Grayscale Ethereum Trust: Risks Are Overblown, But Very Real (ETHE)

Back in October, I predicted grayscale ethereum The Trust’s (OTCQX:ETHE) discount on NAV has grown, and its 30% discount wasn’t enough to make the product last longer.

Initially, I thought the discount would grow to about 42%-45%, and that’s it. Due to the collapse of FTX (FTT-USD) discount has ballooned to just over 50% off NAV.

Part of this could be due to further apathy and falling prices in the cryptocurrency market, but much of it could be due to FTX-related concerns, solvency, etc.

Before I begin, I would like to clarify that at the time of writing this article, I have liquidated all of my assets. ethereum (ETH-USD) holdings including my futures contracts and I have no plans to buy them back until macro conditions change. I think it is quite possible that Ethereum will fall again to $650-$850 before bottoming out.

established theory

In my opinion, ETHE’s discount to NAV more than factored in risk and holding period issues (until redemption or conversion to an ETF is likely).

As a result, there are really only two bear cases left for the fund.

1. You believe in ETHE, Grayscale, DCG and most of all COinbase (COIN) Are committing fraud and basically don’t have the Ethereum they claim to have

2. You Believe Ethereum Is So Overvalued And Like Tulips

It might be a bit of an exaggeration, but I agree – after all, I don’t believe in scam narratives, and I don’t believe Ethereum is in a tulip-shaped bubble.

Ultimately, these are the two reasons why we don’t buy or hold funds. If he has Ethereum that ETHE claims to own, effectively he is buying Ethereum at a 50% discount. It’s certainly a cheap NAV adjustment.

Let’s examine these two bear cases and find the truth in between.

Fraud Risk Review

I think the risks are exaggerated for a variety of reasons, many of which stem from a fundamental misunderstanding of how financial fraud generally occurs among funds, money managers, and large corporations, as well as a fundamental misunderstanding of how financial fraud commonly occurs among funds, money managers, and large corporations. focuses on misconceptions about how custodian services work.

How does Coinbase’s custody service work?

People seem to think that Grayscale allows them to trade, rent, and do whatever they want, whenever they want. That’s Coinbase’s custodianship.

That’s not how it works – not at all.

When a custodianship account is opened, it comes with several account roles. Each user who is part of the custodianship agreement gets her 1 vote to change, move coins, trade, etc. (if they are enabled). Majority or full support for all users.

Grayscale’s products and current custodianship agreements, as far as I know, are not clearly explained, but I remember in the past that multiple executives of companies seeking custodianship had to sign. Yes, 1 or 2 Coinbase In other words, no nonsense can come from one reckless person like SBF transferring funds.

It’s just not realistic.

But that’s speculation – I’ll give it a bear, but how their custodial service operates on an ongoing basis and how the system is set up is no speculation: auditors directly in C have the right to viewoinbase View Accounts, All Actions, All Balances, Everything.

This means that a 10-Q filing, a third-party audit, should be part of the fraud if something happens.

Coinbase also issued a statement recently. In short, they argue that:

• Funds are not mingled and completely separate from coinbase
• They are auditing the funds and are continuously doing so to confirm their existence
• All funds belong to and are legally owned by Grayscale
• Coinbase cannot lend or otherwise touch Grayscale funds
• According to the 10-Q filing, as of September 30, 2022, Grayscale holds 3,056,833.75893012 Ethereum on Coinbase through its custodianship service.

This was approved by the CFO of Coinbase Global and the CEO of Coinbase Custody.

What does this tell us? Nothing about Grayscale, but reaffirming that there is zero risk with Coinbase as a custodian – the product is completely separate – Coinbase cannot do anything with the funds.

The documentation for ETHE (and other grayscale products) has the following clause:

In other words, the fund is basically prohibited from doing anything with the fund – they can’t lend it or trade with it. commission.

It also mentions how CEOs and CFOs approve everything, certify 10-Q filings, third-party audits, etc., and verify the authenticity of statements within them.

This basically means what we’re seeing – if grayscale Products containing ETHE underlying Assets they had:

• Repeatedly lied in quarterly SEC filings
• Third party auditor in your pocket
• A horribly unrecommended setup with Coinbase Custody from the start
• Coinbase colluded employees, possibly high-ranking employees
• Totally corrupt management join hands in agreement
• etc

All of this involves systematic corruption among DCG, Grayscale, Coinbase, and third-party auditors, not to mention regulators.

financial fraud, high return, low risk

Is it possible that DCG, Grayscale, Coinbase, and third-party auditors colluded, especially when it comes to crypto?

probably? Absolutely not.

The problem is that in financial fraud it’s not how this happens or looks. The cabal, the gigantic network and the web aren’t all planning together. Usually it’s a very small high-level executive who hides everything from everyone else. It is impossible here.

Another is that financial fraud goes unpunished or is punished lightly. Because people who commit crimes are generally not stupid people. Criminals, heartless predators, objectively bad people, sure – but they’re not stupid.

They do it in a somewhat undeniable way – maybe they really are incompetent idiots and have created bad debts. You may have hired the wrong team member with poor risk management. It may have been hacked. Maybe it wasn’t organized. Then an accident happened.

That’s not what we’re looking at here. If there is fraud here, there is no way out of here. This is a closed case. straight to jail. Securities fraud, stripping of all personal property, many of which sent him to 20 years in prison. Regulators will throw books at them.

Of course I can’t make any guarantees, but this doesn’t smell like a scam to me. Too many parties, too much protection, too much risk. Realistically, CEO/CFO/etc.Michael Sonnenschein has no angles or interests to compromise the fund.He’s wealthy, has a lot to lose, and has no meaningful ties or obligations to FTX/DCG/etc.

The scam fears are ridiculous – and the risks are exaggerated.

Is Ethereum/Crypto a Tulip Bubble?

Again, a little exaggerated, but still discussed by many people. With thousands of projects built on Ethereum, this and that, all these big DeFi exchanges, etc., you might think I’d call it silly.

That’s true — a rational take — but there’s some truth to what Tulip Doom says. Most of the thousands of projects are garbage. Outright scams, stupid nothing burgers with bad tokenomics, no problem solving, etc.

Let’s skip that tired discussion. Anyone smart and still reading knows that Ethereum has some value and is somewhere.

But the real question I want to ask is, would you buy Ethereum at $1280~/ETH today?

I may have said yes – please read the question again – I said buy instead of hold – would you buy Eterium With fresh money today?

I don’t think so – neither I nor anyone I’ve met has felt this way about Ethereum in quite some time. We see it and hope it goes up, but no one wants to fill a new bag with Ethereum right now.

I would argue that this is probably because we are teetering on the edge of a cliff and are in a deep recession – and that, coupled with generally more expensive capital, will reduce investment in startups and technology. Let’s say – already declining – and with it the development of Ethereum.

If the economy deteriorates and more cash needs to be raised among investors and developers, interest is likely to wane and what catalyst really remains for Ethereum to rise? Is not it?

We had The Merge, it was a success – we got burned, it was a success, we had DeFi, what’s the catalyst now?

What is Ethereum Catalyst?

I don’t think the catalyst will show up. The only catalyst I can think of is the resurgence of Easy Money, which is boosting the cryptocurrency market and development as a whole. Or the decline of the existing financial system pushing more finance to Ethereum. Just encrypt for self management.

With Bitcoin, inflation could pick up and that story could take off, but Ethereum doesn’t have that story – for the third time really, but what’s the catalyst?

Unable to find a catalyst on the horizon, we decided to sell Ethereum and not take advantage of this -50% discount on NAV. Prices will collapse.

Where does that leave us with ETHE?

The steep NAV discounts are more than justified, with little to no risk of fraud or cheating, but they are not a true catalyst for an upswing.

From macroeconomic headwinds pushing down the underlying (Ethereum) price and other potential risks in the general crypto market, from Tether (USDT-USD) to further contagion risks among exchanges, regulations, etc. Please do not forget.

I’d say ETHE is a buy – I really was going to – once I hit this discount to NAV I was going to – but I can’t.

I don’t see any reason to buy ETHE with new money.

practical point

I think there is a reason why you sell your Ethereum spot and use some of the funds to buy Ethereum. Then, if the drop is due to fraud or simply macro power, the spot or his ETHE will be lower.

Personally, I would hold off until macro forces change, Tether blows up, regulation arrives, or Ethereum dips below $850. At that point, we will re-evaluate the ETHE situation and probably buy a large amount of ETHE.

With this being said, these are the deals I’m looking at here:

• When neutral to slightly bullish on Ethereum, swap 40%-70% of your position’s target NLV into ETHE and keep some extra cash for dips or clears.
• If you agree with my contention that the scam is irrational (less than 5% chance), short Ethereum Futures, go long ETHE and recover 5-10% NLV when this fear subsides To do.
• If the Ethereum price is temporarily bearish, do not hold the position and wait to sell a put on Ethereum futures when the price breaks below $1000.

Since I am no longer bullish on Ethereum prices, I choose option #3.

Risks to consider

Again, I believe the risk of fraud is minimal and I was right in the crypto space regarding fraud throughout 2022, so I could be wrong. If so, not only is the fund in trouble, but cryptocurrencies will collapse in a much worse way than the FTX debacle.

This is why I believe it is better to limit your assumed exposures, even if they are bullish. Because even if he is ultimately wrong about ETHE, he will likely have the opportunity to “buy dip” on the spot and recover a significant amount of his desired target exposure in ETH. .