Summary The Grayscale Ethereum Trust ETF (ETHE) offers easy Ether exposure without a crypto wallet but has high volatility and a 2.5% management fee. ETHE closely tracks Ether prices but shows trendless, choppy market behavior, making it less attractive. Despite technical indicators suggesting a potential bottom, I believe Bitcoin offers better returns and diversification than ETHE. ETHE achieves its goal effectively, but given its high correlation to Bitcoin and equities, I prefer Bitcoin exposure. The resurgence of the cryptocurrency bull market has certainly generated a lot of interest from investors in recent months. That is obviously true of the OG Bitcoin, but it has extended to others as well, including Ethereum. The second-largest digital coin is now available in ETF form via the Grayscale Ethereum Trust ETF ( ETHE ), making it much easier for buyers to own Ethereum exposure without having to have a crypto wallet. While more access to crypto is generally good for the space, I’m not convinced Ethereum is the place to be at the moment. For that reason, I’m initiating ETHE with a Sell rating. What is ETHE? Before we get into why I’m not a fan of ETHE at the moment, let’s take a look at what the fund actually is first. ETHE is an ETF that’s managed by Grayscale, a firm with loads of crypto fund management expertise. ETHE is passively invested in Ether, meaning it simply buys Ether directly with investor funds and holds it. There are no derivatives, no hedging, no trading in and out, no leverage; it’s an Ether exposure play and that’s it. In that way, ETHE is a terrific way to own exposure to Ether. You should, in theory, get the same exposure to Ether prices through ETHE as you would opening a crypto wallet and buying it directly. It doesn’t exactly work out that way, but we’ll come on to that in a bit. Ether is a digital currency that is created and transmitted through the peer-to-peer Ethereum Network, and transactions are recorded on a public blockchain. Ether is a true digital currency in that respect. ETHE, which seeks exposure to this, does so by tracking the CoinDesk Ether Price Index, which is a US dollar-denominated reference spot price for Ether. All of that is a long way of saying ETHE very closely tracks the spot price of Ether on a 1-to-1 basis. ETHE charges an annual management fee of 2.5%, which is extremely high for an ETF. That part isn’t something I’m going to try and sugar coat, but I’d also suggest that something that moves around as much as ETHE charging 2.5% is borderline meaningless. Just last Friday the fund gained more than double that amount. It routinely moves 2.5% or more in a single trading day, and the fact is that cryptos are notoriously volatile. If you’re worried about a 2.5% management fee, crypto investing is not for you. Speaking of volatility , ETHE’s current annualized volatility is in excess of 80%, making it more than five times more volatile than owning equities through something like an S&P 500 index fund. This is a high-risk, high-reward situation so if that’s not what you’re after, ETHE is the wrong fund for you. On the other hand, if it’s trading opportunities that interest you, you’ll find plenty of those with something as volatile as ETHE. From a fund construction and execution perspective, ETHE is actually quite good. It sets out to do something simple, and offers investors an easy way to gain exposure to a digital currency without having to open a crypto wallet. Now, let’s take a look at the outlook for ETHE, and why I’m at a Sell rating. A trendless, choppy market That’s how I’d describe the chart of ETHE today, and for me, that’s not particularly attractive. StockCharts We’ve got highs around the mid-$30s and lows in the area of $20, roughly speaking. Within that range, we have a bunch of sideways and very choppy action. That doesn’t fit my style, so I’m not seeing a lot to like here. On the other hand, today we have the PPO turning higher and making a bullish histogram crossover, as well as the Chaikin Money Flow turning sharply higher from oversold areas. The two vertical dotted blue lines I placed on the chart highlight the last two times this happened with ETHE, and both were very near the eventual bottom for those cycles. Does that mean this is the bottom for ETHE? Absolutely not. It does mean the odds of a local bottom being near are higher, however, as today’s technical situation rhymes with two prior instances. My caveat is that the prior two instances followed sharp downtrends with swift selling pressure; this one has not. So, the question each investor must ask on ETHE is whether they want to own Ether here. I don’t based on this chart. But if you do, ETHE is a great way to do that. One thing we can do is also evaluate how well ETHE is actually tracking Ether prices. While we can assume it does a good job based upon its stated goal, we should always validate assumptions. StockCharts The 20-day rolling correlation to Ether has been basically perfect since July of last year when the fund restructured . Likewise, it’s performance relative to Ether itself has been in a very narrow range, meaning ETHE is doing a nice job of tracking Ether pricing. On the other hand, if you’re a crypto investor, I think you’re better off in Bitcoin than Ether/ETHE. StockCharts We can see ETHE’s correlation to Bitcoin is pretty high, but its return profile is much worse. So, these two assets tend to move in the same direction, but ETHE is simply a worse way to gain exposure to crypto based upon this chart. We can see in this panel that ETHE’s correlation to the S&P 500 is also fairly high. StockCharts Given cryptos are generally considered risk-on assets, that makes sense. However, my point here is that with ETHE, you’re getting what is essentially a worse version of Bitcoin (per the return chart we just looked at) and you’re not even really getting diversification away from equities. What does that leave for ETHE then? Not much. As I said above, ETHE does a really nice job of what it sets out to do. I just don’t want exposure to Ether, so I’m slapping a sell on ETHE. I think you’re better off in the crypto space just sticking to Bitcoin.
