Grayscale Ethereum Trust: A 55% Discount To Net Asset Value Looks Like A Bargain

Summary The Grayscale Ethereum Trust is trading at a 55% discount to net asset value. This is likely caused partly by its manager selling into a crypto bear market. Turning its crypto trusts into ETFs would instantly cure the discounts on these CEFs. There are legitimate business reasons for Grayscale to desire to turn these products into ETFs. Conversion won't happen tomorrow but it could happen in a year or two. I had been slowly building my Grayscale Bitcoin Trust (GBTC) allocation back up (read more here ). But after the FTX (FTT-USD) implosion, I've become more aggressive in expanding crypto-related holdings. I've also been buying the Grayscale Ethereum Trust ( ETHE ) which I suspect is suffering the same forced selling as its big Bitcoin (BTC-USD) sister fund the Grayscale Bitcoin Trust ((GBTC)). The manager of these trusts is under pressure because a subsidiary called Genesis is involved in bankruptcy proceedings. With some regularity, there are reports in the media that Grayscale is trying to raise funds by selling venture investments or even straight up selling its own holdings in the Ethereum Trust. Fellow contributor John Miller has a very good article out that goes into a lot of detail on the Genesis/Grayscale relationship, Grayscale suing the SEC (another important topic) and how it all relates to GBTC. To an extent, it is relevant to ETHE as well: Grayscale is not directly touched in the Genesis restructuring agreement and fears DSG would somehow be forced to unwind any of the Grayscale products, thereby spiking coin supplies, now seem remote. If implemented, the agreement also buys DCG time before it is forced to sell a large portion of its own holdings in the Grayscale products at a discount. DCG along with its other subsidiaries are reportedly holding a billion dollars of the Bitcoin Trust. The refinancing of the May 2023 loans through June 2024 greatly reduces the need for immediate liquidity. It also allows time for the sale of other non-coin assets such as CoinDesk. For good measure, I like and own both GBTC and ETHE. The key reason to like ETHE is that it trades at a $7.55 price per unit vs $16.44 in Ethereum (ETH-USD) holdings per unit. ETHE discount to NAV (Grayscale) That's a massive 55% discount to net asset value. If the price were to appreciate from $7.55 to net asset value, that's a 117% return. Ethereum theoretically doesn't have to appreciate anything to achieve that. Admittedly the discount has only been increasing over the last year or so, but I suspect that's, at least in part, due to the manager liquidating some of its holdings. The discount would instantly close if these closed-end funds were turned into ETFs. So far, the SEC hasn't allowed a non-futures crypto ETF product in U.S. markets. Grayscale is suing the SEC over arbitrarily disallowing this and is actively trying to convert its GBTC product. I also believe it makes business sense to do so, even though you risk losing assets or having to lower the management fee. ETFs attract way more capital than closed-end funds and are easier to get access to for investors across the world. The largest ETF in an asset class tends to attract the most flows. GBTC is already the largest Bitcoin fund in the world and would have a leg-up establishing itself as the prime ETF. This is a must-have spot to fight for, and I think the company will do so. Some will argue the discount will never close because the manager gets a 2.5% management fee on the assets or because the holdings are too complex to allow. I understand these arguments, but the first argument seems outweighed by the opportunity to charge 0.5%-1% on the largest Bitcoin ETF in the world. The second argument doesn't make a lot of sense because, over the years we've seen increasingly complex ETFs make it into the markets. Sometimes these even include esoteric derivatives. One other reason Grayscale may be incentivized to turn these funds into ETFs is that the firm apparently needs money (hence liquidating their ETH holdings). By converting before liquidating they could effectively raise 2x as much money given the deep discount. I do have to say the trade mostly makes sense to some if you believe enough in the long-term of the underlying assets of ETHE or GBTC to justify a long position. I usually do not include technicals in my articles, but I do think it is interesting to note that ETH is trading below its 200 EMA (exponential moving average) or 50-day EMA. Simple moving averages paint a similar picture. Data by YCharts While if you use the Ethereum price chart, the cryptocurrency is trading above 200 day moving average. In addition, the 50-day has crossed the 200-day. A very traditional bullish technical signal: Ethereum moving averages (Tradingview) I think it is interesting because I think the ETHE price action likely lags the price action of Ethereum itself a little bit. Obviously, it has its own idiosyncratic influences but ultimately it has to follow Ethereum to a degree. Taking everything together I believe this is a very interesting moment to buy or add a little bit of ETH.