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Posted on May 23rd, 2024

Canada's Ether ETF Revolution: Paving the Way for US Markets

This article, originally published May 23, 2024, has been updated following the launch of spot ether ETFs in the United States.

In November 2014, the world got a peak into the future when Vitalik Buterin released the Ethereum whitepaper, detailing his vision for a decentralized platform where smart contracts and blockchain technology could revolutionize industries, opening doors for anyone with an idea and an internet connection.

The potential applications of Ethereum’s blockchain technology have propelled Ether (the currency required to use Ethereum) to popularity in recent years; it’s currently second only to Bitcoin as the largest cryptocurrency by market capitalization.1 At Purpose, we’ve always been excited by the use cases of Ethereum, which is why we launched the world’s first Ether ETF back in April 2021.

With US spot ether ETFs now launching six months after bitcoin ETFs, we can look to Canada to see what we can expect for US markets. In this article, we discuss Canada’s experience with spot ether ETFs, provide a quick recap of the reception of US spot bitcoin ETFs, and delve into key learnings that can be applied to US spot ether ETFs.

Key Takeaways: 

  • Canada’s success with spot bitcoin and ether ETFs has underscored the importance of a proactive regulatory framework that encourages innovation while ensuring robust investor protection.
  • The enthusiastic reception of ether ETFs in Canada provides a snapshot of potential market dynamics in the US, including investor demand and the influence on ether’s liquidity and price stability.
  • Canada’s rigorous investor protection measures are a blueprint for the US to emulate, ensuring that the potential benefits of ether ETFs do not come at the expense of security and trust.
  • The strategic implications for the US are profound, as Canada’s experience hints at how spot ether ETFs might reshape investment patterns and enhance the integration of cryptocurrencies into the traditional financial system.
  • The success of US bitcoin ETFs highlights the demand for regulated access to cryptocurrencies – paving the way for spot ether ETFs.

The Canadian Experience 

Investor Demand 
Canada’s pioneering journey into spot ether ETFs began in earnest with the launch of the Purpose Ether ETF in April 2021. From the very beginning, the Canadian market’s response to the launch of these spot ether funds signalled a robust appetite for these types of products from investors.

Canadian ether ETFs now hold approximately C$1.5 billion in AUM in a total ETF market valued at around C$455 billion—not an insignificant amount when you consider this asset class came into existence not even a decade ago, and investors were only exposed to this type of ETF a little over two years ago. This amounts to around 0.3% of the total AUM being invested in ether ETFs. 

If the same 0.3% demand was met in the $8.6 trillion US ETF market, we would see $29.1 billion of inflows into US spot ether funds.  

Regulatory Landscape and Investor Protection 
The regulatory environment in Canada, led by the Ontario Securities Commission (OSC), has proven to be adaptive to the burgeoning crypto asset class. The OSC worked closely with fund managers to ensure these products provided adequate investor protections, including stringent custody rules to safeguard ether holdings. 

Unlike in the US, where the SEC’s delay in approving bitcoin ETFs was labelled “arbitrary and capricious” by a US court, the OSC has made it clear through its words and actions that its role as a regulator is not to make judgments on the merits of an investment.

Rather, their mandate is to give investors access to new and innovative asset classes or investment opportunities in a way that offers proper regulatory oversight and maximizes consumer protection. And we have seen how this approach has played out in Canadian markets during a tumultuous 2022, where ether, along with the majority of the crypto space, tumbled from its November 2021 highs. 

As investors sold off units of Canadian spot ether ETFs to cut losses and de-risk their portfolios, there was no fund provider that could not meet its redemption requirements. This is a testament to the importance of properly regulated investment vehicles that have stringent liquidity and safety requirements. 

Canada’s experience demonstrates that a well-regulated market can offer spot ether ETFs without compromising investor safeguards. Measures such as rigorous auditing, transparent pricing mechanisms, and secure custody solutions have instilled investor confidence while proving the importance of having forward-thinking and adaptive regulators.  With US spot funds now available, fully regulated by the SEC, and run by some of the world’s most prominent asset managers, US investors stand to benefit just as Canadians have from more accessible, trustworthy, and liquid ether exposure. 

The Reception of US Bitcoin ETFs

US bitcoin ETFs gathered had approximately $12.5 billion (C$17 billion) net inflows within their first five months of operations, making it one of the most successful ETF launches in the history of the US market.

While we do not necessarily expect the same level of interest for ether ETFs, based on the proportional difference between the AUMs for Canadian bitcoin and ether ETFs (roughly 3 to 1 for bitcoin ETFs) it might be reasonable to put the benchmark for relative success at approximately $3.8 billion of net inflows within a similar timeframe.

The introduction of spot bitcoin and ether ETFs in Canada has had a discernible impact on the market. They have provided a regulated and straightforward avenue for institutional and retail investors to partake in the crypto economy. Moreover, these products have served as a litmus test for the acceptance and viability of cryptocurrency-based financial instruments. 

When considering the global financial landscape, the US market holds significant importance because of its size, influence, and historical role in shaping global economic trends. Because of this, the recent introduction of spot bitcoin ETFs, and now spot ether ETFs, could lead to a substantial shift in investment strategies and market dynamics, not just in North America but across the world.  

Looking Forward 

Canada’s pioneering role in establishing successful spot bitcoin and ether ETFs has set a benchmark for the US market, offering valuable insights into regulatory frameworks, market reactions, and investor sentiments surrounding crypto ETFs. 

Much like how Buterin’s whitepaper offered a sneak peak into the potentials of blockchain technology, Canada’s success and track record with ether ETFs should be considered a blueprint in anticipation of the transformative potential these funds could unlock in the larger and more complex US market. 

–Purpose Investments

Commissions, trailing commissions, management fees, and expenses all may be associated with investment fund investments. The prospectus contains important detailed information about the investment fund. Please read the prospectus before investing. There is no assurance that any fund will achieve its investment objective, and its net asset value, yield, and investment return will fluctuate from time to time with market conditions. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. 

If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed; their values change frequently, and past performance may not be repeated. 

This information is provided for illustrative and discussion purposes only. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision. Historical trends do not imply, forecast or guarantee future results. Information is as of the date indicated and subject to change without notice. Nothing herein constitutes a prediction or projection of future events or future market behaviour.