Summary Bitcoin and Ethereum have performed well in 2023 as the dollar weakens and uncertainty grows in the U.S. banking system. I see upside potential to crypto, and ETHE is one way to play momentum in the space. While it carries a high fee and a concerning discount to its holding value per share, the upside prospects outweigh the negatives. Crypto prices have enjoyed a stellar 2023 after a tough 2022. Year-to-date, Bitcoin (BTC-USD) is up 77% while Ethereum (ETH-USD) is higher by 60%. Investors have been flocking back to digital currencies amid global central bank uncertainty and turmoil at times in the banking world. With a falling US dollar in the last year, that has been another boon to crypto. Consider that more global investors and consumers, particularly younger people, are increasingly adopting crypto as a preferred unit of exchange. In America, we don't see it quite as much, but jump overseas or visit South America, and you'll realize that de-dollarization is becoming more popular. More People Are Adopting Crypto Worldwide GWI Research I have a bullish outlook on Ethereum, but I am cautious on the Grayscale Ethereum Trust (ETHE) due to its high fee and growing discount to its holdings value per share. Overall, my buy rating is premised on strong near-term momentum and global policy uncertainty with traditional currencies. Strong Crypto Momentum In 2023 StockCharts.com According to the issuer , ETHE's investment objective is for the value of its Shares (based on ETH per share) to reflect the value of Ethereum held by the Trust, less fees and expenses. To date, ETHE has not met its investment objective and the Shares quoted on OTCQX have not reflected the value of Ethereum held by ETHE, less ETHE's expenses and other liabilities, but have instead traded at a premium or discount to such value, which at times has been substantial. The Trust's ETH is stored in offline or "cold" storage with Coinbase Custody Trust Company, a fiduciary under §100 of the New York Banking Law and a qualified custodian for purposes of Rule 206(4)-2(d)(6) under the Investment Advisers Act of 1940. You can learn more about ETHE specifics here . Total assets under management of the fund are $5.5 billion as of the end of March while the market cap of the fund is $2.8 billion. Owning ETHE means paying a high 2.5% annual sponsor's fee, similar to a mutual fund or ETF's expense ratio. There may be additional expenses payable by the trust, per Grayscale. As of the end of the first quarter, one share of ETHE represents 0.00973361 ETH. ETHE's market price is $9.04 as of the close on May 3, a steep discount to the $18.15 holdings value per share (like a fund's net asset value). ETHE's Market Price/Share Is At A >50% Discount To Holdings/Share 50% Discount to Holdings/Share" contenteditable="true"> Grayscale Historically, the fund has traded at an increasingly large discount to the holdings/share value. In the quarters after ETHE's inception, the trust traded at a premium to the hypothetical fair value. While many analysts consider the discount to be an upside factor in their theses, I am cautious about how that spread will evolve. With ongoing banking risks and custody concerns in the crypto space, I would not place big bets on the market price reverting to the holdings value any time soon, however, the discount would revert should the trust convert to an ETF. Regulators continue to be hesitant to approve such spot crypto ETFs, though. A Growing Discount Grayscale Seasonally, while May has historically featured the second-biggest average monthly climb, the summer months can feature volatility. June and September are, on average, rough months while only July boasts a better than 50/50 historical trend of higher prices when assessing the June through September timeframe. So, the seasonal tailwinds could be abating. ETH-USD Seasonality: Strong May, Tougher Summer StockCharts.com The Technical Take Homing in on the chart of ETHE, notice in the view below that there are bullish factors. First, the trust broke out from a protracted downtrend resistance line earlier this year. At the same time, ETHE was establishing a bullish rounded bottom pattern. But there's still work to do: In my technical opinion, the share price needs to break above the $12 level to confirm the bullish reversal. If it does, I see an upside price target to near $17. There is also an old gap just shy of $20 that lingers. Another bullish catalyst is the 200-day moving average that has just recently turned positive in its slope. So, while I am cautious on the fundamentals of ETHE as an investment product, the chart is bullish. I see support near $8 and near $6.85 (the early 2020 range lows). ETHE: Bearish To Bullish Reversal And Trend Break, Watching $12 StockCharts.com The Bottom Line While there are mixed factors, I am net bullish on ETHE here. I'd rather simply own Ethereum itself, but I see more bullish potential than bearish risks right now.
