What are Ether Futures ETFs and how do they work?
Ether Futures ETFs, Explained.
Ether Futures ETFs are investment funds that track Ethereum futures contracts, not Ethereum itself.
Consider a future contract to buy Ethereum at a certain price. These derivative contracts are traded through Ether (ETH) futures exchange-traded funds (ETFs), which provide a fixed investment method on Ethereum using a brokerage account.
In the year In 2021, the first Ether futures ETFs were introduced in Canada. While futures-based ETFs have been approved, the United States Securities and Exchange Commission (SEC) has yet to approve the position of Ether ETFs in the country.
Asset management companies manage ether futures ETFs. The main issuers that offer Ether futures ETFs are Bitwise, VanEck and ProShares. These companies take care of the intricacies of buying and selling futures contracts, protecting exposure and ensuring that ETFs comply with regulatory requirements.
How does the Ether Futures ETF work?
Investors can speculate on the future price of Ether using the Ether Futures ETF.
Instead of holding tangible assets, the Ether Futures ETF invests in futures contracts. These contracts are commitments to buy or sell Ether at a predetermined future date at a predetermined price. With no connection to wallets or cryptocurrency exchanges, investors can gain exposure to Ethereum price fluctuations by purchasing these contracts through an ETF.
Let's assume that the Ether Futures ETF has a contract to buy 100 ETH for $4,000 each in three months. The ETF will make a profit, and if Ether reaches $4,500 on the contract's expiration date, its share price will increase. Conversely, if the price of ETH drops to $3,500, the ETF will experience losses.
An important point to remember is that Ether Futures will continuously manage their contracts by rolling them over to maintain ETF exposure. This means they buy new contracts and sell expiring ones at later expirations. Due to this process, the price of the ETF and the actual spot price of Ether may vary slightly.
How to invest in Ether Futures ETFs
To invest in the Ether Futures ETF, select a broker, research the desired ETF, such as the VanEck Ethereum Strategy ETF, and place an order to complete the purchase.
Here are the general steps for investing in Ether Futures ETFs, using the VanEck Ethereum Strategy ETF as an example. The VanEck Ethereum Strategy ETF provides controlled exposure to Ether futures, simplifies direct ownership complexities, and its C-Corporation (C-Corp) structure maximizes tax efficiency for investors.
Choose a broker
The first step involves creating an account with a brokerage platform (such as Fidelity, Robinhood, Vanguard, and Charles Schwab) that allows ETF trading.
Get an ETF
Use the ticker symbol to search for the VanEck Ethereum Strategy ETF or any other Ethereum futures ETF. The VanEck ETF's ticker symbol is EFUT.
Research about ETFs
Do your due diligence on your chosen ETF before buying. Read the fact sheet and prospectus as well as the holdings, fees and risks associated with futures contracts.
Enter an order
Buy the desired Ether Futures ETF shares by placing a buy order, just like you would with a traditional stock. To complete the purchase, specify your order type, such as a limit or market order.
Track your investment
Monitor the ETF's performance after purchase; Remember that Ether Futures ETFs carry the inherent volatility of the cryptocurrency that can be reflected in their share price.
Why Can a C-Corp Offer Tax Benefits to Ether Futures ETF Investors?
C-Corp structured Ether Futures ETFs can offer significant tax advantages to long-term investors compared to traditional regulated investment companies (RICs).
Traditional corporations, or C-corps, are liable for double taxation on both corporate and stock dividends. Dividends are flexible and allow future profits to be offset against losses. In contrast, RICs are special investment companies that must distribute most of their profits to shareholders but are taxed by avoiding company-level taxes.
The ability of C-Corps, such as the VanEck Ethereum Strategy ETF, to carry forward losses to offset future gains can help investors pay taxes. Additionally, more money can remain invested and compounded over time because you are not required to distribute capital gains to investors.
Moreover, since C-Corp Ether Futures ETFs are paid at lower long-term capital gains rates as opposed to regular income rates, an investor's after-tax returns can be even higher.
Advantages of Ether Futures ETFs
Ether Futures ETFs provide a convenient way to trade Ethereum without the need for cryptocurrency wallets, providing regulatory protection and potential tax benefits, while also serving as a hedge against traditional assets and allowing speculation against market downturns.
Like regular stocks, Ether Futures ETFs can be bought and sold through traditional brokerage accounts, eliminating the need to set up cryptocurrency wallets and use exchanges.
By operating within pre-existing regulatory frameworks, Ether Futures ETFs provide investors with a level of protection and control that may not be as robust as direct cryptocurrency markets.
Additionally, by introducing cryptocurrency exposure to a diversified portfolio, these ETFs can act as a hedge against conventional assets and provide investors with the potential for the development of the Ethereum ecosystem.
Unlike holding ETH directly, Ether Futures ETFs can offer significant tax benefits in some jurisdictions. Profits and losses can be treated differently, potentially reducing the tax burden on investors. Additionally, investors can anticipate a decline in Ethereum prices with futures-based ETFs. This provides an opportunity to profit from market declines or to protect other investments in the portfolio.
Risks associated with Ether Futures ETFs
Investing in Ether Futures ETFs carries risks due to price differences with ETH, exacerbated by its volatility and complexity, along with management fees and potential liquidity problems.
The price of Ether Futures ETFs may not always correspond to the spot price of Ethereum because they control futures contracts. In addition, contango – a situation where future prices are higher than the spot price – may occur. Because it constantly rotates on contracts, this can gradually reduce the ETF's income.
ETH, like other cryptocurrencies, is highly volatile. Ether futures ETFs are riskier investments because they inherit this volatility from actual Ethereum. Additionally, some investors find it difficult to understand and invest in these financial instruments due to the complexity involved.
In addition, Ether futures ETFs charge management fees, which add to the overall investment cost as with any ETF. These fees can eat into your refund. Additionally, certain Ether futures ETFs may have lower trading volume than Bitcoin futures ETFs, making it difficult to buy or sell shares at desired prices, especially in large quantities.
