Crypto Fund’s Price Diverges From Holdings in Latest Mispricing

A flood of new shares in the Grayscale Ethereum Trust is sending its price in the opposite direction of the cryptocurrency that it holds.

The $3.5 billion fund, ticker ETHE, fell as much as 22% on Monday, despite Ether rallying almost 10%. The divergence was caused by a surge in the number of shares available to trade, with 116 million unleashed at the end of a lock-up period to join the 47 million that were already outstanding, according to Bloomberg Intelligence.

The divergence highlights the counterintuitive moves common recently in trusts that hold crypto assets, which can whipsaw traders unfamiliar with the mechanisms. Grayscale’s Ethereum trust is the exchange-traded product that invests in the second-largest cryptocurrency. The New York-based company’s Bitcoin trust, ticker GBTC, is the largest crypto exchanged-traded product, with a market value of about $22 billion.

Crypto Fund’s Price Diverges From Holdings in Latest Mispricing

Because securities regulators have not approved the exchange-traded fund format for cryptocurrencies, firms like Grayscale have released structures similar to a closed-end mutual fund, in which a fixed number of shares are issued. This can result in situations where they trade at discounts or premiums to the holdings, without a method for realigning the prices and making it difficult for investors to get out.

Recently, the Bitwise 10 Crypto Index Fund saw its price rise 369% higher than the tokens it holds, as investors clamored for access to Bitcoin, which has rallied more than 300% in the past year. The fund, ticker BITW, currently has more than $500 million in assets.

ETHE’s wave of new shares could help realign the fund’s price and its net asset value as the owners of 116 million split-adjusted shares coming to market sell their holdings, said James Seyffart, associate analyst for Bloomberg Intelligence. The premium has fallen from more than 200% on Dec. 22 to about 100% on Monday.

Still, the inefficiencies in funds like ETHE and BITW have fueled calls for the U.S. Securities and Exchange Commission to approve a cryptocurrency ETF such as one that VanEck Associates Corp. filed for consideration last week.

“By failing to allow a crypto ETF in the U.S., the SEC has left retail investors exposed to significant risks via wide mispricing in less-efficient vehicles, while giving an advantage to accredited investors such as wealthy individuals, hedge funds and private-equity firms,” Seyffart wrote in the BI note.

©2021 Bloomberg L.P.

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