MW Ether ETF holders could see this popular trading strategy open up if Trump's return goes the way they want
By Frances Yue
A weekly look at the most important news and moves in crypto, and what's on the horizon in digital assets
Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.
Crypto bulls are hoping that the regulatory environment could become more friendly after Donald Trump returns to the Oval Office later this month. The president-elect has vowed to build a strategic bitcoin reserve in the U.S., received endorsements from several key figures in the digital-asset space during his campaign, and said he would nominate former Securities and Exchange Commission member Paul Atkins, who is known to be crypto-friendly, to serve as SEC chair.
One change crypto participants are hoping to see is for the SEC to allow ether exchange-traded funds to stake the ether they hold. Staking is a process whereby ether holders lock up their crypto to secure the Ethereum blockchain and gain a reward of additional coins. Staking ether currently generates a return of 3.2% annually, according to the Ethereum Foundation, which supports the blockchain.
Current ether ETFs do not stake the ether they invest in, a concession by issuers due to the regulatory uncertainty around staking. There is debate about whether staking should be seen as a security.
If ether ETFs allow the distribution of staking rewards, they could supercharge a popular strategy called the basis trade, according to Greg Magadini, director of derivatives at crypto-data company Amberdata.
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Staking + basis trade?
The basis trade, sometimes known as the cash-and-carry trade, is a market-neutral strategy aimed at exploiting the price discrepancy between an asset and its corresponding derivatives. It is a popular trade among hedge funds to make profits and hedge risks.
For example, if futures were trading at a premium to cash, traders would buy ether, or ether ETFs, and sell ether futures as they wait for the cash and futures prices to converge. They would hold the ether or ether ETFs through the futures delivery date and use it to cover their short obligations.
The possibility of staking would add an additional layer of potential income in such a trade.
If a trader buys ether and stakes the coins while at the same time shorting ether futures, they may capture yield from both the basis trade and staking, Magadini said in an interview. The ether basis trade potentially yields up to 14% annually, while staking ether provides a return of over 3.2%, he noted.
But there are dangers.
Traders may suffer losses if the basis, or the gap between spot and futures prices, moves in the opposite direction of their position. A trader may also get the timing wrong on when the spot and futures prices would converge. To ensure that a trader could enter or exit a position at expected prices, both the spot and futures markets need to have sufficient liquidity.
Furthermore, as the futures leg of the trade is done on margin, a trader may face margin calls if the market moves against the trader's position. A trader unable to meet a margin call could see positions liquidated at a loss.
As David Krause, emeritus professor of finance at Marquette University, wrote in a paper published in June: "It is essential for individual traders to recognize the inherent risks associated with basis trades. Factors such as the possible imperfect convergence between futures and spot prices, trading fees, and margin requirements can all impact profitability."
For now, while traders are still able to stake ether and short ether futures, it is often difficult to do both in one regulated platform, and they have to move the capital between the two sides to manage risks as ether prices change, said Magadini. Some institutions have also been reluctant to participate in such trades due to their aversion to holding ether directly or to a lack of necessary infrastructure to participate in such trades.
If ether ETFs allow staking, traders may be able to use their position in an ETF as collateral to short ether futures, as both will happen on regulated platforms and prime brokers may have the ability to accept ether ETFs as collateral, Magadini said.
Crypto in a snap
Bitcoin (BTCUSD) has edged up 0.3% over the past seven days, to around $94,854 at the time of writing Wednesday. Ether (ETHUSD) has dipped 0.8% over the past seven days, to around $3,330, according to Dow Jones Market Data.
Must-reads
-- MicroStrategy's latest capital-raise plans are for $2 billion of preferred stock to buy more bitcoin (MarketWatch)
-- Will crypto continue to rally? Trump's first 100 days will be the key. (MarketWatch)
-- Bitcoin may top $125,000 or fall to $77,000 in Q1. It depends on Trump. (MarketWatch)
-- The Great Crypto Crash (The Atlantic)
-Frances Yue
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January 08, 2025 15:44 ET (20:44 GMT)
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