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The cryptosphere
never stops with new developments and offerings appearing nearly every day.
While it’s difficult to miss it when a new blockchain launches to overwhelming
success, disrupting the market, other parts of it are easier to miss if you’re
not part of their main audience.
Grayscale Ethereum
is one of these – while it has been mentioned often during this year, many
crypto users or investors aren’t quite clear in what it is, or why it matters.
At first sight, in fact, it sounds like it could be an Ethereum fork, much like
Bitcoin Classic is to Bitcoin. But it isn’t, or is it really? What is Grayscale
Ethereum, then?
Grayscale Ethereum: Not a
cryptocurrency
Let’s get that out
of the way. Grayscale Ethereum isn’t a cryptocurrency, nor a special
Ethereum-based token. Instead, Grayscale Ethereum (and all Grayscale products
related to cryptocurrencies) is an Ethereum-based investment trust.
This trust works as
regular, fiat-based trusts work, and it was in fact made to get the attention
of traditional investors who might be on the fence about cryptocurrencies.
While many investors have an interest in crypto, they lack the grasp on the
concepts behind it or the market details they would need to successfully
invest. Cryptocurrency-backed trusts present them with the opportunity to reap
some of the investment rewards without needing to learn about and adapt to a
different market dynamic.
How does it work?
Since it’s not a
cryptocurrency, you can’t just hop into Binance and purchase three Grayscale
Ethereums to hold. Instead, what you purchase when you invest into Grayscale
Ethereum is a share in the trust.
It’s a very simple
concept: The Grayscale Ethereum trust is based on a large amount of Ethereum
tokens (over two million as of this writing) that’s being kept secured by
Grayscale. Instead of trading these tokens, investors buy and sell shares in
the trust. The value of these shares is naturally based on the value of the
Ethereum itself, plus an added value due to expected investment returns and
offer/demand market forces.
What does this mean? How can
it be worth more than the Ethereum it holds?
Trust funds are
usually worth more than their stated liquid value – that’s not unusual. The logic
behind these trusts is that the stated value is simply a backup. That is, the
amount of Ethereum in it represents an insurance of sorts – where the trust’s
investments to fail, there’s at least an amount of ETH tokens that guaranteeinvestors won’t lose everything.
When you purchase
shares on an investment trust, the money isn’t just kept by the trust manager.
Instead, that money you provide them is used in investments (the particulars
depends on the trust and manager,) that are expected to provide a ROI. This ROI
is divided among both parties (the trust manager an the investors,) in a
regular fashion. It’s the existence of this ROI that often makes trust
investments wise.
What’s special about an Ethereum trust? Why
not just get a regular, traditional trust investment?
There’s nothing
particularly special about an Ethereum trust, if you compare it to other
cryptocurrency trusts. However, if you compare it to traditional investment
trusts, there’s a large difference: Cryptocurrencies work both as fiduciary and
values.
This is important
here, because traditional funds are valued on either one or the other.
Cryptocurrencies, however, work as both – meaning the fund itself is already an
investment that will change value over time.
Since the funds
themselves will change value, fund shares will appreciate or depreciate on their
own based on this – if Ethereum rallies, shares will be worth more, and if its
price tanks they’ll do likewise. In the current environment, this is a plus
because Ethereum isn’t expected to crash anytime soon, and if it does it won’t
happen for long – meaning the fund will keep appreciating even if no
investments whatsoever were made.
And on top of that,
of course, is the investments Grayscale makes with the money from sales of
shares and fees. These investments are expected to return an ROI, giving the
fund shares an even higher value.
Are there any drawbacks to this?
There are naturally
several, as no investment is ever safe. As mentioned, Ethereum isn’t expected
to crash anytime soon – but the nature of the ETH token, unlike Bitcoin, is
inflationary, so huge rallies are also not expected.
There’s also the
issue of share prices: Shares almost always sell at a higher price than the
percentage of the fund they represent. This is generally due to market
expectations – if markets expect ETH value to go up, share values will be
higher. If a huge bull run is expected, share values will rally likewise, often
trading for values much higher than actual ETH is trading for.
But there’s also a
downside: If the market is expected to crash, share values can tank quite
quickly – and they can even start selling for less than they’re worth. Once
again, ETH isn’t expected to tank, but that doesn’t mean it can’t. Were ETH to
enter a massive bear market, trust investors are likely to lose more than
regular investors due to the nature of the trust and the added difficulty of
trading trust shares as opposed to exchanging crypto.
Should I invest in this?
There’s no clear
answer. Historically, some people have made huge amounts of money with
investment funds, even crypto-backed ones – the original Grayscale Bitcoin fund
returned huge returns for investors as Bitcoin rallied. Even checking out the
performance of the fund so far will show that some people have indeed made
money on the Ethereum fund, a lot of it even.
However, the crypto
market, in general, isn’t the same today as it was back in 2017. A permanent
rally for cryptocurrencies isn’t cast in stone and, while ETH is expected to
appreciate, the question when investing isn’t just whether you’ll make money,
but also whether you could make more money investing somewhere else.
Right now, Grayscale
isn’t a bad option or a bad investment, and it’s a great way for newcomers to
test the waters in crypto markets. Yet, as with all investments, this might not
be the best one around – but then again, you might never know until you try.
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