Looking Back on Ethereum ETFs ―what Went Wrong?

Exchange-traded funds have received considerable media attention since their correlation with Bitcoin projects. Interest from crypto enthusiasts exploded since authorities like the SEC wouldn’t approve them despite being safer than other crypto-based assets. That’s because owning ETFs would offer investors market exposure without possessing the underlying assets, therefore not dealing with volatility prices in the same manner.

Eventually, the SEC confirmed BTC ETF regulatory support at the beginning of 2024, marking it as one of the most critical events in the crypto community. A few months later, the same institution approved Ethereum-based spot ETFs in May, allowing them to be traded on the NYSE or Nasdaq. Shortly after, the ETH price boomed due to significant demand and competitiveness from BTC ETFs.

However, compared to Bitcoin ETFs, which have ruled the market for some time, Ethereum flopped quickly after introducing it to official trading. So, what happened?

What Happens When You Outperform the Market

Many crypto experts consider that the timing in which ETH ETFs were approved and their performance in the market was off, causing the flop. During the previous bear market, Ethereum showed an unnatural good performance compared to other assets, having an unusual path of development.

Ethereum was also not significantly affected by the FTX collapse at the end of 2023. It had its lowest point a few months earlier, during the downfall of the largest hedge-fund trading. However, most investors weren’t optimistic about it, so Ethereum failed its momentum of glory, ultimately leading to its mediocre performance when ETFs got approval.

Not Fitting in to Be Classified

Although Ethereum is an innovative blockchain that leverages Ether at its maximum, some say it struggles to fit in on the market because it may be too edgy. On the one hand, Ethereum is one of the best-decentralized platforms, with all the necessary tools for developers to create anything from applications to games.

On the other hand, Ethereum’s creator, Vitalik Buterin, wants to focus on improving it to offer investors the best financial opportunities through a robust and reliable blockchain. Therefore, it enters the competition with Bitcoin, which is, at its core, a sort of value asset. Consequently, it doesn’t enter a single narrative that would satisfy a specific audience.

A Plethora of Ethereum Alternatives

Since many of the market's assets are backed by Ethereum, as it is built into the blockchain, the network has numerous additional investments that benefit Ether owners. Layer 2 tokens, staking-based tokens, and meme coins are only a few of the many related assets on the blockchain that make the ecosystem one of the best hubs for innovation.

However, the disadvantage of this pool of assets is that investors have too many options, and they can never know if they made the right choice of having meme coins over the actual cryptocurrency, so they limit their options for more safety. At the same time, they might follow market trends and rely on only one ETH-based asset. For example, when the meme coin season was flourishing, investors were interested in nothing but PEPE or BONK.

Previous Concerns About Asset Classification

Before the SEC approved ETH ETFs, there were speculations that the institution would declare Ethereum as a security and forget its previous commodity comment. Considering they announced Bitcoin as a commodity before, some hoped the same for Ethereum, but others were skeptical since Ethereum’s features differed slightly.

Bitcoin was easier to consider a commodity since its value was the result of supply and demand. At the same time, Bitcoin is not tied to a centralized entity, allowing it to pass the Howey test, the US’s official legal framework determining whether a transaction is an investment contract. It’s still unclear if Ethereum is a commodity or a security, but at least the SEC didn’t label it a security, as this would impose certain challenges in trading it.

Still, ETF Approval from the SEC Assured Investors

One of the biggest problems with cryptocurrencies is the lack of regulatory oversight. This exposes investors to risks despite the fact they’re not trading with regular assets, meaning they don’t receive the same coverage and protection when things go down.

However, the SEC’s approval for Ethereum ETFs cleared out security concerns, as they’re more transparent

now. In addition, ETFs are cheaper investments than many others on the market, and they have multiple tax benefits compared to mutual funds, making them a popular choice for crypto and non-crypto investors.

This will inherently attract new buyers to the Ethereum ecosystem since it allows institutional investors to explore a new area full of benefits. On the other hand, Ethereum ETFs will give crypto-natives another reason to return to Ethereum investments.

Nevertheless, ETFs Are Not Entirely Safe

No single investment is 100% safe and profitable. This applies to ETFs as well, whether Bitcoin or Ethereum. Therefore, despite their benefits, investing in ETFs can present considerable risks. First, investors must understand the tax implications of ETFs. Otherwise, they might end up having to pay a significant tax bill due to negligence. For example, commodity ETFs have specific tax implications based on the funds’ structure.

On the other hand, ETFs are prone to tracking errors, which can sometimes be insignificant and not affect investors. However, there are instances where the difference between the index fund and the target index is considerable, influencing the investors’ returns.

Finally, ETFs include liquidity risks since not all benefit from a high trading volume, but you may encounter this when it’s too late to exit the position fast enough to avoid losses.

What’s Your Take on Ethereum ETFs?

Ethereum ETFs were some of the most awaited crypto assets of the year, especially since the SEC approved Bitcoin ETFs at the beginning of the year. However, their performance was objectively poor, as prices and popularity flopped shortly after their introduction to the market. Several factors, like improper classification or too many Ethereum alternatives, contributed to a lack of accomplishment. Still, we’re optimistic about a substantial return in the future.