Ethereum ETFs: Consider These Alternatives for Maximizing Returns
Spot Ether ETFs were initially expected to revolutionize ETH investing, promising high liquidity, low fees, and robust investor protections. However, they have yet to offer staking, leaving retail investors with limited options. Until United States regulators adopt a more favorable stance on crypto, staking on regulated spot exchanges like Coinbase or Gemini remains a preferable choice.
Understanding the Limitations of Spot ETH ETFs
Spot ETH ETFs, which debuted on US exchanges in July, were anticipated to set a new benchmark for Ethereum investments. They offer many advantages, such as high liquidity, low fees, and robust investor protections. Funds like the Grayscale Ethereum Mini Trust (ETH) and Franklin Templeton’s Franklin Ethereum ETF (EZET) exemplify these benefits. However, these ETFs fall short by not including staking options, compelling investors to look elsewhere for maximizing returns.
The Importance of Staking Ethereum
Staking involves locking up ETH with a validator on Ethereum’s Beacon chain. This process yields ETH payouts from network fees and other rewards, though it carries the risk of “slashing,” or losing ETH collateral if the validator behaves improperly. On reputable staking platforms, this risk is minimal. Currently, staking yields around 3.2% APR, and services like Flashbots can offer even higher returns. Investing in ETH without staking is akin to disregarding dividends from stocks, making it a less efficient strategy.
Regulatory Hurdles and Staking in ETFs
Many issuers, including Fidelity, 21Shares, and Franklin Templeton, have lobbied regulators to allow staking in ETH ETFs. However, these requests were denied in March. Consequently, none of the eight ETH ETFs trading in the US offer staking rewards. The reluctance from regulators stems from the unique structure of spot ETH ETFs, known as a Grantor Trust, which is primarily designed for passive commodity funds. Staking, which arguably requires active management, may not be permissible under this structure. Additionally, liquidity concerns arise, as withdrawing staked ETH can take days, complicating the prompt redemption of ETF shares.
Exploring DeFi Protocols and Liquid Staking Derivatives
In the absence of staking options in ETFs, retail investors might consider decentralized finance (DeFi) protocols that offer liquid staking derivatives (LSDs). These protocols, such as Lido Finance, allow users to exchange spot ETH for stETH, a tokenized claim on Lido’s staking pool. The DeFi ecosystem provides various options, from leveraged trading to restaking. However, these LSDs increase risks for stakers and are largely unregulated in the US, leaving investors with limited recourse if issues arise.
Safer Alternatives: Regulated Spot Exchanges
For those seeking a safer approach, regulated spot crypto exchanges like Coinbase and Gemini offer a viable alternative. Although they lack the robust investor protections of ETFs, they are still subject to meaningful oversight. Both Coinbase and Gemini are regulated Virtual Currency Businesses under the New York State Department of Financial Services (NYDFS). They adhere to best practices in cybersecurity and stake ETH with professionally-managed validators. In 2022, Coinbase integrated Flashbots’ MEV-Boost, which helps validators order transactions to maximize rewards. Notably, Coinbase and Gemini promise to repay users for any losses due to errant slashing.
Fee Structures and Considerations
The primary difference between Coinbase and Gemini lies in their fee structures. Both platforms charge commissions on staking rewards rather than for staking and unstaking crypto. Coinbase generally takes 25% of ETH staking rewards and 35% on altcoins like Polygon (MATIC) and Solana (SOL). In contrast, Gemini takes a 15% cut of rewards. Investors should always conduct their own research and carefully consider whether staking aligns with their investment goals.
Looking Ahead: The Future of ETH ETFs and Staking
While investors currently face limited choices, the regulatory landscape in the US may soon change. As America’s regulatory climate begins to thaw, ETH ETF issuers might find a path forward to include staking options. Until then, investors must navigate the available alternatives to maximize their returns.
In summary, while spot ETH ETFs offer many benefits, their inability to include staking limits their appeal. Retail investors looking to maximize returns should consider staking on regulated spot exchanges or exploring DeFi protocols, albeit with caution. The future holds promise, but until then, these alternatives provide viable paths for Ethereum investors.
