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In a surprise move last week, the Securities and Exchange Commission approved exchange proposals to list Ethereum-based ETFs. This means that Ethereum (ETH-USD) will soon be tradable to millions of investors in their brokerage accounts with just a few. Clicks. Approval of Bitcoin ETFs (Bitcoin-dollar) In January it was A watershed moment for cryptocurrenciesEthereum ETFs were the next logical step. Even earlier this month, the idea of creating an Ethereum exchange-traded fund seemed like a far-fetched idea. But Donald Trump intensified his attacks on the Securities and Exchange Commission in early May Started accepting cryptocurrency donationsWhich led prominent Democrats to fear this Cryptocurrencies have become a political vulnerability. It appears that some political pressure may have been applied, and Ethereum rose on news of the approval.
I am a supporter of Bitcoin for its role as a decentralized currency that it cannot be Inflated away by central banks. However, there are over 10,000 other cryptocurrencies available. I would argue that more than 99% of it is basically worthless. It is not clear whether the SEC will start allowing random alternative cryptocurrencies to be listed on US exchanges – and it seems that this will create a lot of potential for all kinds of scams.
But Ethereum has a market cap of more than $400 billion and has been around for more than 10 years, so allowing the ETF to go forward seems like a reasonable compromise between protecting investors and allowing degrees of freedom in where people put their money. However, the key differences between Bitcoin and Ethereum make me skeptical about the benefit of investing in Ethereum, especially via an ETF.
Converting ETFs will end the bonus/discount craze for crypto funds
If you had the full foresight to allow an Ethereum ETF, you could have bought the Grayscale Ethereum Trust (OTCQX:ETHE). The discount on ETHE’s NAV has been steadily shrinking over the past year from 50% plus to nearly 0% as of today.
A long-term view shows the ETHE fund craze and how it traded at a massive premium, and then at a huge discount. For individual investors who don’t understand how NAV works, this is a way to lose a lot of money.
Here we see that the fund traded at a premium of up to 800% to the value of the base currency Ethereum during the coronavirus outbreak. I knew a few retail investors who insisted on buying this fund because it was “Ethereum” and paid 2 or more times the value of the underlying ETH, only to sell it for less than their ETH was worth during the crypto crash of 2022. This caused huge losses.
Here’s another way to look at it – ETHE generally trades at huge premiums to the value of its underlying assets through 2021, and then at huge discounts in 2022 and 2023. In general, if you are going to buy closed-end funds, you need to be aware of the net asset value you are purchasing. Failure to do so can lead to ugly losses, and recognizing times when assets are trading below NAV with a catalyst to bring them back to NAV can lead to great trades.
To this point, you can look at Grayscale’s remaining crypto funds and compare the NAV to the market price. What you will find is that there is little to no correlation between the value of assets and what people pay. For example, Grayscale’s Litecoin Trust (OTCQX:LTCN) is trading for around $29, but the underlying cryptocurrency is worth just $7. Don’t pay $29 when you can pay $7 on the open market!
Grayscale still has a few funds trading well below NAV. The two funds under NAV are Grayscale’s Digital Large Cap Fund (OTCQX:GDLC) and Ethereum Classic Trust (OTC:ETCG), but you’ll have to do some due diligence to find the catalysts. If there’s no trigger, you’ll be stuck paying a 2.5% lifetime fee. If you have an opinion on these matters, share your thoughts with us in the comments! But most of these funds are trading well beyond their net asset value, which means you shouldn’t touch them with a ten-foot pole. It’s not clear whether the SEC will approve more cryptocurrency ETFs after Ethereum, so I think these trades are over.
Money Inside Baseball: Crawl Before You Walk
If you can’t decide who’s the sucker at the poker table, the sucker is you. The same applies to encryption. I just showed you how cryptocurrency funds trade at huge premiums and discounts to NAV, and how people willingly paid huge NAV premiums for their cryptocurrency funds only to get burned. This also applies to cryptocurrencies themselves. The financial returns of people I know who participate in Ethereum are due in large part to staking/farming/lending. If you are not participating in this, you seem to be losing the purchasing power of those who are participating. If you are collecting/lending incorrectly, you also risk losing your money to fraud and counterparty risk.
Ethereum ETFs will not be allowed to conduct staking, according to SEC rules. I mean, would you invest in a USD ETF that doesn’t pay interest? One similarity between the mainstream financial system and the world of cryptocurrencies is that it transfers wealth from people who don’t know what’s going on to people who do. For example, in the United States, money market funds currently hold about $6.4 trillion in assets, while commercial banks hold about $17.6 trillion. If consumers really could use money market funds, it would pose a serious problem for banks, because they could eliminate the invisible middleman en masse. Fortunately for banks, 90% of people don’t realize this or are too lazy to care. Bank of America (BAC) alone holds nearly $1 trillion in consumer deposits and pays an average of 0.55% annually on them. This is something I see all the time. People will make $80,000 a year and complain about no money left, but they have $1,000 a month in a car payment, pay for debit cards with everything and don’t get any cash, and then they put their money where they earn 0.05% APR The problem isn’t The system, but in them. For cryptocurrency investors, these trends are magnified. Although I’m sure there are good opportunities to bet with Ethereum, it requires a high level of sophistication and new ETFs will not be able to participate.
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My question for crypto investors is – if the public understands the US banking system so poorly, do they have any business investing in crypto funds? Other than some Bitcoin, probably not. I think putting some money into the iShares Bitcoin Trust (IBIT) or the Fidelity Wise Origin Bitcoin Fund (FBTC) makes sense. However, people seem to be jumping into the crypto space very quickly, so unless you have a good idea of the basic mechanics of Ethereum and other crypto markets, I think it’s best to stay clear.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.
