The crypto world was abuzz this week as the U.S. Securities and Exchange Commission (SEC) gave the green light for the launch of exchange-traded funds (ETFs) that will track the price of ether, the cryptocurrency powering the Ethereum blockchain.
In a little-noticed release on Thursday evening, the SEC approved a rule change by the Chicago Board Options Exchange (CBOE) that effectively opens the door for ether ETFs to be listed and traded just like their bitcoin counterparts.
This landmark decision represents a major milestone for the crypto industry’s evolution into mainstream finance. It grants ether, after years of regulatory ambiguity, a legitimacy akin to that bestowed upon bitcoin last year when the first bitcoin ETFs hit the market.
“This is a huge development that really drives home ether’s commodity status from a regulatory perspective,” said Rachel Lin, CEO of crypto derivatives platform SynFutures. “It will allow investors, from retail to institutional, to gain exposure to ether through a regulated, familiar investment vehicle.”
Ether is the second-largest cryptocurrency after bitcoin with a market cap of around $220 billion. It has rapidly emerged as a crucial piece of infrastructure undergirding large swaths of crypto and blockchain applications beyond just a medium of exchange.
The Ethereum network hosts a multitude of decentralized apps and services, including large stablecoin ecosystems, decentralized finance (DeFi) platforms for lending/borrowing, and a rapidly expanding universe of blockchain-based games and metaverse projects. All these rely on ether as the “gas” that powers the network.
Major crypto companies quickly celebrated the ruling as catalyzing new growth for the ecosystem. “This approval from the SEC will allow millions of investors to embrace crypto in a familiar, regulated way,” said David Puth, CEO of cryptocurrency exchange CoinX.
The decision paves the way for asset managers to launch ether ETFs that directly hold the cryptocurrency, similar to existing bitcoin offerings like the Bitcoin ETF. This could drive significant new investment into ether from both institutional players seeking crypto exposure without holding the underlying asset, as well as retail investors who want a simple ether investment product available in traditional brokerage accounts.
However, some key questions remain around which specific ETF proposals will get approved, when they might begin trading, and whether they will be physically-backed with actual ether or employ indirect exposure through derivatives.
Leading ETF issuers like BlackRock, Fidelity, and WisdomTree have active filings for ether ETFs that could get a look. But smaller players like Cathie Wood’s Ark Invest were among the first movers on bitcoin ETF filings and could be better positioned for any initial ether product launches as well.
While the ether ETFs have a regulatory greenlight, they will still need to be approved on an individual basis by the SEC and the exchanges they list on. Industry analysts expect a speedy process, with the first launch potentially coming in the next few months.
For ether investors who have waited years for this moment, simple and convenient access to the world’s most actively utilized crypto network through traditional market infrastructure is almost at hand. The launch of ether ETFs may turbocharge investment into the Ethereum ecosystem – and accelerate the momentum behind crypto’s move into mainstream finance.
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The cryptocurrency market is off to a strong start in 2024, led by Bitcoin’s climb back above $45,000 for the first time since April 2022. Bitcoin gained over 150% in 2023, marking its best annual performance since 2020. Analysts say bitcoin’s resurgence is driven by growing optimism that the long wait for a spot bitcoin exchange-traded fund (ETF) may finally end in early 2024.
The Securities and Exchange Commission has rejected numerous proposals for a spot bitcoin ETF over the years, arguing the crypto market is too susceptible to manipulation. But the SEC appears to be warming up to the idea amid maturing crypto regulation and infrastructure. The approval of a spot bitcoin ETF would allow mainstream brokerages to offer crypto exposure to millions of investors for the first time.
Ethereum, the native cryptocurrency of the ethereum blockchain, also rallied to start the year. It gained over 90% in 2023 despite volatility that whipsawed the crypto market. Ethereum has benefited from upgrades to the ethereum network as it transitions to a more energy-efficient proof-of-stake consensus model.
Other layer-1 blockchain tokens like Solana’s SOL, Polygon’s MATIC and Polkadot’s DOT saw steep gains in 2023 as well. The growth of decentralized finance and Web3 applications continues to drive interest in Ethereum rivals.
Mining companies like Riot Blockchain and Bit Digital were up sharply as higher bitcoin prices improve profitability for crypto miners. Even crypto-adjacent equities like Tesla, which holds bitcoin on its balance sheet, have outperformed the broader stock market recently.
Macroeconomic trends are also providing tailwinds for the crypto market after a brutal 2022 bear market. The collapse of the Terra/Luna ecosystem, bankruptcies of key industry players like Celsius Network and FTX, and meltdown of algorithmic stablecoins wiped over $2 trillion from the crypto market cap at its lowest point.
But expectations that the Federal Reserve and other central banks could start cutting interest rates in 2024 have renewed appetite for risk assets. Lower rates tend to benefit high-growth, speculative investments. The crypto market meltdown also flushed out excess leverage and speculative frenzy.
With crypto giants like FTX and Alameda Research gone, attention is returning to building and expanding the underlying utility of blockchain networks. The growth of decentralized applications and services like decentralized finance (DeFi), non-fungible tokens (NFTs), metaverse virtual worlds and Web3 remain long-term tailwinds for crypto adoption.
Some analysts predict the crypto market could get an added boost in 2024 from the U.S. presidential elections. Bitcoin’s four-year reward halving schedule has coincided with recent election year performance. If the crypto bull market resumes as 2024 dawns, analysts say the next Bitcoin halving could fuel further growth.
While risks like regulation and security breaches remain, the crypto industry has weathered previous downturns. With fundamentals still favorable for broader blockchain adoption, the crypto market appears ready to leave its 2022 woes behind as it charges into the new year.
Decision To Switch Ethereum To Proof-Of-Stake May Have Been Based On Misleading Energy FUD
After countless delays, the Ethereum “Merge” finally took place last week, switching the blockchain protocol from proof-of-work (PoW) to proof-of-stake (PoS).
What this means, in brief, is that Ethereum’s native coin, Ether (ETH)—the world’s second largest digital asset following Bitcoin (BTC)—can no longer be mined using a graphics processing unit (GPU). Instead, participants can choose to “stake” their ETH on the network. The Ethereum network then selects which of these participants, known as “validators,” gets to validate transactions, and if such validations are found to be accurate and legitimate, participants are rewarded with new ETH blocks.
This article was republished with permission from Frank Talk, a CEO Blog by Frank Holmes of U.S. Global Investors (GROW). Find more of Frank’s articles here – Originally published September 21, 2022
So what’s the catch? Well, there are a couple of big ones:
1) To become a validator, participants must stake at least 32 ETH, the equivalent of $43,000 at today’s prices, and
2) They must stake them for years.
You can see, then, how the Merge has transformed ETH from a decentralized asset, available to any young gamer with access to a decent GPU, to more of a centralized, oligarchic asset, controlled by a relatively few participants who already own tens of thousands of dollars’ worth of ETH.
In fact, as CoinDesk reported last week, two large validators were responsible for over 40% of the new ETH blocks that were added in the hours post-Merge. Those validators are crypto exchange platform Coinbase and crypto staking service Lido Finance.
PoS Puts Ether in Regulators’ Crosshairs
But wait, there’s more. By converting to PoS, Ether risks being seen by U.S. regulators as a proof-of-security asset. Last Friday, the White House published its first-ever crypto regulatory framework, just a day after the merge was completed.
Gary Gensler, head of the Securities and Exchange Commission (SEC), has said on numerous occasions that PoW assets such as BTC are commodities, not securities, and should therefore not be regulated as securities.
That’s not the case with PoS, according to Gensler. Last week, the SEC chief commented that digital assets that allow investors to stake their holdings in exchange for new coins may qualify them as securities. The implication, of course, is that oversight of these coins may end up being just as rigorous as that of stocks, bonds, ETFs and other highly regulated assets. Besides ETH, other popular PoS cryptocurrencies include Cardano, Polkadot and Avalanche.
The May crash of Terra’s Luna coin, which triggered the collapse of overleveraged crypto lenders such as Celsius, Voyager and Three Arrows Capital, was a major driver of this year’s crypto winter. Lenders’ promises of high returns on investment have landed them in financial and legal hot water. It’s very important that the Ethereum Foundation not make the same mistakes and invite the same level of scrutiny.
As we like to say at U.S. Global Investors, government policy is a precursor to change. But the change, in this case, may not turn out to be favorable. Regulatory pronouncements could add to volatility within the nascent cryptocurrency industry.
In the table below, you can see that ETH was one of the most volatile assets for the one-day and 10-day trading periods as of August 31—more volatile, in fact, than BTC and shares of Tesla. I can’t help believing that’s due to investors’ apprehension of the merge and the regulatory uncertainty that surrounds it.
The DNA of Volatility
Standard Deviation For One-Year, As of August 30, 2022
ONE-DAY
TEN-DAY
Gold Bullion
±1%
±3%
S&P 500
±1%
±4%
Bitcoin
±4%
±11%
Tesla
±4%
±13%
Ethereum
±5%
±15%
MicroStrategy
±6%
±19%
Energy FUD Contributed to Decision to Transition to PoS
If everything I’ve said up until this point is the case, why did Ethereum decision-makers choose to switch to PoS in the first place? Simply put, they folded under pressure from misleading charges that crypto mining, particularly BTC mining, consumes too much energy and is bad for the environment.
This is FUD, or fear, uncertainty and doubt. Yes, BTC mining requires electricity, but compared to nearly every other major industry—including finance and insurance, household appliances and gold mining—energy consumption is incredibly negligible, according to the Bitcoin Mining Council (BMC). What’s more, the BMC found that global BTC miners collectively use a higher sustainable energy mix than every major economy on the planet.
Supporters of the ETH Merge say that the move to PoS could cut the network’s energy usage by as much as 99.5%. None other than the World Economic Forum (WEF) praised the success of the merge last week, writing that crypto “has been waiting for a recalibration towards sustainability… for Web3 climate innovators, the new generation of environmental advocates, as well as U.S. climate efforts more broadly.”
But as many PoW proponents have rightfully pointed out, the GPUs that were previously used to mine ETH will likely now be used for other purposes post-merge, including mining other coins, high-performance computing and gaming. In reality, little to no energy will have been offset.
The question is: Who is funding the FUD about PoW and energy usage? It’s a complicated question.
Last week, a group of environmental activists, including Greenpeace and the Environment Working Group (EWG), announced that it plans to spend $1 million on a new campaign to encourage Bitcoin to follow ETH’s lead and move to PoS. The campaign, titled “Change the Code, Not the Climate,” falsely claims that BTC “fuels” the climate crisis.
This is the same covert tactic used by Russian president Vladimir Putin, who over the years has funded environmental groups and non-governmental organizations (NGOs) in the West in an effort to discredit and undermine the U.S. fracking industry.
Surprise! Gold Is Still One of the Best Performing Assets of 2022
Switching gears, I want to say a few words on gold. BTC’s analogue cousin hit its lowest price since 2020 last week even as inflation remains near 40-year highs and recession fears persist. As I write this, the yellow metal is trading at around $1,666 an ounce, approximately 19% off its peak in March this year.
Some investors may read this and jump to the conclusion that gold is no longer a valuable asset during times of economic and financial uncertainty, but they would be mistaken. Although gold is down for the year, it’s nevertheless outperforming most major asset classes including Treasury bonds, U.S. corporate bonds, the S&P 500 and tech stocks. The precious metal has therefore helped investors mitigate losses in other areas of their portfolio.
The latest report by the World Gold Council (WGC) also makes the case that gold could be a powerful investment in the face of a potential economic recession. The London-based group compared the performance of a number of asset classes during the past seven U.S. recessions going back to 1971, and it found that gold performed the best on average aside from government and corporate bonds.
That said, I still recommend a 10% weighting in gold, with 5% in bullion (bars, coins, jewelry) and 5% in high-quality gold mining stocks and funds. Remember to rebalance on a regular basis.
US Global Investors Disclaimer
The Bloomberg US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index. The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers. The NASDAQ-100 Index is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ. The MSCI Japan Index is a free-float weighted equity JPY index. It was developed with a base value of 100 as of December 31, 1969. The MSCI Europe Index in EUR is a free-float weighted equity index measuring the performance of Europe Developed Markets. It was developed with a base value of 100 as of December 31, 1998. The MSCI USA Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1969. Bloomberg Commodity Index is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
Standard deviation is a quantity calculated to indicate the extent of deviation r a group as a whole.
Holdings may change daily. Holdings are reported as of the most recent quarter-end. The following securities mentioned in the article were held by one or more accounts managed by U.S. Global Investors as of (06/30/22): Tesla Inc.
The Ethereum Merge Could Kick Off a Transformation in Crypto’s Battered Reputation
Cryptocurrencies might still be a very long way from their highs of 2021, but some of the major ones have staged some decent recoveries in the past couple of months. Notably ether (ETH), the second largest cryptocurrency after bitcoin, is trading at almost $US1,700 (£1,463) at the time of writing, having dropped as low as $US876 in mid-June.
Ether, which was created by Canadian/Russian programmer Vitalik Buterin, is the cryptocurrency used for transactions on Ethereum, the leading platform on which developers can applications using blockchain technology.
Blockchains are online ledgers that run without been controlled by any single company. Much of these applications revolve around smart contracts, which are automated contracts that remove the need for intermediaries such as lawyers and are seen as having huge potential for the future.
One of the main catalysts for ether’s rebound has been the Ethereum merge, a huge project to change the way the underlying blockchain operates. Where transactions on Ethereum are currently validated using an energy-intensive system known as proof-of-work (PoW), in which lots of very powerful computers compete to solve complex mathematical puzzles, from around September 15 it will shift to a new system known as proof of stake (PoS).
PoS basically means that transactions on the blockchain will be validated not by all these computations but by a network of investors whose commitment is demonstrated by the fact that they own at least 32 ether (yours for about $US54,000).
The idea is that this gives them an economic incentive to enhance the security of the network, and are therefore very unlikely to try and sabotage it. Whereas bitcoin transactions all depend on PoW, lots of newer cryptocurrencies use PoS, including Ethereum rivals such as Solana and Cardano.
Going Green
When the Ethereum merge takes place, power consumption on the blockchain will be reduced by 99%. Since it is currently the most used blockchain in terms of transactions, this will save a huge amount of electricity each year, corresponding to Chile’s power consumption.
As a result of the merge, some analysts expect ether to overtake bitcoin as the leading crypto in terms of the total value of all the coins (in crypto circles this is referred to as the “flippening”). Ether is currently worth just over US$204 billion, while bitcoin is worth US$396 billion.
Until now, cryptocurrencies and bitcoin in particular have suffered from a bad reputation. Bitcoin was initially conceived with the egalitarian goal of allowing investors access to a financial system with no need for banks and with money that isn’t controlled by countries. It has been championed for its ability to enable billions of people without bank accounts to transact online, and to facilitate things like microfinance and ultra-cheap cross-border trading.
Yet bitcoin has come to be associated with environmental degradation and criminal activities. The mainstream media has endlessly linked the leading cryptocurrency – and by extension the whole space – with money laundering, online drug dealing, Ponzi schemes and exchange hacking.
Netflix documentaries have further reinforced this negative public image. Recent scandals in the crypto world, such as the fall of Ethereum rival Luna and the bankruptcy of Celsius and other crypto lenders, have not helped either.
One major consequence has been that major financial institutions like investment banks and pension funds have been cautious of ploughing money into this space, despite the leap forward in technology that blockchains represent.
But if the most widely adopted crypto platform successfully shifts to PoW in the coming days, many believe that this will overcome the biggest institutional objection and see much more money flowing into the space (there are already early signs, such as Fidelity’s new crypto fund for retail investors). This is likely to accelerate the global regulatory framework that would minimise undesirable activities.
By closing down the environmental objections to crypto, other advantages to ether are likely to come to the fore. The merge will offer a return to investors in the form of rewards in exchange for locking up their money for a period of time (“staking”).
Although you need to stake 32 ether to become one of the network’s validators, numerous companies have set up systems to enable smaller investors to pool their money so that they can participate. For example, Binance, the world’s largest crypto exchange, offers investors 6% annual percentage yield for pooled staking on ether.
Staking will therefore create a win-win situation with guaranteed returns and a very liquid system that makes it easy for people to move their money in and out of ether. This will further enhance the appeal of ether and PoS cryptos in general.
This could help to accentuate other positives around crypto, another of which is humanitarian donations. When Russia invaded Ukraine, for instance, the Ukrainian government called for donations in bitcoin and ether to support its efforts against invaders. This quickly attracted substantial amounts of money.
Tonga was similarly successful with a campaign after its volcanic eruption earlier this year. By being able to cross borders easily and cheaply, cryptocurrencies are the ideal vehicle for international donations.
Lingering Uncertainties
All that said, it is uncertain how the Ethereum blockchain will function after the merge in terms of transaction speeds and costs. One major problem with Ethereum in the past has been that transactions have been ludicrously expensive, sometimes running to thousands of US dollars at peak times in 2021.
The developers of the Ethereum Foundation do not expect the merge to make a big difference in these respects (currently “gas” fees are averaging between $US1 and $US4 per transaction depending on which platform you are using). Much more important is likely to be another shift in ethereum’s journey to “Ethereum 2.0” known as sharding, which is due to happen in 2023.
We will also have to wait and see how smooth the merge is. Synchronisation and update bugs could see problems such as validators disconnected from the blockchain. Negative stories like these could see investors staying away for fear of instability. But on the whole, while the merge will not be a miraculous event, it could help improve the image of cryptocurrencies and attract institutional and retail investors. At a time when sustainable investing is increasingly high priority, the ether merge and its attractive returns have the potential to put ether at the top of the list.
This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Jean-Philippe Serbera, Senior Lecturer in Banking And Financial Markets, Sheffield Hallam University.
