ETHA: The Intersection Of DeFi And TradFi To Boost Demand For Ether

Summary iShares Ethereum Trust ETF is rated a buy, offering exposure to Ethereum's blockchain technology and its growing role in traditional finance. ETHA benefits from Ethereum's dominance in hosting stablecoins like USDC and the rise of tokenized real-world assets by major institutions.

Risks include high volatility and potential competition from faster, lower-cost blockchains, but the fund's long-term growth case remains strong. Investing in ETHA is a bet on blockchain infrastructure adoption, not just cryptocurrency speculation, with institutional participation signaling a maturing opportunity.

Introduction The topic of today's article is a change of pace from my usual diet of steady equities. The iShares Ethereum Trust ETF (ETHA), as the name suggests, is a vehicle that tracks the performance of the cryptocurrency Ethereum, or more correctly, the native coin Ether .

For clarity's sake, investors should understand that ETHA is tracking the price movement of Ether. The word cryptocurrency is a catch-all phrase that encompasses a universe of underlying coins ranging from stores of value such as Bitcoin technology layers such as Ethereum and a plethora of stuff that's either outright worthless or, worse, deliberate fraud .

The risk is that investors fall victim to what's known in philosophy as a tautology . In this instance the tautological reasoning would go, Ethereum is a cryptocurrency, some cryptos are frauds, therefore Ethereum is a fraud.

What I hope to lay out today is the perspective of somebody with a background in the investment world and traditional finance. As I see it, there is an opportunity from a technology perspective to overlay traditional finance with the technology layer that is blockchain.

Given that Ethereum is the largest public blockchain and already hosts numerous decentralized finance, or DeFi, projects, I see it set to be a key beneficiary of the fusion of blockchain technology with traditional finance. We already see plenty of news and hype this summer regarding stablecoins , a sizable portion of which use Ethereum as their primary infrastructure layer.

I am rating this ETF as a buy today. The price action has been very strong lately, and on account of that, I am issuing a buy rather than a strong buy.

I would warn potential investors that Ethereum and crypto generally have exhibited very high historical volatility, and thus this is not one for the faint of heart. An investor in ETHA will need to be comfortable with the investment case and committed to holding through a downturn, provided the investment thesis remains intact, of course.

The Investment Case So what is the investment case for Ethereum? The first thing I want to set out is that I view an investment in Ethereum as akin to investing directly in a technology.

Think of the internet; it's a shared technological infrastructure. The mistake people often make when thinking of Ethereum or any other crypto is to assume an investment in it is an investment in a currency.

The skeptics will say something like, what's the point in investing in this alternative currency? You are not going to purchase items at the store with it.

They will also cite the large volatility level and note that in order for a currency to function effectively, it must have some level of stability. Within the fiat currency world, we can see real-world examples of what happens when volatility swamps a currency, such as in Argentina: its usefulness as a medium of exchange is destroyed.

Ethereum is a public blockchain network technology, and it just so happens that the mechanism of maintaining that technology involves the payment of node validators in the native currency of the blockchain, in this case Ether. So we are not investing in a cryptocurrency as a medium of exchange, but rather we are investing in the underlying technology; the expression of that investment is through a native currency.

Imagine if every time on the internet you opened a web page, an underlying operator of the network got paid a tiny amount of money in order to fulfill that request for you. I hope that explains the underlying mechanism.

Next is why this mechanism is attractive from our perspective as investors. If I boil it right down, the investment case is a simple bet on continued adoption of Ethereum as the standard public blockchain to host traditional finance use cases, which are in the works.

There are numerous examples that can be cited, many of which are still early stage or pilots, but the direction of travel seems clear. So let's give a few examples.

The leading stablecoin issuer, Circle (CRCL), which offers the well-known USDC, utilizes Ethereum as its primary blockchain for hosting the USDC stablecoin. About 65% of USDC runs on Ethereum, and market forecasts for the growth of stablecoins alone are staggering .

Ethereum, like any other network, think the internet or social media, has the advantage of scale. Being the largest allows the network to accrue advantages; users flock to the standard because it's where the majority of other users already are.

The second major use case is the nascent use of tokenized assets, which is simply the creation of digital representations of real-world assets on the blockchain. An instinctive bearish reaction to this is to think of the NFT boom in recent years.

A phenomenon that led to wild speculation in worthless tokens. The coming wave of tokenized assets could not be more different.

Take, for instance, the announcement by Franklin Templeton that they will offer a tokenized version of their money market fund on Ethereum, or BlackRock (BLK) announcing a tokenized U. S.

treasury fund. These are sophisticated entities that are adapting their product offerings to suit the new technological paradigm available.

The use of blockchain-based assets is not just a novelty either; it can solve some very interesting real-world problems. For instance, in the payment world, many payments take several days to settle using traditional financial payment rails, such as wire payments or ACH .

In particular, cross-border payments can cause significant cost and operational delay, which is an efficiency drain for large corporate entities. In the world of trading, the posting of collateral for a derivative trade involves a slow process of sending an asset such as a MM fund to the clearinghouse's bank account.

The asset is held until the completion of the trade. The operational slowness can lead to enhanced risks, less optimized use of a firm's asset base, and greater costs associated with asset and money movement over traditional rails.

The fund itself looks appealing vs. its peer set.

It must be acknowledged that it carries a slightly higher fee load than alternative Ether tracking funds; however, given the magnitude of the higher fee is small, I am happy ETHA remains a good choice. Investors are paying a slight premium in this instance for the safety and operational reputation of BlackRock and the iShares brand.

Seeking Alpha The fund's substantially larger AUM than alternatives means it offers investors much better liquidity, as daily traded volumes are much higher. This should minimize spreads paid by investors compared to other offerings.

When we consider the bid-ask spread with the expense ratio, I believe ETHA is very attractive from a cost perspective. Seeking Alpha Large corporates are waking up to the benefits of blockchain technology.

The implication of that for an investment in ETHA is as follows. More traffic looks destined to come onto the Ethereum network; more traffic will mean a greater volume of transactions requiring processing and competition for speed of processing on the network.

The larger number of participants and transactions supports network volume, which in turn serves as a bid on the underlying currency that powers the network, Ether. There are competing blockchain solutions that will try to take share from Ethereum workloads, and indeed I do not see the market as a winner-takes-all dynamic; more likely, the market will settle into an oligopolist equilibrium.

What seems clear to me, though, is the Ethereum network is set to continue to grow rapidly, and that growth in network traffic will naturally correspond with a rise in the underlying network currency, which is what ETHA is ultimately tracking. Over time, network transactions have continued to rise, and with them so has the native currency, Ether.

The continued shift of new workloads, such as tokenized assets, underpins continued network growth into the future. The Block Performance A quick look at performance.

Since early April, Ethereum has been on a stellar run and now sits up at all-time highs. Investing at all-time highs is always a leap of faith in any instrument.

A sensible pushback to my buy thesis would be, why not wait for a pullback to get the entry point? This is a totally fair point, and my answer is simply that market timing is a tricky thing to do and get right.

I, of course, expect we will have a pullback at some point; the problem is we have no idea when that is or what level it will ultimately pull back from and to. I think a meaningful pullback in the stock would warrant an upgrade to a strong buy.

Given the investment case I have laid out, I think Ethereum would warrant a strong buy; the only thing holding me back is the fact it's at an ATH. I am happy to buy at an ATH given the strength of the secular investment case.

If others wish to keep their powder dry for a better entry point, I see the sense in that; I just have no idea when they might get the chance to deploy that capital. TradingView Risks Two key risks I would call out for investors.

The first one I have mentioned already, and that's the inherent volatility one can expect from this type of investment. Based on historical patterns, it's not unreasonable to expect investors might have to endure a drawdown of 50% or more in ETHA and keep their cool.

The second risk is on the technology side; critics of Ethereum point out the slowness and high cost of the network compared to newer standards such as Solana. There is a possibility that newer blockchain standards eat away at Ethereum's market share, which will naturally lessen the underlying investment case in the currency.

As with prior technologies, it is often not the early adopters that end up being the ultimate victors. A good example is in the smartphone world, the early success of BlackBerry (BB).

Despite having an early lead in the smartphone technology space, BlackBerry ended up being a long-term loser as other players such as Apple (AAPL) availed themselves of a second-mover advantage. Ethereum is a leader in the public blockchain space today, but we must be aware that it could potentially be supplanted as newer blockchains come to market with simply a better product, having watched and learned from shortcomings in the current standards.

Conclusion In conclusion, hopefully I have done a decent job of laying out why I think Ethereum in the form of ETHA represents a good investment opportunity for investors. Crypto has seen many waves of hype, mostly dominated by retail investors to this point.

Now that we are meaningfully seeing big, respected institutions joining the fray, I, with my traditional financial background, have perked up to the opportunity. The benefits of overlaying traditional finance with a better technology layer make perfect sense to anyone who has worked in the industry and experienced the clunky nature of the technology standards.

Much of the financial and investment industry still runs on stuff more suited to the 1970s; the onus for change is clear-cut. Ethereum stands to be a key winner of the tech infrastructure adoption of the industry.