Summary Grayscale's crypto trust products have experienced significant fluctuations in premiums and discounts through the years. Spot ETF conversion ended that arb for GBTC holders. The same trend is now happening to the Grayscale Ethereum Trust which now offers just a 1.5% discount to NAV. I discuss the SEC's pivot on spot Ethereum ETFs, the opportunity cost of investing in ETHE, and estimated spot ETH ETF inflows. I've been covering the crypto trust products from Grayscale Investments for Seeking Alpha going back to late 2019. As closed end funds that are backed by digital assets, these tickers have been a wild ride for investors, to say the least. In the time since I first covered the Grayscale Bitcoin Trust ( GBTC ), we've seen Grayscale's crypto funds trade massive premiums, enormous discounts, and in many instances premiums once again . In one week from the time of this article submission, the Seeking Alpha Investing Summit will take place in New York. One of the first panel discussions is titled "A New Age For Crypto." Grayscale’s Managing Director and Head of Distribution and Strategic Partnerships John Hoffman will be on that panel. This is perhaps serendipitous timing given the recent 19b-4 approvals from the Securities and Exchange Commission for spot Ethereum ( ETH-USD ) ETFs in the United States. The SEC Pivots Just as it did with spot Bitcoin (BTC-USD) ETFs, the SEC has changed its tune on spot Ethereum ETFs. While it should be noted 19b-4s have been approved for 8 different funds, the S-1s have yet to receive SEC approval and it isn't clear when the spot ETH ETFs will begin trading. However, what is clear is that spot ETH ETFs are coming to the United States market. Given the SEC's apparent pivot on spot Ethereum ETFs, the question becomes how can Ethereum-bulls best play ETF conversion from here? Data by YCharts After GBTC's conversion to an ETF earlier this year, the once powerful arbitrage trade in Grayscale's flagship product is now over. This is because ETFs have a redemption mechanism that allow funds to be withdrawn from the fund manager if the price of the shares don't perform in line with the underlying assets. Grayscale's successful conversion of GBTC from a closed end fund to an ETF ended the fund's discount. The same is now happening to the Grayscale Ethereum Trust ( ETHE ) and I'd argue the buy case for ETHE has diminished because of it. ETHE is a viable way to get exposure to Ethereum. However for arbitrage traders, the fund's eventual conversion to an ETF has been essentially priced-in after the discount closed from more than 25% to less than 2% in a matter of just a few sessions. Given the volatility of the underlying asset, the current 1.5% discount to NAV is likely much less exciting for arbitrage traders. Predicting ETH Fund Flow All that said, the lack of a juicy pricing arb doesn't necessarily eliminate the case for holding ETHE as a simple ETH proxy for those bullish Ethereum more broadly. If the spot ETH ETFs are anything like the spot BTC ETFs earlier this year, the underlying asset will perform quite well when investment capital can be allocated to the spot products. Spot ETF Supply (Author's table, BitcoinTreasuries.Net) In the time since the approval of spot BTC ETFs in January, more than 264k of net BTC has come into traditional financial products, even adjusting for the 54% decline in GBTC Bitcoin supply. At current Bitcoin prices, this net inflow has a market valuation of $17.7 billion. Data by YCharts Due in large part to this investor demand, the price of BTC has appreciated by as much as 50% since the spot products were approved. However, I view it as unlikely that Ethereum will generate the same level of investor interest as Bitcoin, considering ETH has a more dynamic coin supply and is seen more as "digital gas" than as digital "gold." But if we use Grayscale's pre-ETF AUM data as an indication for how much investor demand, there may be for spot Ethereum ETFs, we can attempt a back of the envelope guess on how much fund flow ETH holders can expect for spot ETFs in the future. Full Year Flows/AUM (CoinShares) If we take out the year to date crypto investment inflows as presented by CoinShares and judge investor demand purely on AUM figures from the end of 2023, ETH accounted for about 27% of the AUM that Bitcoin did at $9.9 billion. More recently, Bitcoin has enjoyed $16.7 billion in net investment capital inflow this year: Crypto Investor Flow (CoinShares) This capital flow has added more than $20 billion in AUM through a rerating of the BTC that was already held in Bitcoin investment products at the end of last year. But if we divide the $16.7 billion of inflow by the $36.2 billion in AUM that was already allocated to BTC last year, we get about a 46% organic pop in AUM post-spot approvals. Applying that same percentage to the current $15.6 billion in AUM for Ethereum today would be about $7.2 billion in new investor demand. Some may argue that there simply aren't as many ETH bulls as there are BTC bulls, and that would probably be a fair statement. Perhaps the more logical way to estimate ETH investment flow following spot ETFs would be to assume the 27% ETH to BTC AUM ratio that preceded the spot BTC approvals. If we take the $16.7 billion of net capital flow into spot BTC ETFs year to date and assume 27% of that figure will be allocated to spot ETH ETFs upon approval, we get an investor demand figure closer to $4.5 billion. All of this said, Ethereum has arguably carried far more regulatory risk than Bitcoin has in the United States due to the SEC's unwillingness to directly state whether the agency views ETH as a security or not. Spot ETF approvals would figure to dramatically mitigate regulatory risk in ETH domestically, which could result in a net flow story that is far greater than my estimates above. ETH Supply (Ultrasound.money) But if our base case for ETH investment flow following spot ETF approvals in the United States is somewhere between $4.5-7.2 billion, we should observe a similar 40-50% price ramp to new all time highs in ETH as we saw in BTC earlier this year. There simply isn't enough new ETH supply coming into the market to soak up all of that demand, and the coin has actually been deflationary since September 2022. The Drawbacks In Longing ETHE ETHE might be a good way to bet on price appreciation in Ethereum, but it isn't the best, in my view. For long term investors, there are other options. Investors can just buy ETH directly through an exchange like Coinbase ( COIN ) and not pay Grayscale's 2.5% annual fee. Self-custody is the best way to mitigate third party risk and if investors are planning to simply sit on the assets for several years, holding ETH directly may be the better alternative. For tax-advantaged holding, there are alternatives as well. There are several crypto IRA offerings available to US customers that don't charge annual fees for Ethereum positions. The one I use charges 1% fees on buys and sells. But if an investor is planning to hold the asset for longer than a year, holding ETH through a crypto IRA is still more cost-effective than holding ETHE in a Roth. ETH Staking Rate, 1 yr (StakingRewards.com) Finally, ETHE assets are not staked and there's an opportunity cost there for self-custody advocates. At a current reward rate of 3.6% for staking on-chain, the 2.5% annual fee that ETHE holders pay to Grayscale implies a 6.1% annual opportunity cost in longing ETHE over directly buying and staking Ethereum oneself. Summary It's an exciting time to be a crypto investor. Since the collapse of FTX, US regulators have taken a far more antagonistic view on the industry. This combative approach to crypto domestically has created an environment where crypto users have become a significant voting block in America, and Washington has seemingly taken notice. Rather than push young voters to former President Donald Trump, the current administration is now actively courting these voters and has taken a less combative tone. Whether either side are to be believed on their recent openness to the industry is not something I'll touch on in this summary. But the voter pressure is apparently being felt in Washington and that's a good thing for crypto investors longer term in my view, if it leads to sensible regulation rather than choking out the industry. I believe we are indeed at the beginning of "A New Age For Crypto" in America, and I still maintain that Ethereum is one of the best ways to play that narrative. The arbitrage in ETHE may be over, but the fund will likely still serve as a viable ETH proxy for traders who exposure in tax-advantaged accounts.
