This Grayscale Investment Strategy May Be Driving Up Ethereum’s Price - Decrypt

In brief

ETHE shares of Grayscale’s Ethereum Trust are dropping in price as institutional investors exit the mandatory lockup period and sell their shares.
Many ETHE shares were purchased at a discount to market prices by sending borrowed ETH to Grayscale, which investors now must pay back by buying ETH.
Institutions are left to ponder their next move as ETH prices climb even as ETHE prices fall.

Institutional investors in Grayscale’s Ethereum Trust are set to cash in on a trade set up months ago, and the scramble to cover the Ethereum (ETH) used to do it could push prices even higher.

Investors in the Grayscale Ethereum Trust (ETHE) are looking to close out a trade built to profit off the premium value of ETHE shares and will need to buy more Ethereum to do it, according to a theory floated by TheTIE CEO Joshua Frank.

That could mean higher ETH prices this week even as the market price of ETHE shares are falling, as institutional investors consider their next moves in the crypto landscape.

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A large number of Grayscale’s ETHE investors via private placements received their shares today.

ETH’s run the last few days might be in large part due to those institutions buying ETH to cover their loans. https://t.co/qoelppNgzQ

— Joshua Frank (@Joshua_Frank_) January 4, 2021

According to Frank, to make the trade institutional investors borrow ETH at an annual interest rate of around 8%. They use those assets to buy ETHE shares at the value of the crypto on that day, but are subject to a waiting period before they actually receive the shares.

“As an accredited or institutional investor that is interested in investing in a Grayscale product, you can give them cash or a crypto in-kind, as in ETH for ETHE,” Frank told Decrypt.

“You then have a 6 month lockup period, and then after those 6 months you are issued shares in the product, ETHE.”

However, shares of ETHE trade at a value greater than the underlying digital asset, sometimes at a premium of more than 100%. When institutional investors get their shares, they can sell them on the market to capture the profitable difference between what they paid for the borrowed ETH and the current ETHE premium.

“So institutional investors can invest via private placement at the NAV (value of underlying crypto) and after the lock up period they are given those shares and can sell them on the open market,” Frank said.

But remember, many institutions needed to borrow ETH to buy ETHE shares in the first place. After selling the shares, that loan needs to be paid off. That leads borrowers to market buy ETH, pushing Ethereum prices higher. In the meantime, selling ETHE shares pushes those prices lower.

It all adds up to a puzzling situation for institutions considering exposure to Ethereum—ETHE prices and premiums are falling, while the value of the underlying ETH continues to climb.

For retail investors and long-term holders, though, the rush to cover ETH loans (and the price increases that…