Crypto Trust’s 50% Price Collapse Highlights Liquidity Hazard

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Cryptocurrency enthusiasts are getting a reminder of the risks that remain in digital assets even while using structured investment vehicles.

The price of the Grayscale Ethereum Trust, which invests in the the world’s second-largest cryptocurrency, has tumbled more than 50% this week even though the value of the token has increased slightly.

The collapse is happening because so-called accredited investors such as hedge funds are liquidating holdings after their mandatory 12-month lockup for new placements into the trust has ended, said Nic Carter, co-founder of researcher Coin Metrics. The trust had traded at 800% premium to net asset value, he said.

“This means that extremely inefficient situations can develop like the one we’ve seen recently,” Carter said. “Bad news for retail investors that didn’t do their diligence.” The trust’s shares are only available to institutional and accredited investors.

Crypto Trust’s 50% Price Collapse Highlights Liquidity Hazard

Grayscale is the world’s largest digital assets manager, which also runs trusts for other coins, such as Bitcoin and Ethereum Classic.

“Grayscale does not control the prices at which our investment products trade in the public market but are instead subject to market forces,” according to a Grayscale spokesperson.

©2020 Bloomberg L.P.

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