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Ethereum is the second largest cryptocurrency according to the market cap rankings. It is just behind Bitcoin and often tries to accomplish milestones set by BTC in addition to its independent roadmap. After the approval of the spot Bitcoin ETF by the Securities and Exchange Commission in the United States, many crypto users and enthusiasts feel it is time for Ethereum.
Financial companies such as Franklin Templeton Ark Invest and 21Shares are among the huge names filing for a spot Ethereum ETF to the SEC. Pending when these are approved, there are speculations that there might be some cons after the approval of these. This article guide explains the meaning of ETH spot ETFs, the benefits of their approval, and some of the major concerns about them.
Understanding The Ethereum Spot ETF
Before discussing the ETH Spot ETF, it is vital to go through the general meaning of spot ETFs and how they function. Spot exchange-traded funds (ETFs) are a classification of investment that allows investors and traders to have direct exposure to a cryptocurrency. This is very different from futures ETFs. Futures ETFs do not provide direct exposure to the actual cryptocurrency in real-time. Instead, they only offer an opportunity for investors to speculate and place bets on the future price movements of a crypto asset.
An Ethereum Spot ETF is traded in traditional stock exchanges instead of regular crypto exchanges, making it easier for investors to have experience in crypto trades. The benefit of Ethereum Spot ETFs is that they don’t require stock traders to create a wallet and use a crypto exchange. Grayscale, Franklin Templeton, and Ark Invest are some of the companies pushing for the approval of Ethereum Spot ETFs.
How Will ETH Spot ETF Benefit Traders and Investors?
- Increased Ethereum Inflows
One of the things that is assured with the approval of an ETH spot ETF is an increase in Ethereum inflows as the token becomes more accessible to those who didn’t have the chance. For instance, those who didn’t want to use crypto exchanges to trade Ethereum can do so with their favorite traditional stock exchange. The surge in Ethereum inflows will also signify an increase in its adoption; the same thing happened with Bitcoin after the approval of BTC spot ETF.
- Increased Ethereum Liquidity
Pending when a spot ETH ETF is approved, crypto exchanges are the principal way one can trade Ethereum using the spot prices. However, approving this ETF means investors and traders can now buy from stock exchanges. This also means more liquidity, making buying and selling an easy business in the market.
- Price Surge Leading to Profits
Using Bitcoin as a case study, the spot ETFs of any cryptocurrency attract more attention, which often means their price increases. The same thing happened to Bitcoin after the spot ETF approval, with the price reaching a new all-time high above $70k. The same is expected to happen to Ethereum, as there are predictions that the price will exceed $5k due to the spot ETF approval.
- Portfolio Diversification
Some stock traders want to diversify their portfolio with cryptocurrencies but without leaving their favourite stock exchanges for their crypto counterparts. An Ethereum Spot ETF provides an excellent opportunity to invest and benefit from the price appreciation of cryptocurrencies without having to create a wallet.
- Institutional and Retail Accessibility
One of the major functions of crypto spot ETFs is that they bridge or settle the differences between traditional finance and cryptocurrencies. Bridging these differences often attracts more institutional investors to crypto assets
Major Concerns Around the ETH Spot ETF
- Institutional Centralization
The approval of Ethereum Spot ETF would mean more institutions are getting their hands on digital assets. When a large number of institutions control a significant part of the Ethereum circulating supply, it often goes against the fundamental feature of decentralization. This is institutional centralization, as a massive sell-off from these institutions could lead to Ethereum’s price dropping significantly.
- Tracking Errors
As said before, spot ETFs of cryptocurrencies are not actual cryptocurrencies but are created to move according to the price of the real cryptocurrencies. Thus, there can sometimes be market discrepancies while trying to track Ethereum’s price movements, making ETF performance differ from the actual crypto market. Errors like this can easily lead to massive flaws in market performance, and traders might have to face unexpected outcomes.
- Limited Investment Decisions and Control
Investment companies and other financial institutions, such as Ark Invest, are the ones that file for the spot Ethereum ETFs. So, they often have greater control of these ETFs, and a decision from them can quickly impact the trading trajectory of investors. This is unlike the real Ethereum cryptocurrency, where individual traders can make their independent investment decisions without intuitions limiting the control of their assets. Sometimes, the decisions the ETH Spot ETF funds managers make might not align with the investment goals and strategies of traders.
- Issuers Credit Risk
Spot ETFs usually mean that the fund managers and issuers can replicate the price of this crypto asset in real-time. If there’s any failure from the issuer of this spot ETH ETF to replicate the price, it can often result in losses. While this rarely happens, it is still a possibility, making it one of the concerns investors have about the approval.
- Fees
Even while trading in crypto exchanges, one still has to pay transaction fees in the process of depositing, funding, conversion, and withdrawal. However, this can’t be compared to the fees investors have to pay while trading the spot ETF of cryptocurrencies. One of the first things to note is that one has to pay brokerage’s trade fees while trading Ethereum Spot ETFs. Furthermore, there’s also the possibility of paying the fund’s expense ratio, which can be anywhere from 0.39% to 0.95%. In comparison to crypto exchanges, this is very high, as you only need to pay fees as low as a few hundredths of the value traded while buying Ethereum from crypto exchanges.
Wrapping Up
As a recap, the Securities and Exchange Commission is yet to approve the spot ETH ETFs. However, there are already concerns regarding what many perceive to be the challenges that might come up if these ETFs are approved. Moreover, that doesn’t mean that Ethereum Spot ETFs don’t come with their benefits.
Some of the benefits include providing exposure to traditional stock traders, portfolio diversification, and profits. In the same way, there are also perceived cons to these ETFs, such as higher fees, tracking errors, and institutional centralization. Nevertheless, the benefits of approving these spot ETH ETFs seem to outweigh the downsides.
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