Summary

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• Summary

• In 2023, the encryption market will rebound sharply from last year's deep bearishness, and many people may not be able to "get in the car" in the future. At this time, the Grayscale trust share, which is still discounted by about 50% compared to the net asset value (NAV), is particularly attractive;

• Based on the status of the core infrastructure of Ethereum Web3, we are optimistic about the rebound performance of Ethereum Trust (ETHE) in the Grayscale trust product matrix in the future potential bull market;

• ETHE has a long-term premium or discount in history. The reasons for the positive premium include that there is a lock-in period for subscriptions, and the accessibility of products is higher than that of ETH spot. Compared with the cost of keeping private keys, ETHE is more suitable for traditional financial institutions and small white retail investors. invest;

• The reason for the current long-term discount is mainly related to the fact that the product cannot be redeemed directly, and the product structure is similar to that of a closed fund. In addition, the limitation of arbitrage opportunities, the forced liquidation of large speculators, the discount of opportunity cost, and the impact of competitive products are also factors. reason;

• After the formation of the negative premium trend in 2021, the market expects ETHE to return to parity for a longer and longer time. According to our calculations, it once exceeded 14 years at the end of last year, and now it has fallen back to about 10 years. We believe that this expectation is still too long, and it is more reasonable that the implied recovery time may fall back to less than 2 years when optimistic expectations come;

• Since the birth of ETHE in 2019, the product has not gone through a complete "cycle". We believe that a complete cycle should follow the cycle of premium→parity→discount→parity→premium. At present, ETHE products have only completed half of the cycle. We believe that if you bet on a potential bull market, ETHE has better flexibility. Since the beginning of the year, ETHE The increase is 1.7 times that of ETH to prove this;

However, historical data calculations show that the risk-reward ratio of ETHE is not good. As shown in Table 1, it can be seen that ETHE is weaker than ETH/USD in almost all aspects. It means that if you plan to hold ETHE for a long time, you may have to do some targeted income enhancement strategies, otherwise if the bull market does not come quickly, there is a risk that its performance will be weaker than the market.

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In 2023, the cryptocurrency market will once again become the focus of investors' attention, with the gains of BTC and ETH leading the world's major asset classes. However, many investors still failed to recover from the bear market thinking and failed to grasp this investment opportunity in time.

However, in the GBTC and ETHE products under the Grayscale Trust, investors can still get nearly 50% discount buying opportunities.

Because we believe that the Ethereum network (ETH) will be the core infrastructure of mainstream Web 3 applications in the future. In addition to being able to undertake traditional capital spillovers like BTC, it will also have the α brought by Web 3 ecological applications, so this article will pay special attention to Grayscale The discount phenomenon and potential investment value of the trust product ETHE, and discuss in detail the possible reduction or even disappearance of this phenomenon, as well as the reasons for professional investors to join the encryption market. In addition, we will analyze the legal structure and potential risks of this product.

Grayscale Bitcoin Trust was launched as early as September 2013. The person (creditor) who is legally designated as the grantor trust (grantor trust) to create the trust is the owner of the assets and property in the trust and retains full control over the assets in the trust. Control, which is similar in practical purpose to closed-end funds. Under this special structure, it allows investors to indirectly own the assets in the trust fund by purchasing beneficial rights. Like closed-end funds, grantor trusts generally do not allow investors to redeem their holdings at any time.

Grayscale Ethereum Trust (ETHE) (formerly known as Ethereum Investment Trust) (the "Trust") is a statutory trust in Delaware, established on December 13, 2017, listed and traded in July 2019, using the same currency as GBTC trust structure.

• The advantage of adopting a trust structure is that since the trust will not trade, buy, or sell Ethereum or its derivatives on any exchange, it can avoid being subject to the jurisdiction of the corresponding regulatory agencies and facilitate the release of products as soon as possible, although ETH belongs to CFTC or SEC Jurisdiction is still unclear.

First a brief look at the main differences between ETHE and ETH:

• Invest in different ways

ETHE is a listed trust fund regulated by the US Securities Regulatory Commission (SEC), which is convenient for institutions to manage their balance sheets; ETHE is traded through general securities accounts, which is simpler and cheaper than cryptocurrency exchanges; ETHE can become an individual retirement account (IRA) And 401(K) (U.S. retirement benefit plan), enjoy investment tax benefits; no need to learn how to manage cryptocurrency e-wallets, no need to worry about the risk of accidentally losing the private key or the wallet being hacked due to your own reasons;

• supply varies

There is no upper limit to the total supply of ETH, while the supply of ETHE depends on Grayscale’s issuance plan;

• different market needs

other

ETHE investors are temporarily unable to redeem the underlying ETH assets or equivalent USD from Grayscale; ETHE charges a management fee of 2.5% of the net asset value every year; ETHE cannot participate in on-chain activities such as DeFi mining.

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In theory, the price of ETHE should fluctuate around the value of ETH holdings, but in fact its secondary price performance is not completely discounted to the market. Since ETHE was listed in 2019, it has maintained a positive premium to ETH for a long time in history. It exceeded 1000% for the first time. ETHE has entered a negative premium mode since February 2021 and has continued to this day.

Figure 1: Historical ETHE discount premium and ETH price trend

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Source: Graysacle, Trend Research

Grayscale's encrypted trust share is similar to a closed fund, which led to a very limited market supply in the early days. Secondly, due to the immaturity of the cryptocurrency market, many investors do not know how to buy and store cryptocurrencies, so Grayscale’s crypto trust funds, which can be purchased directly on the US stock brokerage platform, were bought at a premium.

On June 29, 2021, GBTC’s application to convert to an ETF was rejected by the SEC, and Grayscale sued the SEC only one hour later, which further amplified the discount on ETHE. From the middle of 2021 to the end of 2022, as the digital currency market as a whole peaked and weakened, large speculators led by several failed encryption companies such as Three Arrows Capital (3AC) and BlockFi during the period due to excessive leverage or tight financial needs Forced to sell fund shares, even if the market discounted at that time, they could not wait, which also further expanded the discount of ETHE.

Figure 2: Discount/Premium Change Vs. ETH Price Trend Since First Negative Premium in Early 2021

Source: Tradingview, Trend Research

Figure 3: Correlation between ETHE and ETH prices is very high most of the time

Source: Tradingview, Trend Research

In summary, the reason behind the negative premium/positive premium is the fund product structure that Grayscale ETHE Trust cannot directly redeem. The reasons for the positive premium include that the accessibility of the product is higher than that of ETH spot, compared to the cost of keeping the private key yourself ETHE is more suitable for investment by traditional financial institutions and small white retail investors; balance sheet entry processing, tax advantages, and helping investors bypass compliance-related issues; reasons for negative premiums include fund structures that cannot be directly applied for redemption, and arbitrage opportunities Restrictions, discounted opportunity costs, and the impact of competitive products are related to four major reasons, which will be highlighted below.

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1. Fund structure that cannot directly apply for redemption

According to legal documents, only Grayscale authorized participants (Authorized Participants, referred to as AP) can directly purchase and redeem ETH from Grayscale. APs need to meet certain eligibility and regulatory requirements, including being a registered broker or dealer and meeting specific regulatory standards. According to the rules, the trust shares are divided into groups of 100 shares, AP purchases at least one group each time, and can only be exchanged with ETH spot.

Therefore, it can also be understood that Grayscale itself plays the role of primary dealer, while other investors can only buy the shares that flow out of them. Therefore, although some institutions may be able to purchase ETHE at the original price of the primary market, they are not direct purchasers and have no right to request redemption in terms of rules. As for why these institutions do this, there may be two main reasons. One is to see the arbitrage opportunities in the secondary market premium, and the other is to use Grayscale as a custodian to avoid the risks and costs of managing private keys by themselves.

Currently, the Trust does not operate a share redemption program and AP and its clients cannot redeem shares through the Trust. Therefore, participants cannot take advantage of the arbitrage opportunities generated when the secondary market price deviates from the net value per share of the trust's ETH asset holdings, which makes it difficult to recover the price difference when there is a discount. If direct redemption is possible, market participants can purchase trust shares at a low price in the secondary market and then redeem higher-value ETH from the fund to narrow the discount.

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2. Limitation of arbitrage opportunities

Due to the inability to directly apply for redemption, arbitrage opportunities are limited. This obstacle is not obvious when there is a positive premium for depositing ETHE in a bull market, but it is more significant when there is a negative premium in a bear market.

• In traditional ETF markets, arbitrage opportunities arise when demand for ETFs increases or decreases market prices compared to net asset value lead to premium or discount mispricing. This mispricing tends to quickly correct itself through arbitrage.

There are two main modes of arbitrage, one is for the basic arbitrage between ETF shares that can be purchased and redeemed quickly and the underlying assets, and the other is for CTA strategy arbitrage that cannot be purchased and redeemed quickly:

Basic arbitrage

• In the case of a premium, investors will arbitrage by purchasing ETF shares from the fund company and then selling them in the secondary market; this will reduce the demand/price of the ETF.

In the event of a discount, the secondary market buys the ETF and redeems it for a higher value at the fund house for arbitrage; this will increase the demand/price of the ETF shares.

CTA strategy arbitrage

The implementation space of this strategy is affected by the value convergence channel. In the case of ETHE, since the value return mainly depends on the judgment of supervision, rather than certain operations of market participants (such as redemption), the uncertainty is relatively large. High, resulting in a larger price difference that the market can tolerate.

Figure 4: ETHE Historical Discount Premium Rate Vs. Number of Circulating Shares

image descriptionSource: Graysacle, Trend Research。

As can be seen from the figure above, after the premium narrows,

After the spring of 2021, positive basic arbitrage will no longer exist, and new purchases of trust shares will also stop

There is also a classic case of a closed fund that cannot be redeemed or redeemed in the traditional market. This is the stock of Berkshire Hathaway owned by Warren Buffett. As an investment company, its stock price may be affected by fluctuations in the stock prices of companies held in its investment portfolio. It is not possible to apply for new shares of the company at any time.

But shares of Berkshire Hathaway have traded at a premium to their net asset value over the past few decades, largely thanks to the successful investing track record and market stature of company founder Warren Buffett. However, during certain periods, the premium level of a company's stock may decline, reflecting a change in the market's perception of the company.

For example, in March 2020, shares of Berkshire Hathaway fell by about 30%, causing the company's shares to trade at a significant discount. The discount likely primarily reflects market concerns about the COVID-19 pandemic and Berkshire Hathaway's exposure to industries affected by the pandemic, such as travel, airlines, and finance.Going back to the case of ETHE, ETHE can only be circulated in the secondary market after being held for at least 6 months after the first-level purchase. Therefore, the basic arbitrage path of positive premium exists, but it takes longer. However, after the negative premium of ETHE appeared for the first time in February 2021, the purchase behavior of investors in the primary market has almost stagnated. This is obviously because the basic arbitrage of negative premium requires redemption support, and the timetable for Grayscale to open the plan is unknown. Therefore, when ETHE's investment strategy has no more advantages than holding spot, it is difficult for its closed shares to return to a premium like Berkshire Hathaway's stock.Secondly, as the overall digital currency market peaked and weakened, in terms of institutional sell-offs, large speculators led by several failed encryption companies such as Three Arrows Capital (3AC) and BlockFi previously made bases from the huge premiums of GBTC and ETHE. Arbitrage to make money, a large number of purchases-waiting for 6 months to sell, and then forced to sell fund shares due to excessive leverage or financial constraints, even if the market was discounted at that time, they could not wait. For example, it can be seen in the published information

, to enlarge the negative premium space of ETHE.

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Source: Tradingview, Trend Research

3. Discounted opportunity cost

Table 1: ETHE related legal/financial information (As of March 31, 2023)

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Grayscale Ethereum Trust's management fee is 2.5% of Net Asset Value (NAV) per annum. In the public data, Grayscale will deduct the expected accrued but unpaid fees of the trust from its ETH holdings on a daily basis, so the amount of ETH represented by each ETHE is gradually decreasing, which can also be seen from the figure below .

Figure 6: The number of ETHE circulating shares (left) Vs. the amount of ETH held by the trust corresponding to each share (right)

image description

Source: Graysacle, Trend Research

If other risks are not considered, today's discount can be understood as the discount of the opportunity cost of holding positions. Therefore, based on the discount rate X in the secondary market and the opportunity cost Y of holding positions, we can invert the implied market expectation for redemption or the time T required to restore NAV parity. We assume that the potential growth expectation of NVA is 0, and at the same time assume:

Available: T=ln( 1+X)/ln( 1-Y)

Figure 7: ETHE Historical Discount Rate Vs. Implied Market Expected Redemption (Return to Parity) Time (Unit: Year)

Source: Graysacle, Trend Research

From the above figure, we can see that after the negative premium trend is formed in 2021, the market expects ETHE to return to parity for a longer and longer time. At the end of last year, due to regulatory suppression + market coldness, it once exceeded 14 years, and now it has fallen back to about 10 years. However, we believe that this expectation is still too long, and it is a more reasonable expectation that the implied recovery time may fall back to less than 2 years when optimistic expectations come. The most pessimistic product’s final liquidation and dissolution may be expected to meet the pricing of more than 10 years. After all, it took only 9 years for Mt. Gox’s assets to be liquidated.

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4. The impact of competitive products

Before 2019, there were few competitors for Grayscale’s trust products in the market. On February 18, 2021, Purpose bitcoin ETF, a Canadian fund that directly invests in Bitcoin, officially started trading, and quickly accumulated more than 1 billion US dollars within a month assets, and the 1% management fee is less than half that of GBTC, and its ETF structure can closely track Bitcoin, so it is more attractive than Grayscale's products.And just two months later, on April 17, Canadian regulators approved three Ethereum ETFs at the same time, namely Purpose Investments’ Ethereum ETF (ETHH), Evolve Capital Group’s Ethereum ETF (ETHR) and CI Global Capital Management’s Ethereum ETF (ETHX), and all three were listed on April 20. According to the three official websites, the management fees of the three Ethereum ETFs are slightly different. CI Global’s management fee is 0.4%, Evolve’s is 0.75%, and Purpose Investments’ management fee is 1%. The Purpose Ethereum ETF attracted C$26.46 million (about US$21.32 million) on its debut day, Evolve’s ETHR raised C$2.22 million (US$1.79 million), while CI Global’s ETHX The size is C$2.25 million (approximately US$1.81 million).3 days later, on April 23, Canada’s fourth Ethereum ETF also started trading on the Toronto Stock Exchangetrade。jin ri

trade

In addition, there are more ETH futures ETFs, related stocks, including listed companies holding coins, and listed companies such as mining and asset management businesses have increased their market share. These diversified investment channels have weakened Grayscale trust products The scarcity of traditional financial investment institutions and retail investors has become a competitive factor that Grayscale has to consider.

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Topic 2: When trade-ins may shrink - disappear

There are seven situations that can cause the discount to narrow or even disappear: including open redemption of ETH spot (divided into two cases: redemption is exempted by the SEC and ETF conversion application is passed), redemption exemption is obtained, product dissolution and liquidation, Grayscale’s own repurchase, The development of arbitrage strategies and the improvement of market confidence and the reduction of opportunity cost will help to repair the discount.1. Improvement of the regulatory environment - ETF application approvalAccording to the latest GrayscaleThe FORM 10-K declaration document issued by the end of 2022Specifically, they still believe that after obtaining SEC approval for the ETF conversion, their trust can conduct a redemption plan. Although the SEC has rejected the application to convert GBTC into an ETF, the

A U.S. appeals court judge questioned the SEC's decision in March

, because the agency had previously approved bitcoin futures ETF products.

It should be noted that Grayscale currently only has an ETF conversion application for GrayscaleBitcoin Trust (GBTC), and has not yet announced a plan to convert Grayscale Ethereum Trust (ETHE) into an ETF. But recent developments have been undeniably positive, with Grayscale arguing at the most recent hearing on March 7 this year that there was an inconsistency in the standards applied by the SEC as they approved applications for bitcoin futures ETFs but consistently rejected spot bitcoin applications. Token ETF application.Grayscale argued that since the two products are based on the same underlying asset and both derive their prices from bitcoin, Wall Street regulators should treat these products similarly, but they did not. Grayscale claims the regulator's actions were arbitrary and capricious, and thus violated U.S. federal law. The SEC responded that it had been applying the same standard, but the products were actually different. According to the SEC, the Bitcoin futures market is regulated by the CFTC, which makes it different from spot BTC ETFs, which they believe are not regulated.Think Grayscale has a 70% chance of winning

. If GBTC is approved, it will also directly benefit the mood of ETHE. However, it should be noted that unlike BTC, which has a futures-based ETF approved by the SEC for listing, the SEC has not approved any Ethereum-based funds for listing, which is related to the dispute over the legal status of Ethereum.

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2. Improvement of the regulatory environment - becoming a registered investment company or being recognized as a commodity

However, if the SEC believes that the trust needs to be registered as an investment company under the Investment Company Act of 1940, Grayscale believes that in this case the trust structure can be dissolved, and its shares may be converted into shares, but this is only a guess and ultimately depends It depends on the company's specific situation and regulatory opinions, as well as the regulations of the exchange.

In addition, if ETHE is considered by the CFTC as a commodity investment portfolio, it needs to comply with the relevant regulations of the Commodity Exchange Act (CEA) and register and supervise with the CFTC, which is also a possible regulatory direction.

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3. Obtain a redemption waiver

In fact, Grayscale once offered a redemption plan, but the plan was suspended in 2016 after being accused by the SEC of violating Regulation M. Specifically, the SEC is concerned that the Grayscale Trust's simultaneous redemption of new shares may affect market prices and lead to market manipulation, insider trading or unfair trading practices. Therefore, Grayscale has since suspended the GBTC redemption plan, and has continued to use this operation in the subsequent issuance of trust funds such as BCH and ETHE to ensure that its trading practices comply with applicable regulations and regulatory requirements.

However, the possibility of actively seeking such an exemption cannot be ruled out in the future, although the timing and probability of success are uncertain. Moreover, the development of redemption assets will reduce the income of Grayscale as a trust manager. At present, it may not have the motivation to actively pursue the application for redemption exemption.

If such a waiver is granted and Grayscale agrees to redemption, a redemption program may proceed. The redemption plan will enable authorized participants (APs) to obtain arbitrage opportunities when the market value of trust shares deviates from the value of ETH holdings, minus the value of fund fees and other liabilities. This arbitrage opportunity may be monopolized by the AP, or may be transferred to the customer by the AP. It is not clear at present, because currently only Grayscale affiliates are the exclusive AP, and the monopoly may raise concerns about unfair competition.

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In the previous article, we discussed the problem that the path of discount arbitrage is not smooth, so the discount cannot be obviously repaired. But on the other hand, because of the existence of the CTA strategy, when the encryption market as a whole enters a positive momentum, even if it is still not redeemable at the moment, arbitrage traders may also compress the discount range. Because since the birth of ETHE in 2019, the product has not yet gone through a complete "cycle". We believe that a complete cycle should follow the cycle of premium→parity→discount→parity→premium. At present, ETHE products have only completed the first half of the cycle.

Figure 8: Annual Return ETHE Vs. ETH (It can be seen that ETHE is inferior to ETH in the long-term performance of the annual cycle)

Source: Graysacle, Trend Research

Figure 9: Monthly Return ETHE Vs. ETH (it can be seen that ETHE is more elastic than ETH in short-term performance)

Source: Graysacle, Trend Research

From the comparison of annual and monthly returns in the above figure, it can be seen that 2019-2022 belongs to the cycle of "premium→parity→discount". This cycle can be understood as an anti-bubble cycle. ETHE does not have excess returns. Investment during this period is not good choose. However, since the elasticity of ETHE products is greater than that of ETH itself, in the future repair cycle of "discount → parity → premium", it should create better positive returns. In fact, it can be clearly seen from the performance comparison of the past 3 months this year Up to this point, the increase of ETHE is 1.7 times that of ETH.

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5. Situations where the ETF cannot be converted and the final trust is dissolved and liquidatedIf neither the redemption exemption nor the ETF conversion can be approved, if this situation lasts for too long, the continuous deductions of fund management fees may cause investor dissatisfaction, so Grayscale will face greater pressure to liquidate and dissolve. Once the liquidation is confirmed, the discount to NAV in the secondary market may resume soon.De facto bankrupt FTX and its affiliates

Alameda Research has sued Grayscale Investments and its owner DCG Group in March 2023

• , attacking Grayscale for charging high fees and refusing to let investors redeem from GBTC and ETHE, Alameda said it was suffering "hundreds of millions of dollars in losses" due to such a structure. Similar situations may increase over time.

• In addition, according to the declaration documents, the main situations that may trigger the early termination and liquidation of ETHE Trust include:

• U.S. federal or state regulations require the trust to close, or force the trust to liquidate its ETH, or seize, seize or otherwise restrict the use of the trust’s assets;

• If CFTC or SEC, FinCEN and other regulators believe that the trust needs to comply with specific regulations and regulations, Grayscale may choose to dissolve the trust to avoid unnecessary legal liabilities and financial risks;

• Grayscale believes that the trust's assets and expenses are not proportional to the risks, costs and benefits;

• the trust license is suspended;

• the trustee resigns or is dismissed without a replacement;

The trust becomes insolvent or bankrupt.

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6. Grayscale repurchases itself

Assuming an extreme situation, that is, Grayscale is willing to repurchase all the outstanding shares in the market at a cost lower than NAV, and decides to privatize or dissolve the trust. Such an operation is obviously profitable. And the announcement of a large repurchase plan will help boost market confidence, which may be conducive to the return of discounts.Grayscale's parent company, Digital Currency Group, has successively announced trust share repurchase plans totaling up to US$1 billion from 2021 to 2022. However, GBTC has since traded at a price lower than NAV, which may be because the size of the repurchase is a drop in the bucket compared to the overall asset management scale of tens of billions of dollars, although the secondary market repurchase has helped narrow the price gap.Michael Sonnenshein's 2022 year-end letter to investors mentions

, if the GBTC ETF does not materialize, one of the ways for investors to unlock it is a tender offer, such as repurchasing no more than 20% of GBTC's outstanding shares. If this happens, all its trust products should be taken into account, and the discount of ETHE may also be narrowed.

first level title7. Opportunity cost drops。

According to what we discussed in Topic 2, today’s discount can be understood as a discount of opportunity cost, so if Grayscale cuts management fees, or the market’s risk-free interest rate falls, it will help the discount on the basis of the same expectation of time to restore parity narrowed, in fact

• Grayscale CEO Sonnenshein also mentioned possible fee cuts in March.

• Even now with the same 10.5-year forecast, a simple simulation:

• The 10-year treasury bond and the management fee each dropped by 1 percentage point. At this time, the opportunity cost is an annualized 3.91%, which can help narrow the discount from -47.3% to -34.2%;

If each decreases by 2 percentage points, the opportunity cost at this time is 1.91% at an annualized rate, and the discount may be narrowed to -18.35%.

image description

Source: Graysacle, Trend Research

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Topic 3: Why betting on the crypto market is suitable for professional investors

Grayscale digital currency trust products have advantages in accessibility, balance sheet entry processing, cost advantages compared to keeping private keys by themselves, investment tax advantages, etc., and so far, ETHE is still the only Ethereum provided by the US stock market A "stock" that has spot as its primary asset.Specifically, it looks like:

Accessibility:Grayscale digital currency trust shares can be traded through common US stock brokerages, which means investors can buy and sell these products more easily. In contrast, trading through cryptocurrency exchanges or other channels may involve more risks and fees.

Balance Sheet Management:The Grayscale digital currency trust product is a security product, which means that professional investors don't have to worry about how to handle their digital assets on their balance sheets, and can more easily incorporate them into their portfolios.

Hosting cost advantages:Grayscale Digital Currency Trust products may have lower costs than digital currencies in which you keep your own private keys. For example, when purchasing digital currency on the chain, investors may need to bear high learning costs and network fees. And there may be a risk of leakage when keeping the private key, and the possibility that once lost, the assets may not be recovered at all. When buying and selling Grayscale digital currency trust products, investors only need to pay commissions and fees related to securities transactions.

• Investment tax advantages:

Grayscale Digital Currency Trust Products are considered securities products under U.S. tax law and may therefore enjoy the same investment tax benefits as other securities products. For example, investors may be able to enjoy a lower capital gains tax rate if they sell a Grayscale digital currency trust product after holding it for more than a year.

The bull market has rebounded since the end of 2022. ETHE has a maximum of 107%, far greater than 61% of ETH. It can be seen that quite a few pessimistic factors have been included in the discount cycle. Therefore, when the market rebounds, ETHE’s elasticity is greater than that of ETH, which is better for the bull market. bet.

image description

Source: Tradingview, Trend Research

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• Topic 4: Risks of investing in ETHE

• 1. Policy and Mechanism Risks

• Designation of ETH or any other digital asset as a "security" may adversely affect the value of ETH and such stock;

• Any jurisdiction restricting the use of ETH, verification activities or the operation of the Ethereum network or digital asset markets could adversely affect the value of the stock;

Regulatory changes or interpretations may force trusts to register and comply with new regulations, which may incur additional expenses for trusts;

Because Grayscale's affiliates are the only institutions that can create or destroy fund shares, whether due to regulatory restrictions or technical reasons, the number of issuance and destruction may not be adjusted efficiently according to market demand, which may lead to secondary market transaction prices. Frequent large deviations from NAV;

Historically, the risk-reward ratio of ETHE is not good. As shown in Table 2, it can be seen that ETHE is weaker than ETH/USD in almost all aspects. It means that if you plan to hold ETHE for a long time, you may have to do some targeted income enhancement strategies, otherwise if the bull market does not come quickly, there is a risk that its performance will be weaker than the market.

Table 2: Risk and Return Metrics (Jul 2019 — Mar 2023)

image descriptionrate of return:

Risk-adjusted return:Regardless of the monthly or annualized arithmetic mean rate of return or geometric mean rate of return, ETH outperforms ETHE. Especially in terms of annualized rate of return, Ethereum USD has reached 150.24%, while Grayscale Ethereum Trust is only 102.18%. In terms of annualized geometric average rate of return, Ethereum USD reached 62.90%, while Grayscale Ethereum Trust was -11.12%.

Risk-adjusted return:From the perspective of risk-adjusted return indicators such as Sharpe ratio, Sortino ratio and Treynor ratio, ETHE's risk-adjusted return performance is weaker than that of ETH.

Volatility:The volatility (standard deviation) of ETHE is as high as 137.75%, which means that investors may face greater risk of price fluctuations. In comparison, ETH has a lower volatility of 100.48%.

Maximum drawdown:ETHE’s maximum drawdown reached -89.6%, which is higher than Ethereum USD’s -77.96%, which means that in the past performance, ETHE lost more in the worst case.

Active returns and information ratios: