Grayscale's ETH product is trading at a more than 400% premium to NAV

Ecosystems•March 10, 2020, 4:38PM EDT
UPDATED: November 25, 2020, 3:48PM EST
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Grayscale's ETH product is trading at a more than 400% premium to NAV
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Quick Take

  • Global markets are in turmoil, and crypto is no exception
  • Grayscale’s crypto products trade at a premium to the spot market
  • This opens the door to two potential trades, investors say. 

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Grayscale's Ethereum Trust is trading at an immense premium relative to the spot price of its underlying asset, ethereum's native ETH token, according to a review of market data.

Data compiled by The Block shows that ETHE is trading at a premium of 425% to NAV (net-asset-value), the highest level in nine months. The chart below shows that the premium is a long-standing phenomenon, but one that has seen accelerating growth since the start of 2020. NAV or net asset value is the value of the underlying asset – in this case, ETH – minus liabilities.

Source: YCharts, The Block

Grayscale's GBTC and ETHE products are among the most popular crypto-tied financial vehicles in the nascent institutional market. Unlike an ETF, Grayscale's products trade over-the-counter rather than on an exchange. 

As The Block's Yogita Khatri previously reported, GBTC is more popular than Netflix stock among its millennial clientele. Still, GBTC also trades at a premium to the underlying spot market, which means investors are pay more than market price for bitcoin exposure. The premium for GBTC stands at 20%, as seen in the graph below:

Source: YCharts, The Block

The premium presents an opportunity for some hedge funds in the crypto market to capture the spread between ETHE's premium and the NAV, according to two hedge funders and one former Grayscale employee. Still, it is not as simple as buying low – at NAV – and then selling back to the market high – at the premium. Purchasing shares at NAV requires an institutional investor to hold their shares for a period of six months in GBTC's case and 12 months in ETHE's case. 

Still, the 400% premium in ETHE is high enough that at least one hedge fund considered buying shares and waiting the 12-months to sell with the upside being that the premium persists and the downside being that it doesn't. 

"There's nothing to prevent the premium going and staying negative indefinitely except possibly a vague incentive for Grayscale to eventually dissolve the product if the premium became extremely negative for a sustained period," one source, a hedge funder who considered the trading strategy, told The Block. His crypto hedge fund ultimately did not make this trade. 

"It's just a speculative bet that retail buying of the Grayscale product will maintain at least an equal value let alone a meaningful premium," he added.

Another strategy floated: an institutional investor could instantly capture the spread by purchasing shares at NAV and borrowing shares at the premium price and then selling those borrowed shares.

"The investment captures the delta minus the cost of borrowing," another hedge funder source said.

Still, this trade would be tricky to execute and would depends on the existence of enough market liquidity to borrow. The cost to borrow could also move against a trader. 

"It is really hard to borrow in ETHE," the hedge funder added.


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