from the trend of Bitcoin's futures products. There is another consideration - if the SEC approves a spot bitcoin ETF, assets in the futures market may move heavily into the spot market.

"I believe investors want the real thing," Geraci said, referring to spot ETFs.

Appropriate references

Analysts are already trying to estimate the size of the ethereum futures ETF market. Bitcoin has a market capitalization of about $500 billion, while Ethereum is worth slightly less than half that figure. “I think it’s a pretty good benchmark for forecasting ethereum futures ETFs,” Geraci said.

Matt Kunke, research analyst at market maker GSR, is also making estimates. "We expect demand to be capped at around $1 billion," he told DL News. That's just a fraction of what market makers are expecting for spot ETFs, he added.