After Spot Bitcoin ETFs, is Ethereum the Next Big Thing?

As ethereum begins to behave like bitcoin, investors may wonder if the asset offers diversification.

Michael Jordan had Scottie Pippen. Mick Jagger has Keith Richards. Bitcoin has ethereum. 

The second-largest cryptocurrency by market capitalization, ethereum ETF-wise is where bitcoin was not too long ago—only available for futures investments. Investors can’t directly access the spot price of the asset.

Not yet, at least. The SEC is reviewing spot ethereum ETF applications from asset managers including BlackRock Inc., VanEck, Invesco Ltd. and several others. The spot market and the expectations for institutional demand for this second-fiddle crypto asset is bound to cause excitement as it did recently for spot bitcoin ETFs.

In the meantime, investors have ways to get something approaching that, just as they did and still do with bitcoin.

As was the case in the spot bitcoin saga, Grayscale Investments has had a trust security, not an ETF, the Grayscale Ethereum Trust (ETHE) which debuted in 2017. Grayscale has already filed to convert ETHE into a spot ETF as they were able to do with the Grayscale Bitcoin Trust (GBTC), which you may have noticed has its own television commercials and billboards. 

The key question for advisors, as with cryptocurrency in general, is to what extent their client base cares about the goings-on in what some call a striking new asset class and others think of as a speculative plaything.

There’s a good chance there is some correlation here: if clients were asking about and interested in bitcoin ETFs, they are likely to want to know about Ethereum products as the news flow increases.

Fair fight: GBTC vs. ETHE 

Perhaps the most even-handed way to consider whether the second most well-known crypto asset will rival the first when it comes to advisor client interest is a direct performance comparison during the time that neither was in spot ETF form. From the start of 2020, the first full year where both traded, through the end of 2023, GBTC rose by a whopping 323%. Not bad for only four years’ time. ETHE gained 504%. Less not bad, if you will. 

As to their risk measure, I checked that using annualized standard deviation of 12-month returns (source: Ycharts) during that period. ETHE’s price variability was dramatically higher than GBTC during most of that time but narrowed significantly during 2023. In fact, since last October, the two securities have been nearly in lock step on this measure. Still, both clock in at around a standard deviation of 60%, which is about triple that of the stock market when it is volatile. So that should help advisors put the risk side of the equation into perspective.

So, Ethereum may be starting to look more like bitcoin than in the past. That brings up an age-old question that advisors have had to grapple with in managing client portfolios. Specifically, what is good diversification and what appears to be diversified but isn’t? If many cryptos follow bitcoin up and down in percentage terms, there’s little value added through diversification. That relationship remains to be seen. 

As for now, advisors can do with Ethereum what they did with bitcoin in its pre-spot ETF days. Own the closest thing available in ETF form, which means funds that track futures or other derived ways to try to profit from crypto, in a liquid form, but not using the spot price. Among the current candidates are the ProShares Ether Strategy ETF (EETH) and the VanEck Ethereum Strategy ETF (EFUT). 

Have your bitcoin cake and “ethe” it too 

And the $42 million Valkyrie Bitcoin and Ether Strategy ETF (BTF) combines the two cryptos, and returned more than 90% the past 12 months, and started 2024 on a run, up 30% through Monday’s close. BTF is actively managed, investing in a portfolio primarily comprised of Bitcoin and Ether Futures. 

These first two kings of cryptocurrencies are bound to bring advisors into conversations with clients, especially younger ones. That generation is essentially growing up with bitcoin and its mates, so advisors don’t really have a choice to learn about them. They need to. 

However, the opinions they form in this area will go a long way in assuring clients they are holistic in their investment approach. And since clients tend to want what just went up in price, the advisory function is perhaps as important here as in any aspect of the investment fiduciary aspect of their practice.