- ETHE was trading at over a 800% premium as of June 5, 2020.
- ETHE’s tradable shares represent 3% of total outstanding shares, as compared to 71% for GBTC.
- ETHE’s huge premium is unlikely to sustain in the long run, as restricted shares getting unlocked in the near future
In late April, we discussed the incredible 400% premium that Grayscale Ethereum Trust (ETHE) was trading at. (“Why are Investors Paying a 400%+ Premium on ETH?”) As of June 5, ETHE’s premium has skyrocketed to 877% of its net asset value, doubling the previous record in a little over one month.
Source:Grayscale Ethereum Trust (as of June 5, 2020)
Interestingly, Grayscale Bitcoin Trust has been trading at a much smaller premium of 24% recently. What supports the high premium of ETHE? And what accounts for the disparity of ETHE premium versus GBTC premium?
Source: Grayscale Bitcoin Trust (as of June 9, 2020)
In an efficient financial market, high premium will be wiped out by arbitraging activities. However, as we explained in “Why are Investors Paying a 400%+ Premium on ETH” and “Why Does Grayscale Seldom Sell Bitcoin”, investors subscribing to ETHE and GBTC in the primary market are subject to 1 year or 6 months of holding period. More importantly, it is hard to find shortable shares of ETHE to arbitrage the price difference.
How many shares of ETHE and GBTC are shortable? While we don’t have a definite answer to this question, shortable shares are at least freely tradable. Let’s take a close look at the number of freely tradable ETHE and GBTC shares in the market.
Based on GBTC and ETHE’s latest annual reports, as of December 31, 2019, there were 204,546,060 units of freely tradeable GBTC shares, amounting to 76% of the total shares outstanding, and 455,435 freely tradeable ETHE shares, merely 8.7% of the total shares.
How about new shares issued in 2020 and shares unlocked once the restricted holding period is satisfied? GBTC issued 41% more new shares in 2020, while ETHE issued 189% more.
Private placements of GBTC were subject to a minimum holding period of 1 year prior to April 20, 2020 and 6 months afterwards. The red arrow indicates the unlock schedule of GBTC. By June 11, all the shares issued on or before Dec 11, 2019 have become freely tradable shares. The number of GBTC total outstanding shares was 269,445,300 as of Dec 31, 2019. That means around 70% of GBTC’s current shares, 380,090,300 units in total, are now freely tradable. Percentage wise, the freely tradable shares decreased from 76%, diluted by the 41% new shares issued in the first half of 2020.
Source: Grayscale Q1 2020 report
Conversely, ETHE private placement participants have to hold for at least 12 months. The ETHE subscriptions in the four quarters of 2019 were USD 0, USD 14 million, USD 62.7 million and USD 19.1 million respectively. Currently, ETHE could only unlock shares subscribed on or before June 2019. We can observe from the ETHE chart that there were virtually no subscriptions prior to June 2019. The number of total outstanding ETHE shares was 455,435 as of June 30, 2019, suggesting that only 3% of the current shares, 15,498,400 units in total, can be freely traded right now.
Source: Grayscale Q1 2020 report
Why would anyone still buy ETHE in the secondary market at a 800% premium? This can be attributed two possible factors:
- Some institutional investors are not allowed to buy restricted securities in the primary market due to compliance restrictions. Smaller investors don’t meet the accredited investor criteria and thus, are not able to purchase in the primary market. And obviously, these investors choose not to hold Ethereum directly.
- Some traders are taking advantage of the low public float and trading a widening ETHE premium spread.
ETHE’s high premium is not driven by strong demand of Ethereum itself, but rather extremely low percentage of public float. The massive premium ETHE will, in turn, attract arbitragers to purchase more through private placements and drive up the AUM of ETHE.
However, ETHE’s high premium will not sustain as more shares will be gradually unlocked and released into the secondary market eventually.