Bitcoin might have returned 66.12% YTD, but the second-largest cryptocurrency by market cap, Ethereum (CRYPTO: ETH) has done over six times that with an astonishing 433.14% YTD return. At the time of writing, Ethereum is currently trading at US $3,860.40, down over 20% from its all-time-high of US$4818,70 on November 8, 2021 but still up massively overall since inception, with an incredible 32,318.49% since 2016.
Buy the dip!
In my opinion, the recent dip represents an excellent entry point for investors looking to add Ethereum to their portfolio at a cheaper price. Despite the high volatility, investors who are “HODL” (holding on for dear life) and consistently buy the dips have reaped fat gains.
The Ethereum blockchain is heavily used for a variety of defi (decentralized finance) applications, non-fungible tokens (NFTs) and as the basis for other emerging cryptocurrencies. I personally think it will overtake Bitcoin by market capitalization in the near future (an event called “the flippening”).
Traditionally, Canadian investors bought Ethereum on coin exchanges such as Binance, Shakepay, Newton and now Wealthsimple Crypto, and either held it online in their “hot wallet” or offline in their “cold wallet.” The problem with these methods is that every sale is a taxable event, meaning that when you sell your Ethereum, you pay capital gains tax, which could eat up your once juicy gains.
ETFs solve that problem
Fortunately, fund providers like CI Global Asset Management have introduced numerous exchange-traded funds (ETFs) that track the spot price of Ethereum. These ETFs hold the underlying Ethereum in offline cold storage with a custodian, and divvy it up into shares. Buying a share of these ETFs essentially gives you exposure to a proportionate amount of Ethereum.
Shares of this ETF can be traded on the stock market like any other equity using most brokerage apps, making it easy to buy or sell as you build your portfolio. But what’s really cool is that these ETFs can be held in your TFSA, meaning that when you sell, you pay zero income tax. This makes them ideal for a long-term hold.
The dominant ETF at this time is the CI Galaxy Ethereum ETF (TSX: ETHX.B) This ETF currently has assets under management (AUM) of $1.38 billion and holds 172,319.1 Ethereum, which works out to around 0.003684 Ethereum per share. Holding this ETF will cost you a 0.40% management fee annually (taken out of the funds overall performance), plus additional trading and tax costs.
The Foolish takeaway
Physical Ethereum ETFs that trade on the Toronto Stock Exchange offer numerous advantages over futures-based ETFs or close-ended funds, including less tracking error, fewer discrepancies between the market price and net asset value of the fund, and superior liquidity. They also come with the potential for large tax-free gains, ease of buying/selling on an exchange, and diversification benefits.
However, investors need to be aware of a few risks prior to buying one of these ETFs.
Firstly, the underlying asset is highly volatile. Intra-day losses of up to 10% are not uncommon and may not be suited to investors with a low risk tolerance, a short time horizon, or investment objective focused on capital preservation.
Secondly, unlike Ethereum, these ETFs do not trade 24/7. After-hour and weekend fluctuations in the underlying can leave you with sudden losses or gains at the opening bell.
Finally, some of these ETFs are not currency hedged, meaning that fluctuations in the FX rate between the CAD/USD can introduce additional volatility that alter your returns in the short term.
