Invest in Web 3.0 with ETFs

Ethereum is the word on everyone’s lips in anticipation of new system upgrades. Known for its native cryptocurrency Ether, the world’s second flagship digital currency, this decentralized blockchain technology empowers the use of smart contracts, decentralized exchanges, and decentralized applications. 

Initially, Ethereum was meant to complement Bitcoin rather than compete with it. Vitalik Buterin argued, when first conceiving the technology in 2013, that blockchain could benefit other applications besides financial services and cryptocurrencies. Buterin then gathered like-minded people and unfolded an alternative language that is better suited for application development. The assignment resulted in Ethereum’s genesis in 2015.  

Understanding the technology behind Web 3.0: Blockchain

Blockchain stands for a decentralized digital ledger of transactions across a peer-to-peer network where they are duplicated and distributed. Data is stored in a digital format on each computer, otherwise referred to as a node. One major benefit of blockchain is that participants can confirm transactions without the need for a central clearing authority. Another advantage is that stored data can only be distributed and verified but cannot be edited or deleted. Among other things, blockchain is the technology that enables the existence of cryptocurrency. 

Ethereum is a technology powered by a decentralized blockchain employing peer-to-peer networks to securely execute and verify application codes. One of the most promising uses of Ethereum is the provision of ‘smart contracts’ which constitute programs running on prespecified conditions used to automate the execution of an agreement. They allow parties to directly transact with each other, nullifying third party interventions and granting easy access to banking. Additionally, Ethereum is an open-source technology where its source code is freely available to use, modify, and distribute. Its ecosystem allows for decentralized applications, including decentralized finance (DeFi), decentralized exchanges (dEX), and the ability to create new tokens. One of the unique selling points of Ethereum is that it promotes internet privacy alleviating government control. It is building a digital economy based on value, not on surveillance.

Blockchain energy cravings

Blockchain and petrol-powered vehicles have one thing in common: they are both known for harming the environment. What was depicted as a forward-thinking technology already has real-world ramifications. Currently, Ethereum operates under a proof-of-work (“POW”) blockchain like Satoshi Nakamoto’s Bitcoin and other blockchain technologies, leading to it being criticized for being energy hungry and creating high levels of carbon emissions. POW is the underlying consensus mechanism where different nodes race to package transactions and solve complex mathematical problems. Few blockchain applications are designed to increase the calculation complexity as new nodes are added to the network requiring ever more electrical power.

To solve this problem, Ethereum is introducing a series of network updates in what is also known as the “Merge.” The upgrades allow for the release of Ethereum 2.0 after transitioning to a proof-of-stake (“POS”) framework. It requires an array of nodes to enter a lottery for the chance to verify transactions, where each node submits collateral preventing fraudulent transactions that would devalue the cryptocurrency and cost the node its stake. The move away from POW to POS will render operations faster, more efficient and less energy consuming. The long-awaited “Merge” is scheduled to take place on September 15th, 2022, and expectations are that it will allow for an environmentally friendly approach. 

Ether: Fuel powering the Ethereum machine

The Ethereum machine requires fuel to function properly. Users must pay a fee – also known as “gas” which is settled in Ether – to create tokens and applications on the Ethereum platform. Another way to think of this is to compare Ether to cash that a passenger pays when riding a cab. The longer the trip, the higher the fee. In that context, Ether is the money paid when developing and hosting applications using Ethereum’s technology. It goes without saying that the more network resources are used, the higher the fee. Ethereum accepts only one cryptocurrency, Ether, to secure its computational operations. This has resulted in Ether serving two purposes: store of value and fuel transactions and operations. For instance, investors can either trade the token or hold it hoping for future appreciation in value while in other instances, the token is used to power transactions on the technology platform.

Ether, Ethereum’s native cryptocurrency, is one of the world’s largest cryptocurrencies as measured by market cap, second only to Bitcoin. As of September 6th, Ether’s market cap is USD$197 billion while one token trades at USD$1,617.  

Ethereum ETFs available to global investors

As the “Merge” looms on the horizon, Ethereum is gaining momentum and increasing in popularity. Its native cryptocurrency posted 4.08% gains month-to-date after a lackluster performance since the beginning of the year (-56% year-to-date). 

Trackinsight's Thematic ETF Screener identifies 141 Cryptocurrency ETFs available to global investors. Of those, there are 27 Ethereum ETFs with combined assets under management of USD$1.85 billion as of September 2nd. Ethereum ETFs were not successful at generating positive returns in 2022 however, nor at attracting investor money, averaging -1.35% in returns and losing USD$102 million year-to-date.  

Despite poor performance over the year, there was a slight rebound last week in anticipation of the “Merge.” The CI Galaxy Ethereum ETF (ETHX.U), the 3iQ CoinShares Ether ETF (ETHQ), the Purpose Ether Yield ETF (ETHY.U), and the Purpose Ether ETF (ETHH.U) traded in the green for the week between August 26th and September 2nd. They generated 0.42%, 0.31%, 0.29%, and 0.28% of positive returns respectively. 

For investors who believe in the long-term potential of Ethereum, below is a list of 10 ETFs tracking Ethereum available to global investors – ETFs are ranked by assets under management:

1. Ether Tracker Euro (SE0010296582)
2. Ether Tracker One (SE0010296574)
3. 21Shares Ethereum ETP (AETH)
4. CI Galaxy Ethereum ETF (ETHX.B)
5. CI Galaxy Ethereum ETF (ETHX.U)
6. CoinShares Physical Ethereum (CETH)
7. 3iQ CoinShares Ether ETF (ETHQ)
8. Purpose Ether ETF (ETHH.B)
9. VanEck Vectors Ethereum ETN (VETH)
10. Purpose Ether ETF (ETHH)

Please note this article is for information purposes only and does not constitute investment advice.