Bitcoin ETFs Are Off to a Roaring Start. Are Other Crypto Funds Next?

Key differences between bitcoin and ether mean approval is far from assured.
Key differences between bitcoin and ether mean approval is far from assured.

Summary

BlackRock, Fidelity and other Wall Street firms have applied to launch ether ETFs.

Wall Street firms launched bitcoin exchange-traded funds just a few weeks ago. Now, they want to offer everyday investors funds holding a smaller and more volatile crypto asset.

At least 10 firms including BlackRock and Fidelity Investments have filed applications to launch what would be the first U.S.-listed ETFs holding ether, the second-largest cryptocurrency. As with bitcoin and other ETFs, the firms would earn management fees for any investments people make.

Ether, the in-house token on the Ethereum blockchain, surged above $3,000 last Tuesday for the first time since April 2022 in anticipation of the potential approvals. That gave it a market cap of about $360 billion, compared with bitcoin’s more than $1 trillion valuation.

The Securities and Exchange Commission faces a May deadline to approve or reject the first application for a spot ether ETF, and is expected to simultaneously apply the same decision to the other applications. Critics say a greenlight could pave the way for ETFs backed by more speculative crypto assets, which they say would expose investors to more risks than they might realize.

“Ether is just a very volatile asset and subject to tremendous price swings," said Ben Schiffrin, director of securities policy at Better Markets, which advocates for tighter financial regulations.

Volatility and the potential for price manipulation aren’t unique to ether; thousands of cryptocurrencies have proliferated over the years, and only about a dozen of those have gained any appreciable size.

The SEC hasn’t given a clear signal of whether it will approve or reject the ether applications. Several new factors are also at play since firms applied for spot bitcoin ETFs.

The SEC had for years cited bitcoin’s susceptibility to fraud in repeatedly rejecting applications for spot bitcoin ETFs. That was before a court ruling in August compelled the agency to approve such funds last month. Investors promptly poured about $13 billion into nine of them, according to Bloomberg and JPMorgan data.

Some analysts say approval of the bitcoin funds makes it likely the ether funds will follow.

In its approval of the bitcoin funds, the SEC cited the high correlation between the prices of bitcoin and bitcoin futures. Ether is the only other cryptocurrency with futures contracts traded on the CME, which is regulated by the Commodity Futures Trading Commission.

The SEC allowed the launch of more than half a dozen futures-based ether ETFs in October, though the funds haven’t attracted much interest.

The approved applications for spot bitcoin ETFs in January also had notable revisions specifying how the funds would operate. The applications for the spot ether ETFs list similar details.

Having such technical issues figured out is another reason to think approval is in the cards, said James Seyffart, an ETF analyst at Bloomberg Intelligence.

“My base case is that we will see these approved in 2024," he said.

Still, key differences between ether and bitcoin mean approval is far from assured.

To start, SEC Chair Gary Gensler has consistently described bitcoin as a commodity, but hasn’t explicitly stated whether ether is a security or a commodity. The distinction determines which agency oversees the asset and the regulations it is subject to.

Another potential hurdle to approval is a key aspect of ether that has been in the SEC’s crosshairs. Owners of ether can pledge their holdings and computing power to help the Ethereum network verify transactions. The process, called staking, lets people earn interest on their assets.

Last February, the SEC ordered the crypto exchange Kraken to stop offering staking in the U.S. and sued Coinbase Global a few months later saying its staking program is an unregistered security.

Seyffart thinks one possibility is that the SEC approves the ether ETFs—but doesn’t allow staking in them. The applicants have signaled different approaches on the matter.

Crypto asset manager Grayscale Investments, which applied to convert its $9.4 billion ether trust into an ETF, said in a blog post that it doesn’t offer staking in the trust due to limited tax guidance and other risks.

Franklin Templeton said in its application that it may stake a portion of its ETF’s assets through other firms, and add the earned interest as income to the fund.

If the SEC signs off on any of the plans, the funds still aren’t expected to be nearly as popular as their bitcoin counterparts. That likely won’t stop Wall Street firms from offering them.

“Given the massive initial success of spot bitcoin ETFs, issuers are no doubt salivating over the prospect of launching spot ether ETFs." said Nate Geraci, president of ETF Store, an investment-advisory firm.

Write to Vicky Ge Huang at vicky.huang@wsj.com

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