- ETHE doesn’t track Ethereum.
- It is way too expensive.
- ETHE will probably be superseded by better investment vehicles soon.
A (very) quick primer on Ethereum
Ethereum is the #2 crypto asset by market cap, after Bitcoin. It has some technical capabilities that Bitcoin lacks. In addition to its function as a currency, Ethereum runs software, which can support distributed applications and smart contracts. For this reason it has drawn some interest from various financial companies.
For purposes of this article, I am agnostic about the success of Ethereum. My point right now is that the Grayscale Ethereum Trust is a bad investment vehicle. Part of the problem is that even if Ethereum does well, ETHE may very well do poorly.
Problem #1: ETHE doesn’t track the underlying asset
The reason to put your money in ETHE is, presumably, because you want exposure to Ethereum. ETHE is essentially a pile of Ethereum, so you would think the two would trade together. You would be very wrong.
(Source: Yahoo Finance)
The black line is Ethereum: a choppy but basically steady upward line. I can see why someone would be interested in it. The wildly oscillating candle chart is ETHE. As you can see, it has very little correlation with the price of Ethereum. Coincidentally, on this 1-year chart, the two lines end in approximately the same place, although there is a difference of about 2500 basis points between the results. But over the course of the year, the two assets sometimes diverged by hundreds of percent. Ethereum was basically flat over the summer; ETHE crashed. You would have been up, had you invested in Ethereum in mid-December. You would have been down, had you invested in ETHE over the same time period.
If what you want is exposure to Ethereum, for right now you have to buy Ethereum.
Problem #2: ETHE is way too expensive
Again, the reason to invest in ETHE is that you want exposure to Ethereum. The problem is that you pay way more for the assets in trust than they are worth.
Right now, one share of ETHE represents approximately .01 units of Ethereum. Those units trade at $775, so one share of ETHE represents about $7.75 of value. However, you will pay $15.50 for the share: twice what the underlying assets are worth. This huge premium to NAV is not unusual for ETHE.
Sometimes the premium is even higher; the fact that it moves around so much is what accounts for the crazy swings in ETHE relative to Ethereum.
On top of all that, Grayscale will take 2.5% of your money per year for the difficult work of sitting on an Ethereum account.
Problem #3: The end is nigh
Bitcoin is going mainstream, with increasing institutional support. Van Eck is trying, for the third time, to start a Bitcoin ETF. Obviously they think they have a good shot. My educated guess is that the SEC will, at some point in the near future, recognize that there is no reason to keep preventing this obvious move, and it will allow crypto ETFs. When that happens, Van Eck will open its Bitcoin ETF, followed by many other ETF companies, and they will create investment vehicles that have competitive fees and a normal relationship to their underlying asset. When that happens, the premium on the Grayscale Bitcoin Trust (OTC:GBTC), which is 17% as of this writing, will collapse. Anyone holding GBTC will lose about 17% of their money immediately.
If Van Eck can start a Bitcoin ETF, they can presumably start an Ethereum ETF, and why wouldn’t they, with a fat 100% competitor’s premium to cannibalize. I strongly believe the clock is ticking on ETHE. You do not want to be the last rat off this ship.
What to do
You might be bullish on Ethereum. If so, you should buy some Ethereum. The easiest way to do that is to open an account with Robinhood, where you can trade Bitcoin, Ethereum, and some other cryptocurrencies right from your account.
Robinhood does not support IRAs, however. If an IRA structure is important to you, you may be interested in iTrustCapital. They specialize in allowing crypto (and gold) trades within a tax-protected account.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.