Wall Street’s favorite ether investment vehicle is plunging just as the underlying cryptocurrency is near records. But there’s a good reason why.
Grayscale’s Ethereum Investment Trust, ETHE, has dropped from a 6-month high of $23 on Dec. 22, to $14 at the time of writing. That ~40% drop contrasts with the near 70% rise of ether, the only asset the ETHE trust holds, over the same time period.
To understand why, it’s necessary to delve into how ETHE functions. ETHE, like the Bitcoin- backed GBTC, is a security issued by Grayscale Investments to allow buyers to gain exposure to Ethereum via traditional brokerage accounts. Because regulators have not yet approved an exchange-traded fund by which consumers can directly gain exposure to cryptocurrencies, Grayscale developed these trusts as a workaround.
All Grayscale trusts function similarly. The company accepts both USD and cryptocurrency from accredited investors, and then issues shares of the security, ETHE for example, at the net asset value (NAV) of the target asset to those investors who must then wait a lock-up period (6 months for GBTC, 12 for ETHE) before their shares become liquid.
This issuance structure is controversial in the cryptocurrency community, large factions of which support permissionless financial opportunity, because while accredited investors can buy the shares at NAV of the crypto, they can sell at the security’s market price (after the lock-up period), which, according to YCharts, has hit levels over 3000% higher than Ethereum’s true value.
Market price of ETHE and GBTC shares have averaged a 707% and 38% premiums respectively over NAV over the last year, as investors bid up the price in the secondary market.
Until recently, investors could only be granted accredited status by way of a $1 million net worth (excluding primary residence) or a $200,000 income ($300,000 with a spouse). While the SEC has loosened these restrictions this year to include holders of FINRA licenses as well as organizations with over $5 million in assets, the hurdle to become accredited remains beyond reach for almost all who don’t invest professionally.
While not a guaranteed arbitrage, if the premium exists in 6-months, accredited investors can profit from the difference between the NAV at the time of purchase and the price of ETHE or GBTC post lock-up period. As ETHE has only ever traded at a premium, accredited investors have only ever profited in purchasing ETHE shares from Grayscale.
But a potential flood of ETHE shares is causing that premium to drop from as high as 270% in December to 15% on Tuesday. 116M ETHE shares have suddenly become available after the lockup period expired on Jan. 4, according to Bloomberg Intelligence analyst James Seyffart.
Investors are likely rushing to sell their securities before the gap closes.
The drop certainly comes as a rough surprise to many ETHE investors who may not have fully grasped the processes by which Grayscale issues the security. Ethereum has certainly been the asset to invest in over the last month, but for some ETHE may not have been the vehicle to gain exposure.
Still, to others who have been waiting on the sidelines, perhaps unwilling to invest their 401ks in ETHE considering the premium, now may be an excellent time to buy. As crypto influencer ShardiB exclaimed on Twitter,
“WOW… 26% premium on $ETHE??
This thing may actually be tradeable in the open markets now…”