What is an ETF and why is it important for the Cryptocurrency market?
An Exchange-Traded Fund (ETF) is a type of investment fund that trades on a stock exchange like a stock. An ETF can hold a basket of assets, such as stocks, bonds, commodities or Cryptocurrencies, and allows investors to diversify their portfolio and access markets that would otherwise be difficult or expensive to enter.
Cryptocurrency ETFs are funds that invest in Cryptocurrencies or derivative contracts related to them, such as futures or options. These funds offer investors a simple and regulated way to invest in the Cryptocurrency sector without having to directly purchase, store or manage digital currencies.
Cryptocurrency ETFs can have several advantages, such as:
- Greater liquidity: ETFs trade on regulated exchanges and are in high demand by institutional and retail investors, making it easier to buy and sell fund shares.
- Lower risk: ETFs are subject to oversight and compliance by regulatory authorities, reducing the risk of fraud, manipulation, or theft of the underlying Cryptocurrencies.
- Lower cost: ETFs have lower fees than Cryptocurrency exchange platforms, allowing investors to save on operating expenses and taxes.
- Greater exposure: ETFs can include a variety of Cryptocurrencies or indices that reflect sector performance, allowing investors to diversify their portfolio and benefit from market growth.
What is Nasdaq proposing with its mixed Ether and Cryptocurrency ETF?
Nasdaq, the second largest stock exchange in the United States, has submitted a request to the Securities and Exchange Commission (SEC) to approve the listing of a mixed Ether and Cryptocurrency ETF offered by Hashdex, an asset management company based in Brazil.
The ETF is called Hashdex Nasdaq Ethereum ETF and aims to replicate the Nasdaq Crypto Index (NCI), which includes the 10 largest Cryptocurrencies on the market by market capitalization. The NCI is updated quarterly and is currently composed of Bitcoin (BTC), Ether (ETH), Cardano (ADA), Bitcoin Cash (BCH), Litecoin (LTC), Chainlink (LINK), Stellar (XLM), Uniswap (UNI) , Filecoin (FIL) and Polygon (MATIC).
The ETF will not only invest in spot Cryptocurrencies, but also in futures contracts or options on them. In this way, the fund aims to reduce its dependence on the spot market and mitigate the risk of manipulation or volatility.
According to the form presented by Nasdaq:
“Rather than holding 100% spot Ether, which could make it more susceptible to price manipulation in the spot market, the Fund will hold a mix of spot Ether, Ether futures contracts and cash. The Fund intends to reduce its reliance on the spot market and address concerns regarding potential manipulation in the unregulated Ether spot markets by including cash and Ether futures contracts in its holdings.”
The ETF will be based primarily on Ether futures contracts traded on the Chicago Mercantile Exchange (CME), which is an exchange regulated by the CFTC. The CME launched Ether futures in February 2021 and has since seen growing interest from institutional and retail investors.
The ETF will have a management fee of 0.95% per year and will be listed on the Nasdaq exchange under the symbol HETH. The fund expects to raise $20 million in its initial offering and will have a minimum of 25,000 shares available for purchase.
The ETF still needs approval from the SEC, which has so far rejected all Bitcoin ETF applications filed by several companies. The SEC has expressed concerns about the lack of oversight, market manipulation, and volatility of Cryptocurrencies.
However, Nasdaq expects its mixed Ether and Cryptocurrency ETF to have a better chance of being approved as it is based on a diversified and regulated index, and uses futures contracts to reduce risk. Furthermore, the SEC has shown a more favorable attitude toward Ether thantoward Bitcoin, considering it a digital asset and not a security.
What implications does this ETF have for the Cryptocurrency market?
If the SEC approves the Nasdaq ETF, it could be a historic milestone for the Cryptocurrency market as it would be the first ETF of its kind in the United States. This could have several positive implications, such as:
- Increased adoption: The ETF could attract more institutional and retail investors to the Cryptocurrency market by offering them an easy, safe and regulated way to invest in this sector. This could increase the demand and value of the Cryptocurrencies included in the index.
- Greater legitimacy: The ETF could give more credibility and recognition to the Cryptocurrency sector, by demonstrating that it meets the regulatory and transparency standards required by the SEC. This could improve the trust and reputation of Cryptocurrencies among the general public and authorities.
- Greater innovation: The ETF could drive development and innovation in the Cryptocurrency sector, by encouraging more companies and projects to create solutions based on blockchain and Cryptocurrencies. This could create more opportunities and benefits for users and market participants.
Nasdaq has asked the SEC for approval of a mixed Ether and Cryptocurrency ETF offered by Hashdex, which aims to replicate the Nasdaq Crypto Index. This ETF could be the first of its kind in the United States and could have a major impact on the Cryptocurrency market, increasing its adoption, legitimacy, and innovation. However, the ETF still needs to clear the regulatory hurdle from the SEC, which has been very strict with previous applications.