Golden Encyclopedia | What are Ethereum Futures ETFs and how do they work?

Author: Jagjit Singh, CoinTelegraph; Compiler: Tao Zhu, Golden Finance

1. Introduction to Ethereum Futures ETFs

Ethereum futures ETFs are investment funds that track Ethereum futures contracts rather than Ethereum itself.

Consider a contract that promises to buy Ethereum at a specific price at a certain time in the future. These derivative contracts are traded through Ethereum (ETH) futures exchange-traded funds (ETFs), providing a regulated way to invest in Ethereum using a brokerage account.

In 2021, Canada launched the first Ethereum futures ETFs. Although futures-based ETFs have been approved, the U.S. Securities and Exchange Commission (SEC) has not yet approved a spot Ethereum ETF in the country.

Asset management companies regulate Ethereum futures ETFs. The main issuers that offer Ethereum futures ETFs are Bitwise, VanEck, and ProShares. These companies are responsible for handling the complex issues involved in purchasing and disposing of futures contracts, controlling rollovers to retain risk exposure, and ensuring that ETFs comply with legal requirements.

Second, How does an Ethereum futures ETF work?

Without actually holding the cryptocurrency, investors can use Ethereum futures ETFs to speculate on the future price of Ethereum.

Instead of holding tangible assets, Ethereum futures ETFs invest in futures contracts. These contracts are promises to buy or sell Ethereum at a predetermined price on a predetermined date in the future. Without having to deal with wallets or cryptocurrency exchanges, investors can buy these contracts through ETFs, thereby being exposed to Ethereum price fluctuations, and ETFs simply raise investors' funds to buy them.

Suppose an Ethereum futures ETF has a contract to buy 100 ETH at $4,000 each in three months. If Ethereum reaches $4,500 on the contract expiration date, the ETF will make a profit and its stock price will rise. In contrast, if the price of ETH falls to $3,500, the ETF will suffer a loss.

A key point to remember is that Ethereum futures ETFs continually manage their contracts by rolling them over to maintain exposure. This means they buy new contracts with later expiration dates and sell contracts that are about to expire. Due to this process, the price of the ETF and the actual spot price of Ethereum may differ slightly.

How to Invest in Ethereum Futures ETFs

To invest in Ethereum futures ETFs, choose a brokerage firm, find the ETF you want, such as the VanEck Ethereum Strategy ETF, research it thoroughly and place an order to complete the purchase.

Here are the general steps to invest in Ethereum futures ETFs, using the VanEck Ethereum Strategy ETF as an example. The VanEck Ethereum Strategy ETF provides regulated Ethereum futures exposure, simplifies the complexity of direct ownership, and its C-Corp structure improves tax efficiency for investors.

Choose a Brokerage

The first step involves creating an account on a brokerage platform such as Fidelity, Robinhood, Vanguard, and Charles Schwab that allows ETF trading.

Find the ETF

Find the VanEck Ethereum Strategy ETF or any other Ethereum futures ETF using its ticker symbol. The ticker symbol for the VanEck ETF is EFUT.

Research About ETFs

Do your due diligence on the selected ETF before buying. Read the fact sheet and prospectus, as well as the positions, fees, and risks associated with futures contracts.

Place an Order

Purchase the desired amount of Ethereum Futures ETF by placing a buy order, just like buying traditional stocks. To complete the purchase, specify your order type, such as a limit order or a market order.

Keep an Eye on Your Investment

After your purchase, monitor the performance of the ETF; keep in mind that the Ethereum Futures ETF inherits the volatility of cryptocurrencies, which may be reflected in its price.

Why C-Corps May Offer Tax Benefits to Ethereum Futures ETF Investors?

Compared to traditional regulated investment companies (RICs), C-Corp structured Ethereum Futures ETFs may offer significant tax benefits to long-term investors.

Traditional corporations (or C-Corps) are subject to double taxation on corporate and shareholder dividends. They allow for flexible profit distributions and use losses to offset future gains. In contrast, RICs are special investment companies that must distribute most of their profits to shareholders, but are subject to pass-through taxation, avoiding corporate-level taxation.

The ability of C-Corps such as the VanEck Ethereum Strategy ETF to carry forward losses to balance future gains may help investors reduce their tax payments. In addition, more funds may continue to be invested and compound over time because they are also not required to distribute capital gains to investors.

In addition, investors' after-tax returns can be further increased because the expenses of C-Corp Ethereum Futures ETFs are often taxed at a lower long-term capital gains rate compared to regular income tax rates.

V. Advantages of Ethereum Futures ETFs

Ethereum Futures ETFs provide a convenient way to trade Ethereum without a cryptocurrency wallet, providing regulatory protection and potential tax benefits, while also serving as a hedge against traditional assets and allowing speculation during market downturns.

Just like ordinary stocks, Ethereum Futures ETFs can be bought and sold through traditional brokerage accounts, without the need to configure cryptocurrency wallets and use exchanges.

By operating within the existing regulatory framework, Ethereum Futures ETFs provide investors with a degree of protection and supervision.

In addition, by introducing cryptocurrency risk into a diversified portfolio, these ETFs can serve as a hedging tool for traditional assets and provide investors with an opportunity to understand the potential for the development of the Ethereum ecosystem.

Unlike actually owning ETH, Ethereum futures ETFs may provide significant tax benefits in some jurisdictions. Gains and losses may be treated differently, potentially reducing investors' tax burden. In addition, investors can speculate on falling Ethereum prices through futures-based ETFs. This provides an opportunity to profit from market downturns or protect other investments in a portfolio.

Six, Risks Associated with Ethereum Futures ETFs

Investing in Ethereum futures ETFs carries risks due to price differences with ETH, which are exacerbated by its volatility and complexity, as well as management fees and potential liquidity issues.

The price of Ethereum futures ETFs may not always be consistent with the Ethereum spot price because they monitor futures contracts. In addition, there may be situations where the futures price exceeds the spot price. As it continuously rolls over contracts, this will gradually reduce the returns of the ETF.

Like other cryptocurrencies, ETH is highly volatile. Ethereum futures ETFs are riskier investments because they inherit this volatility of actual Ethereum. In addition, some investors find it difficult to understand and invest in these financial instruments due to the high level of complexity involved.

In addition, Ethereum futures ETFs charge management fees, which, like any ETF, can increase the overall cost of investing. These fees can erode potential returns. Additionally, some Ethereum futures ETFs may have lower trading volumes than Bitcoin futures ETFs, making it difficult to buy or sell at a desired price, especially in large volumes.