Why Grayscale Ethereum Trust Is Getting Crushed Today

What happened

Shares of Grayscale Ethereum Trust (OTC:ETHE), a fund designed to allow traditional investors to invest in the non-traditional asset known as Ether, are getting crushed today. As of 11:20 a.m. EST, it’s down a whopping 18%. By contrast, Ether is only down 3% over the past 24 hours. In theory, the movements shouldn’t diverge this much. What gives?

So what

I can objectively say that Grayscale Ethereum Trust is wildly overvalued, and that’s probably why shares are falling today. On the fund’s own website, under market performance, it explains to investors how much each share is worth. Right now, at the current price of Ether, the fund holds $6.34 worth of Ether per share. However, shares are currently trading hands over $16 per share — more than double their intrinsic value.

Stacks of physical coins display the Ethereum Blockchain symbol.

Image source: Getty Images.

I’m not sure why Grayscale Ethereum Trust started diverging from the price of Ether in the first place. But as the following chart shows, it’s been a wild few months.

ETHE data by YCharts

Grayscale Ethereum Trust did undergo a 9-for-1 stock split on Dec. 17. This could have caused some confusion among investors as to the intrinsic value of shares. However, this theory falls short because Grayscale Ethereum Trust was rising fast before the split and has since fallen. Note that the chart is split-adjusted.

But why is Grayscale Ethereum Trust falling today? The most likely explanation is traders know it’s been a good run, and they’re booking profits now before the end of the year for tax purposes.

Now what

Since Grayscale Ethereum Trust is still overvalued even after today’s decline, I wouldn’t be surprised if it kept falling. Of course, if the price of Ether (the native token to the Ethereum blockchain) starts soaring again, then this outlook could improve. However, predicting the future price of Ether is complicated. Furthermore, the fund’s expense ratio is pretty high at 2.5% annually, which should give investors even more pause before investing in Grayscale Ethereum Trust.