ETHV ETF: Question & Answer

Investing in the VanEck Ethereum ETF involves significant risk and may not be suitable for all investors. We use the generic term “ETF” to refer to exchange-traded investment vehicles, including those that are required to register under the Investment Company Act of 1940, as amended (the “40 Act”), as well as other exchange-traded products which are not subject to the registration of the ‘40 Act. The Trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for the purposes of the Commodity Exchange Act, and thus offers investors fewer protections.

• Why should investors consider ETHV?
• Why should investors consider investing in ether now?
• What is the investment strategy for ETHV?
• How does the VanEck Ethereum ETF track the price of ether?
• How do Ethereum ETPs compare to direct ether ownership?
• What are the differences between ETHV and other ether investment options?
• How do Ethereum ETPs work?
• What are the tax implications compared to direct ether investment?
• What kind of fees does ETHV have?
• How is the ether in ETHV custodied?
• Who is Gemini?
• Who is Coinbase?
• What are the risks of buying an Ethereum ETP?
• How does the Trust audit its ether?
• How can investors buy ETHV?

Why should investors consider ETHV?

ETHV offers a convenient way to gain exposure to ether (ETH) without the complexities of direct ownership. It’s a cost-efficient method to obtain ether exposure, managed by VanEck, a well-established ETF issuer with extensive experience in crypto-related products. ETHV also benefits from expert management and qualified custody of ether. The combination of these factors enables ETHV to make it easier and potentially more secure for investors to add ether to their portfolios.

Why should investors consider investing in ether now?

Ethereum is an open-source “App Store” that runs software and allows for transfer of value. Ether is the native cryptocurrency of the Ethereum network, and powers the use of smart contracts and decentralized applications (dApps). This makes ether integral to the functioning and growth of the Ethereum ecosystem. As a digital asset, ether offers several key benefits:

• Utility and Demand: Ether is used to pay for transaction fees and computational services on the Ethereum network, driving continuous demand.
• Smart Contract Platform: Ethereum's capability to facilitate smart contracts and dApps makes Ether a crucial part of many innovative blockchain solutions.
• Portfolio Diversification: Investing in ether can provide potential portfolio diversification benefits, as it operates differently from traditional financial assets.
• Adoption and Growth: With a robust development community and growing mainstream acceptance, ether's role in the digital economy is expanding rapidly.

What is the investment strategy for ETHV?

The Trust’s investment objective is to reflect the performance of the price of ether less the expenses of the Trust’s operations. The Trust is a passive investment vehicle that does not seek to pursue any investment strategy beyond tracking the price of ETH.

How does the VanEck Ethereum ETF track the price of ether?

The product aims to closely track the spot price of the MarketVector Ethereum Benchmark Rate (EBR). Its NAV (Net Asset Value) is calculated based on the current market value of the ether it holds, less any applicable fees and expenses. 

How do Ethereum ETPs compare to direct ether ownership?

Direct ether ownership requires interacting with a crypto exchange, managing storage, and ensuring security, all of which can be complex. ETHV can be bought and sold on traditional stock exchanges, making it accessible through brokerage accounts, simplifying the process for investors.

What are the differences between ETHV and other ether investment options?

The differences between ETHV and other investment options are outlined in the table below:

How do Ethereum ETPs work?

How does the fund's creation/redemption process work?

The Fund has an all-cash creation and redemption process. For creations, the Sponsor receives cash from the Authorized Participant (AP) in exchange for shares of the Fund. For redemptions, the Sponsor receives shares of the Fund from the AP in exchange for cash. Following a creation or redemption order, the Trust utilizes liquidity providers and Gemini Clearing to execute and settle the underlying ether. All trading costs (as pertaining to the underlying ether transactions) for each primary market order will be passed back to the Authorized Participant(s) placing the creation/redemption order(s). The Fund does not offer in-kind creations or redemptions.

How does the fund buy and sell ether?

For creations, the Sponsor uses cash delivered by APs to purchase ether from third-party liquidity providers. Once the purchase is made, the ether is delivered to the Trust’s custodian, Gemini Trust Company, LLC, ensuring secure storage. To satisfy redemptions, the Sponsor sells ether to a third-party liquidity provider in exchange for cash.

What are the tax implications compared to direct ether investment?

The VanEck Ethereum ETF is a grantor trust for U.S. federal income tax purposes. As a result, the Trust itself is not subject to U.S. federal income tax. Instead, the Trust’s income and expenses “flow through” to the Shareholders. Shareholders generally will be treated, for U.S. federal income tax purposes, as if they directly owned a pro rata share of the underlying assets held in the Trust. Shareholders also will be treated as if they directly received their respective pro rata shares of the Trust’s income and proceeds, and directly incurred their pro rata share of the Trust’s expenses. Most state and local tax authorities follow U.S. Income tax rules in this regard. However, Shareholders should contact their own tax advisors as to the tax consequences of ownership of ETHV shares.

What kind of fees does ETHV have?

ETHV currently charges 0 fees. During the period commencing on July 23, 2024, and ending on July 22, 2025, the Sponsor will waive the entire Sponsor Fee for the first $1.5 billion of the Trust’s assets. If the Trust’s assets exceed $1.5 billion prior to July 22, 2025, the Sponsor Fee charged on assets over $1.5 billion will be 0.20%. All investors will incur the same Sponsor Fee which is the weighted average of those fee rates. After July 22, 2025, the Sponsor Fee will be 0.20%. Brokerage fees and commissions may apply, so please check with your broker. This adjustment demonstrates VanEck's commitment to delivering enhanced value to investors through competitive pricing.

How is the ether in ETHV custodied?

The Trust’s ether is held by its crypto custodians (currently, Gemini Trust Company, LLC and Coinbase Custody Trust, LLC), which act as the ether Custodian, responsible for securely storing all the Trust’s ether related to its ether Account and Clearing Account.

Who is Gemini?

Gemini is a leading cryptocurrency exchange and custodian known for its robust security measures and regulatory compliance. It is a full-reserve exchange and custodian, regulated by NYDFS, licensed in all 50 US states, and holds multiple licenses globally. In addition, Gemini includes multi-signature technology, role-based governance protocols, physical security, multiple layers of biometric access controls, and $100M in digital asset insurance coverage. It has also completed SOC 1 Type II and SOC 2 Type II audits, and is ISO 27001 certified. The company’s strong operational standards means all customer funds are held 1:1 and are available for withdrawal.

Below are comprehensive details about Gemini and how the company safeguards customer assets through its adherence to strict compliance and operational protocols:

• Storage Solutions:
  • Cold Storage: Gemini is required to hold the Trust’s ether in cold storage, which involves storing private keys completely offline to protect against unauthorized access and cyber threats. Cold storage is used for long-term security.
  • Hot Storage: Ether that needs to be accessible temporarily for operations, such as creations, redemptions, or to pay the Sponsor Fee and extraordinary expenses, is held in hot wallets. These wallets are connected to the internet but are used only for short periods.

• Custody Structure and Security:
  • Gemini employs hardware security modules (HSMs) to generate, store, and manage private keys for both cold and hot storage.
  • Multi-signature technology and geographically diverse storage locations across the United States are used to enhance security and reduce risks.
  • All private keys are stored in air-gapped environments with multiple levels of physical security and monitoring controls.

• Regulatory Compliance:
  • As a fiduciary under Section 100 of the New York Banking Law, Gemini is held to stringent capital reserve requirements and banking compliance standards.
  • Gemini is subject to various U.S. federal and state laws, including anti-money laundering regulations, the Bank Secrecy Act, and the USA PATRIOT Act.

• Insurance Coverage:
  • Gemini maintains a $100 million specie policy covering fraud, theft, and cyber-security breaches, and a $25 million crime policy. This insurance applies to all digital assets held by Gemini, including those of the Trust.
  • Although the Trust is not a named beneficiary, the insurance covers customer losses, including those suffered by the Trust, from specified events such as fraud and theft.

Who is Coinbase?

Coinbase is a prominent cryptocurrency exchange and custodian acclaimed for its extensive security protocols and regulatory adherence. The company operates as a licensed and regulated entity in the U.S. and various jurisdictions worldwide. Coinbase also engages in regular SOC 1 and SOC 2 Type II audits and employs comprehensive security features. These include cold storage for the majority of assets, multi-signature technology, encrypted private keys stored within high-security environments, and $320M in digital asset insurance coverage. Ensures that customer assets are held in segregated or omnibus accounts with strict adherence to accounting controls. The company’s strong operational standards ensure the protection and integrity of customer assets.

Below are comprehensive details about Coinbase and how the company safeguards customer assets through its adherence to strict compliance and operational protocols:

• Information Security Management Program:
  • Led by the Chief Security Officer with independent SOC 1 and SOC 2 Type II attestations.
  • Includes policies, procedures, and standards to manage information security risks
  • Detailed Physical Security program with access control processes, emergency procedures, CCTV, and security systems governed by a board-approved policy.

• Custody and Security of Assets:
  • Vault wallet: Assets are secured within a cold storage environment with segregated wallets. Extensive key management technology, operations, and personnel ensure security.
  • Trading balance: majority of assets kept in cold storage with some in hot wallets.

• Secure Storage of Client Keys/Assets
  • Vault wallet: secure key generation, dual encrypted private key material, and geographically redundant storage. Transactions require cryptographic consensus across multiple operators.
  • Trading wallet: private keys are stored within high security online environments, encrypted at rest, and transactions are signed in protected environments.

• Insurance Coverage
  • Commercial Crime insurance policy covering loss of client assets with coverage for employee collusion, theft, security breaches, and fraudulent transfers. This insurance has been renewed annually since 2013, providing broad and deep coverage.

What are the risks of buying an Ethereum ETP?

• Ether Market Risks: The value of ether can be extremely volatile and unpredictable.
• Regulatory Risks: Changes in laws or regulations affecting ether may impact the value of the Trust's holdings.
• Operational Risks: There are risks related to the custody and security of the Trust's ether holdings.
• Market Trading Risks: There may be a lack of liquidity in the shares, affecting their market price.

How does the Trust audit its ether?

On a daily basis, the Sponsor and the accounting agent reconcile the ether position at Gemini and Coinbase. As part of the Trust's annual audit, auditors confirm the existence of ether positions. Gemini and Coinbase have a SOC 1 Report produced by an independent auditor outlining controls around the safekeeping of assets.

How can investors buy ETHV?

Investors can buy ETHV shares through their existing brokerage accounts, such as Charles Schwab and Robinhood, by searching for the ticker symbol "ETHV", making it a convenient addition to any investment portfolio.

Learn more here.

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