Grayscale Investments is best known for its Grayscale Bitcoin Trust (GBTC) product, which is currently trading at a steep discount to its assets under management (AUM). But the company has also created a number of other publicly traded products, among them the Grayscale Ethereum Trust (ETHE) which, much like GBTC, provides ether exposure via a trust trading on US over-the-counter (OTC) markets.
Also much like GBTC, ETHE is currently trading at a discount to ether (a 42% discount, to be precise). Its share price has also declined 80% year-to-date, while ether itself has declined 68% in the same timeframe.
The inferior performance of Grayscale’s Ethereum trust relative to its only asset reflects investors’ uncertainty around the ability to redeem ETHE for ether anytime soon.
All Grayscale trusts are currently closed for share redemptions. Investors can’t give ETHE to Grayscale to redeem ether and because of this restriction, Grayscale trusts trade at a different price to the assets they possess.
Problems with Grayscale’s ETHE
- FTX’s collapse impacted Grayscale and its sister company, Genesis Trading. Genesis is currently researching options that include bankruptcy due to financial issues that were exacerbated by losing $175 million in digital assets due to FTX’s collapse.
- Unlike some other digital asset companies, Grayscale refused to release data on its digital asset reserves, citing security concerns. In a Twitter thread, it denied that it lends, borrows, or otherwise rehypothecates the assets held by its OTC Markets trusts.
- Cathie Wood’s ARK Invest has been regularly buying GBTC shares despite their worsening discount-to-NAV. ARK has not been buying ETHE.
- In a weekly email to investors, former hedge fund manager Whitney Tilson called ETHE a strong buy opportunity. Tilson cited Ethereum’s dominance as a Layer 1 smart contract platform. However, Tilson said little about Grayscale Investments’ health as a trust administrator, aside from caveating broadly, “Investors will be better off in the long run if they never invest in anything related to cryptocurrencies.”
As noted earlier, Grayscale’s 10-Q filing reiterates that it doesn’t offer redemptions for ETHE shares and it doesn’t have plans to enable redemptions. Grayscale has also been pushing hard to get approval from the Securities and Exchange Commission (SEC) to convert its flagship trust, GBTC, into an Exchange Traded Fund (ETF).
However, Grayscale hasn’t pushed for ETF conversion for ETHE. Regulation M could provide an alternative that allows the redemption of trust shares for underlying assets, but the SEC shut down a Regulation M trust redemption action by Grayscale in 2016. As such, Grayscale isn’t likely to succeed using this loophole.
What if DCG sells Grayscale itself?
Most of the issues with ETHE seem to revolve around Grayscale’s relationship with Digital Currency Group (DCG), which owns Grayscale and Genesis Trading. Problems with Genesis Trading could force DCG to liquidate Grayscale’s trust funds or even sell Grayscale altogether.
DCG has already sent a $140 million equity infusion to Genesis to make up for the $175 million in now-locked funds on FTX. It also has a $1.1 billion promissory note for Genesis Trading, among other liabilities.
Grayscale claims that all the digital assets in its trust funds are safe. However, investors aren’t confident in Grayscale’s ability to gain SEC approval to convert its trusts into ETFs nor enable the redemption of trust shares for underlying assets. Indeed, due to these uncertainties, the discount-to-NAV for both GBTC and ETHE continues to worsen by the month.