Grayscale’s investment strategy seems to be behind the latest Ethereum price increase as institutional investors borrowed the asset to profit of the ETH Trust. Now they have to pay it back as ETH climbs higher as we can see more today in our latest Ethereum news.
ETH shares of Grayscale’s Ethereum Trust are dropping in price as institutional investors decided to exit the mandatory lockup period and to sell their shares. Most ETHE shares were bought at a discount to market prices by sending borrowed ETH go Grayscale which now the investors have to pay back by purchasing ETH. Institutions are left to ponder their move now as ETH prices climb even as ETHE prices fall.
The institutional investors in the Grayscale Ethereum Trust are set to cash out in one trader set up months ago and the scramble to cover the ETH used to do it could push the prices higher. The investors are looking to close out a trade that is built to profit off the premium value of ETHE shares that are needed to purchase more ETH in order to do it, according to the theory floated by the TIE CEO Joshua Frank.
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
This could mean that higher ETH prices this week could be expected with the ETHE shares falling as the institutional investors consider their next move in the crypto space. According to Frank and to make the trade and institutional investors borrow ETH at an annual interest rate of around 8% and they will use these assets to purchase ETHE shares at the value of crypto on that day but they will be subject to a waiting period before they actually receive the shares. Frank continued:
“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. You then have a 6 month lockup period, and then after those 6 months you are issued shares in the product, ETHE.”
Grayscale’s investment strategy means that the ETHE shares trade at a value bigger than the underlying digital asset which is sometimes a premium of 100%. When the institutional investors get their shares, they can sell them on the market and capture profitable differences between what they paid for the borrowed ETH and the current 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.”
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