ETHE - Grayscale Ethereum Trust: Buy This NAV Discount Opportunity

2023-12-09 01:00:47 ET

Summary

• Ether is more than just another currency; it powers a technology and platform that can change the universe.
• I expect the next generation to be consumers of decentralized apps built on blockchains like Ethereum.
• The cost of using the platform is measured in Ether, and end users will compete and pay cash for this scarce resource.
• I like Ether because the Ethereum blockchain is diverse and has the ability to track and regulate the movement of tokens.
• ETHE is undervalued when considering the spot price of its assets.

Introduction

Ethereum Grayscale Trust ( ETHE ) is an ETF that invests in and stores Ether. I write this article to reiterate to investors that Ethereum should be thought of as more than a currency; it bears similarities to the equity and commodity asset classes and stands to revolutionize the way we live. Much like AI, the full spectrum of use cases for such technology is vast and likely seeps into all industries in some manner. Ethereum's potential and ETHE trading currently at a discount to net asset value make this instrument very attractive. On the basis of operational value, solid macros, and technical momentum, I rate ETHE a Strong Buy.

The Value of Ether and Ethereum

Ether is to Ethereum as stock is to a company. The profitability of one drives the value of the other. Of course, miners make the profits on the Ethereum platform, but the economics are the same as with companies. There are many nuances, like staking which now yields investors interest on their Ether. Proof of stake consensus governance means that the control over Ethereum operations, akin to voting rights, lie in Ether.

Ether is also a commodity, representing the ability to do business through the Ethereum ecosystem. Ether earned by miners is sometimes called gas. As petroleum powers global commerce, so too will Ether become a commodity that powers a virtual economy on the Ethereum blockchain.

Ethereum is like a solid company because its product is valuable to humans. Trustless transactions with no middleman stand to solve many inefficiencies. Data mobility, privacy, and opportunity are key components of the value of Ethereum to users, as is authenticity and legitimacy of digital objects. It therefore paradoxically can make us more secure, honest, and fair in our use of the Internet. Web 3.0 encapsulates this idea.

All the available Ether is now worth around $276 billion. If cryptocurrencies were valued as companies are, the market capitalization numbers would put Ethereum in the mega-cap range. Although I tend to write about small- and micro-cap stocks with large upside potential, I believe Ether has as much value as any equity or commodity exposed in my portfolio.

The Macro Picture

While the Federal Reserve's Summary of Economic Projections is to release the week after I write this article, things are looking pretty good except for inflation above target levels. Employment increased more than forecasted and unemployment rates fell in November. The data suggest that Federal Reserve may come off a bit hawkish and send ETHE prices lower. Despite monetary headwinds, there are other macroeconomic factors that are favorable to Ethereum in the long run. As the jobs numbers show, real economic growth is robust and opportunity exists. Long term trends toward digital consumer products and content over physical alternatives bode well for blockchain generally. Challenges of implementing a government may be mitigated by the adoption of blockchain in government institutions, facilitating lower tax rates and improved resource allocation.

Technical Momentum

In the context of the bear market and all time highs, now is a great time to buy ETHE for the longer term. From late 2021 to the beginning of 2023, tracking the Ether bear market, ETHE prices were in a sustained downturn. The current price trend suggests that we are in a bull market, although recent price increases appear slightly parabolic, piercing up into the trend line in the chart below. I therefore believe we are overbought in the short term yet in the medium to longer term the trend suggests that this ETF will increase in price. I especially like that the bottom has been clearly validated by daily, weekly, and monthly gains, although it is not yet as pronounced as reduced volume would indicate. I am looking for volume to increase to historical levels and a long run trend to persist no sharper than the trend line below indicates. On a technical basis, I am targeting $30 per share in the next year.

Risks

Ethereum is a highly volatile asset; prices move on all sorts of news. You are gambling on the political sausage making process in owning crypto assets. Government officials have expressed concern and anger towards the emergence of the technology, with many early adopters being criminals.

While I believe that technology can and will be harnessed for the advancement of society, the perception and primary bias against crypto for these reasons may dampen its adoption. There is also competitive risk from other blockchains that provide the same service as Ethereum. Mitigating this risk is the legacy that Ethereum enjoys, as a lot of end users find legitimate purpose on the platform.

While I believe that some cryptocurrencies should not be thought of as just a currency, many investors and users envision Ether replacing the dollar, and with those people I disagree. Priced into Ether may be these expectations, in which case correction may occur. Finally, there is risk related to news surrounding the SEC's decision to give this OTC ETF its stamp of approval.

Conclusion

I recommend ETHE as an ETF that invests in Ether for several reasons. While it comes with a 2.5% management fee, it takes the work out of buying and safely storing Ether. Given the NAV discount, it is even better to buy this ETF than to buy the cryptocurrency itself. I am targeting 20% portfolio exposure in the near term and would not recommend going any higher. I am also not buying any other asset with meaningful cryptocurrency exposure.

The broader case for Ethereum remains strong and characterized by potential to revolutionize the global economy. Miners may replace bankers and others. Decentralized applications will consume gas to provide the next generation of goods and services in a digital economy. As an investor in ETHE, you are owning this commodity and speculating on an increase in its value for a discount. This piece reflects my honest market outlook on 12/5/2023 as I write and is subject to change, revision, or follow up to be published exclusively on Seeking Alpha .

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