Lost in the wave of the first cryptocurrency exchange-traded funds (ETFs) hitting the market over the past month is that investors with traditional brokerage accounts have had stock exchange-traded access to crypto exposure for some time. Grayscale operates a couple of single-asset cryptocurrency trusts, holding nothing but cold-stored crypto in single denominations. Grayscale trusts trade more like closed-end funds than exchange-traded funds — with premiums and more recently wide discounts — along the way.
Grayscale’s two largest trusts — holding Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH) — are fetching discounts of 16% and 5%, respectively. They are mammoth trusts with a combined $54 billion in assets, but there are even bigger markdowns to be had in the Grayscale catalog.
Grayscale Ethereum Classic Trust (OTC:ETCG) is commanding the largest discount to its net assets among all of the firm’s investments right now. The trust is a single-asset investment owning only Ethereum Classic (CRYPTO:ETC), and as of Thursday’s close it was trading at whopping a 58% discount to its underlying crypto. How did we get to this extreme disparity between the spot price of Ethererum Classic and the market price of Grayscale Ethereum Classic Trust? More importantly, can you really buy Ethereum Classic at a 58% markdown?
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It’s a fire sale
Ethereum Classic shouldn’t be confused with Ethereum itself. The two denominations went their separate ways five years ago. Ethereum Classic commands a $7 billion market cap. There are 32 digital currencies currently worth more, including the more popular Ethereum with its $535 billion valuation.
Ethereum Classic has been a laggard lately, roughly flat over the past month as Etherum has soared 34% in that time. However, the relative sluggishness of Ethereum Classic since peaking at more than triple today’s price exactly six months ago is naturally already baked into the trust.
Grayscale Ethereum Classic Trust closed at $20.10 on Thursday. Divide the roughly $665 million of Ethereum Classic that the trust owns at current pricing into the nearly 14 million shares outstanding and you have a value of $47.54 a share. Put another way, investors are getting exposure to Ethereum Classic for $0.42 on the dollar.
There is no free lunch, of course. Buying into Grayscale Etherum Classic Trust doesn’t mean that investors will be able to cash out at the going rate of the crypto. If anything investors who thought they were getting a bargain at 30%, 40%, and even 50% discounts are even deeper into the markdown now. Unless Grayscale pushes and is allowed to convert the trust into an ETF — something that is reportedly being considered for its largest Bitcoin trust — there are no assurances that the discount will be wider or narrower when an investor decides to sell.
Grayscale Ethereum Classic Trust also charges 3% in annual fees, taken out in small chunks throughout the year. Those fees are taken from the crypto it holds, so the Ethereum Classic supporting each share is whittled away over time. As of Thursday the Ethereum Classic per share stands at 0.87274218.
It’s a tempting offer. And ultimately the answer is that you can technically get exposure to Ethereum Classic at a 58% discount. It’s just a deal that has proven to be too good to be true for investors this year, even if it does seem less risky than buying the crypto itself at this point.
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