Major Caution Is Advised On Grayscale Ethereum Trust

|
About: Grayscale Ethereum Trust (ETHE), Includes: ETCG, GBTC
by: StockBaller
Summary

Grayscale Ethereum Trust trades at an enormous premium to Ethereum.

The price of the stock may not even mirror the actual price of Ethereum.

There are other disadvantages such as low liquidity and not being able to trade 24/7.

With the cryptocurrency markets going wild again, there is major fear-of-missing-out taking place again as many speculators scramble to buy a position before the price rises further. However, buying cryptocurrencies through a normal exchange is a process that can easily take several days, as you may need to sell positions in your normal brokerage account, wait for the funds to settle, withdraw, wire the funds to your cryptocurrency exchange and only then buy a position – and in a crazy bull market, the price by that time may be drastically higher than when you originally wanted to get in.

That's not to mention the huge fees that cryptocurrency exchanges usually have compared to ordinary stockbrokers, which are usually somewhere in the region of 1% or more of the total value of the position in a round-trip trade (vastly higher than a flat fee of only around $10 per 100 shares with brokers like Fidelity or Schwab, or only $1 per 100 shares with Interactive Brokers, for example).

With that in mind, it's easy to see why Grayscale – a self-proclaimed “trusted authority on digital currency investing,” providing “secure access and diversified exposure to the digital currency asset class” is so appealing: they advertise stocks you can buy in your ordinary brokerage account that will roughly follow the price of Bitcoin (BTC-USD) (through GBTC), Ethereum Classic (ETC-USD) (through ETCG) and now Ethereum (ETH-USD) (through ETHE).

ETHE was only just launched, in fact, and will no doubt attract a plethora of buyers who want to get in on Ethereum's action immediately. However, it's important to know what you are buying, and in this article, I am strongly advising against holding any of Grayscale's cryptocurrency stocks as a long-term investment. Regardless of how anxious you may be to get into Bitcoin or Ethereum, you should still buy it through a reputable exchange where you actually own the cryptocurrency yourself.

The first and biggest issue with ETHE (and indeed, GBTC and ETCG) is that it is trading at an insane premium to the actual value of Ethereum, and you are only getting a fraction of the cryptocurrency you think you are paying for. Refer to this page on Grayscale's website, and in particular the “Ethereum per Share” section, which currently gives the figure of 0.09626067. That means you would actually need to buy over 10 shares of ETHE to get 1 Ethereum. At ETHE's price of around $132 at the time of writing (as a side note, it was trading at an absolutely unbelievable $500-600 per share for the first half hour of its listing before collapsing in the hours that followed and finishing at $132), you are therefore only getting 1 Ether per $1,371 invested in ETHE (calculated by 132/0.09626067). At Ethereum's current price of roughly $311, that represents a roughly 340% premium.

That means any of Grayscale's stocks could collapse on a whim and still be fundamentally drastically overvalued compared to the cryptocurrency they are supposed to be mirroring. That in fact just happened with ETCH, which dropped 30% on Monday, 24 June while Ethereum Classic was doing just fine. Here is what ETCH looked like:

And the price of Ethereum Classic around those hours, doing just fine:

If one compares the 1-year chart of GBTC to Bitcoin or the 1-year chart of ETCH to Ethereum Classic, they are admittedly very close, but the fact that something like the above incident can and did happen is a scary prospect. It is entirely possible that the newly listed ETHE may also take a huge crash at any day as investors realise how high its premium is. And if one can't even be guaranteed that these stocks will follow their respective cryptocurrencies while they trade at enormous premiums, then why on earth would one want to hold them long term?

The other disadvantage with these stocks worth mentioning is that unlike the real cryptocurrency markets, they can only trade during regular market hours. Should Bitcoin or Ethereum make a huge move over the weekend, for example, you will still be completely stuck until the ordinary stock market opens. I also found when looking at ETCH's level 2 price action that there is often a huge spread of $1 or more, meaning they may not be as liquid as the real cryptocurrency is when traded in a major exchange. GBTC at least has reasonably high volume, but in times of major volatility, you may find it very difficult to enter or exit a position without having to buy way above the bid or sell way below the ask. Remember these stocks are traded on the OTC exchange, normally far less liquid than the Nasdaq or NYSE.

In light of the above, I urge those wishing to get into the cryptocurrency market to do it the proper way and buy it through a real exchange. Grayscale stocks are simply far too risky to be worth getting involved with.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.