Grayscale’s ETHE discount seems to have stabilized as the deadline for the decision on Ethereum exchange-traded funds (ETFs) approaches. According to data from YCharts, shares in Grayscale’s ETHE are currently trading at a 22% discount compared to the value of the fund’s crypto holdings. This discount has fluctuated between 21% and 26% since March 22, widening from as little as 8% earlier that month.
There is skepticism among many crypto market analysts regarding the approval of spot Ethereum ETFs in the U.S. in the near future. The Securities and Exchange Commission (SEC) will need to respond to the earliest applications for such a product by May 25, with VanEck being the first asset manager to submit their application.
Mark Connors, head of research at digital asset investment firm 3iQ, believes that the steady discount on ETHE reflects the market’s consideration of both regulatory risks and potential industry developments. However, the chances of approval for spot Ethereum ETFs in May have significantly declined from 76% in January to 6% as reported by traders on Polymarket. The SEC’s internal view of Ethereum as a security, revealed in April, has not been favorable for the approval odds.
In contrast, spot Bitcoin ETFs saw a boost in their approval odds last year following Grayscale’s courtroom victory over the SEC. The judge deemed the agency’s previous denials of Grayscale Bitcoin Trust (GBTC) to be arbitrary and capricious, leading to a series of spot Bitcoin ETF approvals in January, including the conversion of GBTC. Hedge funds and institutional investors were able to capitalize on this by shorting Bitcoin while holding GBTC. Some investors are now positioning themselves in a similar way with ETHE, anticipating potential litigation following expected denials from the SEC.
ETHE’s discount or premium relative to its crypto holdings is a result of the fund’s structure. Without a mechanism for share creation or redemption, ETHE experienced a discount as high as 60% in early 2023. Each share of ETHE corresponds to approximately 0.0094 Ethereum, currently valued at around $29, but the fund’s structural limitations mean that shares are currently trading at $22.50.
In addition to VanEck, Grayscale is also seeking to convert its fund into a spot Ethereum ETF. Several other firms, including BlackRock, Fidelity, Hashdex, Invesco and Galaxy, and Ark Invest and 21Shares, are awaiting the SEC’s response as well.