Grayscale Ethereum Trust: Steady Lads

Summary Ethereum is one of the only crypto assets that has experienced investment outflow year to date according to CoinShares. Part of the problem could be the rise in the dollar and the potential attractiveness of US debt as an alternative to crypto yields. I still like ETHE is an arbitrage trade, given the discount to NAV, but I wouldn't rule out lower prices in the short term. It's been a little over a month since I last covered Grayscale Ethereum Trust (ETHE) and by extension the Ethereum (ETH-USD) blockchain network. With the backdrop of the US Securities and Exchange Commission under pressure to allow a spot Bitcoin (BTC-USD) ETF and the recent applications for a spot Ethereum ETF, it's been interesting to see the Grayscale fund now outperforming the underlying asset on various timeframes. Data by YCharts Over the last six months, shares of ETHE are up over 26% even as ETH itself is actually down. Data by YCharts Since the beginning of the year, we've seen shares of ETHE move from a preposterous discount to NAV near 60% to a less preposterous discount to NAV of slightly over 26%. That discount has since crossed back to roughly 32% as of article submission. In this update, we'll go over some factors that I think should be considered for ETHE investors today. Investment Outflow From an investment flow standpoint, it's been a really underwhelming year for the crypto market. Crypto investment vehicles have experienced net outflow during 8 of the last 9 weeks, totaling nearly $500 million: CoinChares Adding up crypto assets under management for all of the providers, the investment AUM for the industry is currently a little over $32 billion - with almost 67% of that AUM coming from Grayscale alone. Year to date, the total net flow for all providers combined is just $51 million and at the current pace of outflows, the net change year to date will likely turn negative in October. What's interesting is breaking the year to date changes down by asset: Asset YTD Flows AUM (millions $) Change Bitcoin 155 21,609 0.7% Ethereum -113 6,852 -1.6% Short BTC 46 111 70.8% Litecoin ( LTC-USD ) 3 106 2.9% Solana ( SOL-USD ) 26 73 55.3% Ripple ( XRP-USD ) 14 57 32.6% Tronix ( TRX-USD ) -51 24 -68.0% Cardano ( ADA-USD ) 6 24 33.3% Source: CoinShares, as of 9/15/23 Here we get decent data from CoinShares though the company doesn't split every single asset. Not shown in my table above, is an additional $3.2 billion sitting in multi-coin funds and "other" coins. With the exception of Tronix, the only individual asset that is actually down from net flow standpoint this year is Ethereum. While this is obviously concerning, I do think there are reasonable theories as to why this might be happening. Inflationary Again Ethereum has once again become an inflationary asset. Following the merge last September, the issuance of new ETH slowed down to the point where more Ethereum was being burned than was being issued. This was largely the case at the beginning of the year. From January through mid-August, we saw a net supply change of -306k ETH. However, this has changed over the last several weeks: 30 Day Supply Growth (Ultra Sound Money) Over the last 30 days, Ethereum has flipped from a deflationary asset to an inflationary asset. Since mid-August, we've seen net supply change in ETH approach +17k. This has presumably been a factor in the recent $200 per coin drawdown seen in ETH over the same timeframe. To be clear, there is still far less ETH in supply since the merge last year. But nothing goes in a straight line and ETH is again inflationary at the moment. This could be having an impact on Ethereum's position as the "risk free rate" in Defi: Staking Cap Staking Ratio Reward Rate Real Rate Ethereum $43.1 21.6% 3.90% 3.6% Solana $7.7 71.9% 6.90% -0.4% Cardano $5.6 62.7% 3.10% 0.4% Binance ( BNB-USD ) $4.9 14.7% 1.70% 8.4% Aptos ( APT-USD ) $4.7 84.1% 6.30% -15.8% Source: Staking Rewards, as of 9/27/23. Dollars in billions While still far more palatable than the negative yields seen in Solana or Aptos, Ethereum's 3.6% real rate of return for staking isn't nearly as attractive as it was 90 days ago when it was over 5%. Federal Reserve By comparison, the real yield on the 10-year treasury is the highest it has been in the last 15 years at 2.18%. Given the larger level of short term volatility in something like Ethereum compared to dollars from a purchasing power vantage, the yields on US debt could certainly be having an impact on where even the most risk tolerant investors are putting capital to work. The Block To be clear though, ETH staking remains very strong with approximately 27 million ETH currently in stake. That number has been consistently growing since Beacon Chain was launched a few years ago. But again, the investor outflow from Ethereum this year is definitely something ETHE investors should keep an eye on as it could foretell a reversal in the discount to NAV trend that we've been enjoying over the last several months. I'm not personally there yet, but I do think it's worth considering. Vitalik's Holdings Something else that has generated some buzz is the recent move by Ethereum co-founder Vitalik Buterin sending 400 ETH to Coinbase ( COIN ), presumably to liquidate those holdings. At $1,600 per ETH, those holdings have a current market value of $640k which is slightly more than Vitalik's recently liquidated position in MakerDAO ( MKR-USD ) that I noted in recent coverage of that coin. On the surface, this might seem bearish and "Crypto Twitter" was quick to point that out. But it's important to keep this transaction in context: Arkham Intelligence Arkham Intelligence has Vitalik Buterin's public ETH holdings at nearly 247k coins. With $349 million in ETH still under his control, Vitalik's recent Coinbase deposit amounted to about 2 tenths of a percent of his total ETH holdings. It's a non-issue in my opinion. Summary In August, I said patience would be rewarded in ETHE. I still believe that to be true. But it's worth considering that patience for a better price might be prudent as well. It's admittedly concerning seeing investment demand for Ethereum and Ethereum derivatives go negative year to date. However, I think this is largely due to strength in the dollar and the perception that US debt might be a better alternative than crypto yields. It's also worth mentioning that the Ethereum held in custody for Grayscale is not actively staked. This means there is theoretically an opportunity cost in longing ETHE rather than buying ETH directly and staking it yourself or through a staking provider. I think there's a lot of credence to that idea when ETHE is trading more in line with the underlying asset. For me, ETHE is a very simple arbitrage trade. If we like ETH and we think there will ultimately be a spot ETH ETF in the United States either under this administration or the next one, I think ETHE is still a really great trade at a 30% discount. All that said, it's probably wise to keep an element of patience if the share price moves the other way in the short time. Steady lads.