The Ethereum network made headlines last week with the SEC’s surprise rule change approval, opening the door for ether ETF approvals. While potential spot ether and spot bitcoin ETFs share some similarities, foundational differences in the two cryptocurrencies make for very different use cases for investors.
The SEC approved applications from several exchanges seeking to list and trade spot ether ETFs on May 23, 2024. These exchanges include Nasdaq, NYSE Arca, and CBOE BZX. Collectively, eight ETFs are currently awaiting S-1 approvals, which could take weeks or months, with no guarantee that all will eventually launch. Ether would be the second spot cryptocurrency to garner mainstream investment approval from the regulatory agency this year.
Bitcoin and Ether: Few Similarities, Many Differences
Ether and bitcoin are both cryptocurrencies and tokens of their native platforms (Ethereum and Bitcoin respectively). Considered high-risk investing due to their heightened volatility and arguably speculative nature, in reality, the two offer very few similarities. The ether token (ETH) is used to power the Ethereum blockchain, a decentralized platform and technology hub. On the other hand, bitcoin (BTC) is seen generally as a store of value.
See also: “What Do Advisors Think About Ethereum?”
The Ethereum platform is home to smart contracts that don’t require third-party validation, as well as decentralized applications (DApps). Nonfungible tokens (NFTs), decentralized finance (DeFi) applications, and tokenization of real-world assets all happen on the Ethereum network. DApps leverage smart contract capabilities while using ether tokens as payment. All transactions on the network incur ETH fees (called gas), meaning ether powers the platform. As such, ether investors often consider it an investment in the underlying technology.
In contrast, the Bitcoin network was created primarily as a digital, decentralized alternative to fiat money. It’s used as digital currency in peer-to-peer transactions, and investors in bitcoin often consider it a store of value.
For a currency, commodity, or asset to be considered a store of value, it must retain its value without depreciating. Gold is arguably the most popular store of value asset within investing. Proponents of bitcoin liken it to digital gold given its use case as digital currency with a defined, limited supply of 21 million BTC.
Bitcoin also halves every four years, meaning that the amount mined through complex computer computations is reduced by half every four-year cycle. This creates a relatively predictable inflation schedule. In contrast, ether has no cap. However, its inflation rate remains low as it mints and burns ETH continuously through its Proof-of-Stake model.
Fundamental Operating Differences Carry Investment Implications
The consensus mechanisms (the programming that ensures agreement across the blockchain regarding its ledger) that Bitcoin and Ethereum employ drastically differ. It’s a difference that has implications for investors weighing the benefits of direct or indirect exposure via ETFs.
Bitcoin utilizes a Proof-of-Work model, which means specialized computers, called mining rigs, solve complex mathematical puzzles (hashes). This process validates transactions on the network and creates a new BTC for the miner that completes the hash first. It’s an energy-intensive process that garners much attention. Venezuela is the latest in a growing number of countries to ban bitcoin and cryptocurrency mining, citing national power grid concerns.
Image source: BlockGeeks
Ethereum utilizes a Proof-of-Stake model after its Merge in 2022 that made it 99.9% more energy efficient. In this process, validators create new blocks on-chain by staking a percentage of the ether owned as collateral. An algorithm chooses the validator out of the staking pool. The ETH is held for a set amount of time, and the owner is paid interest in return. It makes direct ETH investing attractive but is a feature that ether ETF investors will miss out on in the U.S.
See also: “What Potential Approval of Spot Ethereum ETFs Really Means”
Grayscale, Fidelity, and ARK all removed staking from their ether ETF filings this month, reported CNBC. In response to the SEC’s stance in lawsuits against Kraken and Coinbase, it's likely that staking-as-a-service is an unregistered security.
While the price action of ether generally correlates to bitcoin, the two often become less correlated during periods of heightened market uncertainty. Independent factors unique to the Ethereum network also drive price action, such as major updates and growing interest in DeFi. The introduction of spot ether ETFs may further differentiate the two largest cryptocurrencies, though only time will tell.
Understanding the underlying differences between bitcoin and ether allows investors to make more educated decisions. Whether investing directly or indirectly via spot bitcoin ETFs or eventual ether ETFs, knowing the fundamentals allows for better portfolio allocation.
For more news, information, and analysis, visit the Crypto Channel.
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