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Should You Invest in Spot Ether ETFs?

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

The Securities and Exchange Commission recently approved spot ether Exchange-Traded Funds for trading on public exchanges. As of June 2024, only a few steps remain before investors can purchase shares of these ETFs for themselves. This is not unprecedented — Spot Bitcoin ETFs debuted on the U.S. stock exchange in February 2024. Still, members of the cryptocurrency space consider this a surprise move by the SEC, one that could signal a growing acceptance of cryptocurrency in the securities industry.

Spot ether ETFs are poised to become the next trendy investment, but investors should be wary of their pitfalls. The price of ether is volatile and there is limited precedent to assess the soundness of this cryptocurrency investment. According to the Wall Street Journal, critics of spot Ether ETFs have suggested that the Ethereum blockchain has “features that make it vulnerable to fraud.”

What Are Spot Ether Exchange-Traded Funds?

Spot ether ETFs are a type of ETF that aims to make money from the price of ether.

  • Exchange-traded funds are funds that comprise a collection of investments. They trade on the stock exchange and usually track an index, such as the S&P 500. The ETF grows along with the stock market and weathers its losses. These types of funds spread out risk so that investors do not have to rely on the success of any one investment.
  • In the case of spot ether ETFs, the index is the price of ether.
  • “Spot” refers to the current trading price.
  • Ether is a decentralized currency that derives its value from Ethereum, a blockchain similar to Bitcoin.

How Does Ether Work?

Ether functions using a process called proof-of-stake (PoS). Ethereum holders “stake” their coins for the chance to validate transactions. They are chosen based on the amount they have staked. If they accurately validate a transaction, the stake-holders, or “validators” earn ether. If a staker validates fraudulent transactions, they are penalized by losing ether.

Cryptocurrency enthusiasts point out that Ethereum’s proof-of-stake model requires far less energy than Bitcoin’s proof-of-work model, which validates transactions using computers to solve puzzles. The computational power required has garnered concerns about Bitcoin’s eco-friendliness and long-term sustainability.

Because stakers must own ether in order to validate transactions, spot Ether ETFs offer investors the chance to participate in the cryptocurrency market without having to purchase crypto. Purchasing crypto involves opening a digital wallet, which may not be an easily accessible process to those new to the crypto space.

Why Did the SEC Approve Spot Ether ETFs?

The SEC determined that Bitcoin is not a security, but a currency. What makes spot ether ETFs (and spot Bitcoin ETFs) different?

The SEC defines an investment using the Howey Test. The Howey Test demands that an investment meets the following four criteria:

  1. An investment money;
  2. In a common enterprise;
  3. With the expectation of profits,
  4. Based on the efforts of others.

While Bitcoin owners may hope that the value of their Bitcoin will increase over time, they are not relying on the efforts of others to make that happen. The value of Bitcoin is based solely on supply and demand. ETFs, however, are securities that can track the value of currencies.

Who Will Offer Spot Ether ETFs?

MorningStar reports that the following asset managers have submitted S-1 filings to offer spot ether ETFs:

  • VanEck
  • Fidelity
  • iShares
  • Bitwise
  • Ark 21Shares
  • Invesco Galaxy
  • Franklin
  • Grayscale

What Are the Dangers of Investing in Spot Ether ETFs?

The price of ether, like any cryptocurrency, is extremely volatile. Investors should be wary of brokers who push these investments and be aware that they are not suitable for investors who want low-risk investments. Investors may experience fear of missing out on the cryptocurrency trend and feel pressured to take a risk.

Do not hesitate to speak with a securities attorney if you lost money on a spot ether ETF after working with a registered broker. Investors who rely on their brokers for recommendations may have a case for an investment fraud attorney.

Our attorneys offer free case consultations: (877) 600-0098 and info@kurtalawfirm.com. Many brokerage firms require clients to file their claims through FINRA arbitration rather than a civil suit, and our securities attorneys are experts in the FINRA arbitration process.

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.