Summary Ether Capital Corporation has agreed to sell its business to Purpose Investments and convert its shares into an Ethereum Staking ETF. Ether Capital currently derives revenue from staking Ethereum on its balance sheet, but returns are dependent on the price of Ethereum and staking yields. The company's shares have historically traded at a discount to the value of its Ethereum assets, but the discount has closed considerably since the announcement of the ETF conversion. Ether Capital Corporation ( ETHC:CA )( DTSRF ) has been one of the more slept-on gems in the cryptocurrency investment space for the last several years. Given the company's small market cap relative to other companies in the space and its primary focus on Ethereum ( ETH-USD ), Ether Capital has regularly traded at a large discount to the value of the assets on the balance sheet. I've personally held this company's stock in the past and even highlighted it for my no longer active Seeking Alpha investor group BlockChain Reaction. Data by YCharts Up until recently, ETHC shares have generally traded in-line with the price of Ethereum. In the chart above, we can observe a clear divergence between the two at the beginning of May. The large increase in the price of ETHC shares relative to ETH is attributable to the company's May 2nd announcement that it has agreed to sell the business to Purpose Investments. From there, the company shares are intended to be converted to an Ethereum Staking ETF utilizing the company's assets. Current Business Model Ether Capital has generally had a straightforward business. As currently constructed, the company derives revenue from staking the Ethereum that is held on the balance sheet and receiving blockchain rewards. Ether Capital isn't the only publicly traded company that does this. Bitcoin ( BTC-USD ) miner and AI compute provider Bit Digital ( BTBT ) also has an Ethereum Staking business as a small tertiary revenue stream. Data by YCharts Since Ethereum staking returns are denominated in ETH, fiat-denominated revenue from staking is dependent on the price of Ethereum and the staking yield from the blockchain. Following Ethereum's migration from proof-of-work to proof-of-stake, Ether Capital's staking strategy is far more economical than the energy-intense and machine-heavy Bitcoin mining. Additionally, staking is a rather simple endeavor for those with public blockchain competence and doesn't require much overhead. However, when staking yields are low, the return on capital is not necessarily strong. Trailing twelve months Ether Capital's ROTC is just 1% per data from Seeking Alpha. As for the Ethereum network itself, staking yields have historically been much higher and have occasionally eclipsed 7%: Ethereum Staking Rewards (IntoTheBlock) More recently, we've seen annualized staking rewards decline from about 3.8% the week prior to Ethereum's Dencun upgrade to under 3% so far through the month of May. And even the pre-Dencun yield figures were well below the 4-7% annualized yields from ETH staking during much of late-2022 and the first half of 2023. The long-term trend in staking yield is lower. Thus, the crossroads for Ether Capital. ETF Conversion And Arbitrage As mentioned in the introduction, ETHC shares have generally traded at a discount to the value of the Ethereum assets on the balance sheet - at times that discount has been as high as 40%. In late 2023 , the company announced former CEO Brian Mosoff stepping down and co-founder Som Seif stepping in as interim CEO. Following the conclusion of a strategic review, Ether Capital disclosed the plan to transition the company to an Ethereum Staking ETF: After considering various alternatives during its strategic review, including continuing under its existing corporate structure and focusing on maximizing its staking strategy, the Independent Committee and the Board concluded that converting into an ETF is the most advantageous strategy for the Corporation and its Shareholders. Following this announcement, the price of ETHC quickly rallied nearly 30% in a single session: Data by YCharts The discount arbitrage trade has now closed considerably, but there is actually still some meat on the bone. As of March 31st, 2024, Ether Capital has 46,274 ETH on the balance sheet - 98% of which is staked. At a $3,100 ETH price, the market value of the Ether Capital's ETH assets is currently $143.4 million. Given 32.8 million shares outstanding, if we value ETHC shares at the market value of the underlying ETH, ETHC shares are worth about $4.37 USD per share. As of article submission, ETHC shares are trading at $4.97 CAD, or $3.65 USD - which is still a 16% discount to the market value of the ETH on the balance sheet by my calculations. Risks As I see it, the primary risk in longing ETHC for the arbitrage opportunity is the exposure to ETH. Cryptocurrencies are highly volatile and companies that rely on cryptocurrencies for revenue and/or equity valuation carry considerably more risk than companies that don't. Adding to the possible volatility in ETHC and Ether Capital depository shares is the low trading volume in the company's stock. Additionally, the shareholder meeting in June could theoretically result in a vote against the ETF conversional proposal. In my view, a vote against the ETF proposal is unlikely, as it would possibly result in a share price discount back to pre-conversion-news levels. Finally, there is the risk that regulators may not approve the conversion. The TSX already has several Ethereum ETFs, but as far as I can tell none of them are actively staking the ETH within the funds. This would make ETHC's ETF conversion slightly different from the products already on the market. Summary In my view, Ether Capital is yet another crypto arbitrage trade that could bear fruit for patient share buyers. Given the relative illiquidity of the shares, I would personally only use limit orders when building a position. That said, I'm not currently long Ether Capital because I like other arbitrage opportunities in the market a bit more. Specifically, the 42% discount in the Grayscale Digital Large Cap Fund ( GDLC ) and the 8% discount in the Osprey Bitcoin Fund ( OBTC ).
