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 contract that commits to purchasing Ethereum at a specific price at a future time. These derivative contracts are traded via Ether (ETH) futures exchange-traded funds (ETFs), providing a regulated method of investing in Ethereum using a brokerage account.

In 2021, the first Ether futures ETFs were introduced in Canada. Although futures-based ETFs have been approved, the United States Securities and Exchange Commission (SEC) has not yet approved a spot Ether ETF in the country.

Asset management companies oversee Ether futures ETFs. The major issuers offering Ether futures ETFs are Bitwise, VanEck and ProShares. These firms take care of the complexities involved in purchasing and disposing of futures contracts, controlling rollovers to preserve exposure and ensuring the ETF complies with legal requirements.

How Ether futures ETFs work

Without actually holding the cryptocurrency, investors can speculate on Ethereum’s future price using Ether futures ETFs. 

Rather than retaining tangible assets, Ether futures ETFs make investments in futures contracts. These contracts are commitments to buy or sell ether on a predetermined future date for a predetermined price. Without having to deal with wallets or cryptocurrency exchanges, investors can be exposed to Ethereum’s price fluctuations by purchasing these contracts through the ETF, which simply pools investors’ money to acquire them.

Assume an Ether futures ETF has a contract to purchase 100 ETH at a price of $4,000 each in three months. The ETF gains profit, and its share price rises if Ether reaches $4,500 by the contract’s expiration date. In contrast, the ETF experiences a loss if ETH’s price falls to $3,500.

A crucial point to remember is that Ether futures ETFs continuously manage their contracts by rolling them over to preserve exposure. This means they purchase new contracts with later expiration dates and sell the ones that are about to expire. The price of the ETF and the real spot price of Ether may differ slightly as a result of this process.

How to invest in Ether futures ETFs

To invest in an Ether futures ETF, select a brokerage, find the desired ETF, such as the VanEck Ethereum Strategy ETF, research it thoroughly and place an order to complete the purchase.

Here are the general steps involved in investing in Ether futures ETFs, using the VanEck Ethereum Strategy ETF as an example. The VanEck Ethereum Strategy ETF offers regulated exposure to Ether futures, streamlining direct ownership complexities, and its C-Corporation (C-Corp) structure enhances tax efficiency for investors.

Select a brokerage

The first step involves creating an account on a brokerage platform (e.g., Fidelity, Robinhood, Vanguard, and Charles Schwab) that allows trading of ETFs. 

Find the ETF

Use its ticker symbol to look for the VanEck Ethereum Strategy ETF or any other Ether futures ETF. The VanEck ETF’s ticker symbol is EFUT.

Research about the ETF

Conduct due diligence on the chosen ETF before purchasing. Read the fact sheet and prospectus, as well as the holdings, fees and risks related to futures contracts.

Place an order

Buy the desired number of shares of the Ether futures ETF by placing a buy order, just like you would with traditional stock. To complete the purchase, specify your order type, such as a limit or market order.

Keep an eye on your investment

Following purchase, monitor the ETF’s performance; remember that Ether futures ETFs carry the inherited cryptocurrency volatility that may reflect in their share price.

Why a C-Corp may mean tax benefits for Ether futures ETF investors?

C-Corp structured Ether futures ETFs may offer significant tax benefits to long-term investors compared to traditional regulated investment companies (RICs).

Traditional corporations, or C-corps, are liable to both corporate and shareholder dividend double taxation. They allow for the distribution of profits to be flexible and offset future gains with losses. In contrast, RICs are special investment companies that must distribute the majority of their profits to shareholders but are subject to pass-through taxation, avoiding company-level tax.

The capacity of C-Corps like VanEck Ethereum Strategy ETF to carry forward losses to balance off future gains may help investors pay less in taxes. Additionally, more money may stay invested and compound over time because they are also not required to distribute capital gains to investors. 

Moreover, an investor’s after-tax returns can be further increased because payouts from a C-Corp Ether futures ETF are frequently taxed at the lower long-term capital gains rate as opposed to regular income rates.

Advantages of Ether futures ETFs

Ether futures ETFs offer a convenient way to trade Ethereum without needing cryptocurrency wallets, providing regulatory protection and potential tax benefits while also serving as a hedge against traditional assets and allowing speculation on market downturns.

Just like regular stocks, Ether futures ETFs can be bought and sold through traditional brokerage accounts, eliminating the need to configure cryptocurrency wallets and use exchanges.

By operating within pre-existing regulatory frameworks, Ether futures ETFs provide investors with a degree of protection and oversight that may not be as robust as in direct cryptocurrency markets.

Moreover, by introducing cryptocurrency exposure into a diversified portfolio, these ETFs may act as a hedge against conventional assets and provide investors access to the Ethereum ecosystem’s development potential.

As opposed to actually owning ETH, Ether futures ETFs may provide considerable tax benefits in some jurisdictions. Gains and losses may be treated differently, potentially reducing investors’ tax burden. Additionally, investors can speculate on a drop in the price of Ethereum with futures-based ETFs. This offers chances to profit from market downturns or protect other investments in a portfolio.

Risks associated with Ether futures ETFs

Investing in Ether futures ETFs entails risks due to price discrepancies with ETH, exacerbated by its volatility and complexity, along with management fees and potential liquidity issues.

The price of Ether futures ETFs may not always coincide with the spot price of Ethereum because they monitor futures contracts. Furthermore, contango — a scenario in which futures prices exceed the spot price — may occur. Because it continuously rolls over contracts, this can gradually reduce the ETF’s returns.

ETH is highly volatile, just like other cryptocurrencies. Ether futures ETFs are more risky investments since they inherit this volatility from actual Ethereum. Additionally, some investors would find it hard to understand and invest in these financial instruments due to the high level of complexity involved.

Furthermore, Ether futures ETFs charge management fees, which add to overall investment cost like any ETF. These fees can eat into potential returns. In addition, certain Ether futures ETFs may have lower trading volumes than Bitcoin futures ETFs, making it difficult to buy or sell shares at desired prices, especially in large quantities.