While the Securities and Exchange Commission still has not signed off on any bitcoin-related exchange-traded funds, the Financial Industry Regulatory Authority Inc. has recently approved the Grayscale Ethereum Trust (ETHE) for public quotation on the over-the-counter market.

ETHE is an open-ended trust that holds the digital currency ethereum and derives its value solely from the value of ethereum. The trust is sponsored by Grayscale Investments LLC, a New York City-based digital currency asset management firm with roughly $1.9 billion in assets under management across a suite of 10 investment products. Nine of the 10 products provide passive exposure to a single digital currency. The other product, the Grayscale Digital Large Cap Fund, holds the top digital currencies on a market cap-weighted basis.

Grayscale has two single-currency products currently trading on the OTC market: the Grayscale Bitcoin Trust (GBTC) and Grayscale Ethereum Classic Trust (ETCG). Like with those two funds, the Grayscale Ethereum Trust initially launched as a private placement for accredited investors who can subscribe to it in dollars in exchange for shares at a daily net asset value. Under Rule 144, investors can resell those shares on the OTCQX market after a one-year lockup period. Those liquid shares can be purchased by non-accredited investors on a daily basis.

Shares of the ETHE trust won’t be available to retail investors until it is deemed eligible for trading by the Depository Trust Company, which processes transactions for the global financial services industry.

“One of the last steps before trading is to ensure that ETHE shares will trade and settle properly under the DTC system,” says Michael Sonnenshein, managing director at Grayscale Investments.

That approval is expected soon.

The Grayscale Ethereum Trust, not to be confused with the Grayscale Ethereum Classic Trust (more on that in a moment) initially launched in December 2017 and currently has nearly $12 million in assets under management, Sonnenshein says.

The Grayscale Ethereum Classic Trust and Grayscale Bitcoin Trust respectively are up more than 275 percent and 169 percent this year, according to Morningstar.

Morningstar includes these two products in its ETF category, but the Grayscale trusts aren’t exchange-traded products because they trade on the OTCQX market, which Sonnenshein says is the highest tier of the OTC marketplace where many American depositary receipts of foreign companies are quoted in the U.S. “[The OTC markets] are not considered exchanges the way the NYSE and Nasdaq are,” he says.

Plus, the Grayscale trust products don’t employ the share creation and redemption mechanism that helps keep an ETF’s market price close to its underlying value. New shares are created only through the private placement, and the lack of a redemption mechanism means there’s no reduction of shares and the number of shares increase over time.

Client demand and market forces dictate the price of the publicly traded shares, and right now both products trade on the OTCQX (where retail investors buy them) at hefty premiums to their net asset value (what accredited investors pay via the private placement). 

Fork In The Road

Prices for digital currencies plunged after the bitcoin-fueled cryptocurrency bubble burst in late 2017. While the Grayscale Ethereum Classic Trust and Grayscale Bitcoin Trust have rebounded strongly this year, they’re both way off of their all-time highs.

The Grayscale Bitcoin Trust has $1.2 billion in assets and charges an expense ratio of 2 percent. The Grayscale Ethereum Classic Trust has $34.3 million in assets and a 3 percent expense ratio. The Grayscale Ethereum Trust set to begin trading soon has an expense ratio of 2.5 percent.

The reason for the two ethereums stems from a hacker (or hackers) who stole roughly $55 million from the ethereum blockchain in 2016. In an effort to thwart the attack and prevent the loss of people’s digital money, several key decision makers advocated changing the ethereum blockchain in order to fix the programming glitch that enabled the breach to happen.

The majority of the ethereum community was on board with the software update, and the fix was made. This is called a hard fork.

But the original ethereum (where the theft occurred) kept growing because some people continued to make transactions on that version of the blockchain. This original version became known as ethereum classic. The newer version created by the hard fork is called ethereum.

“From a technological standpoint the two are nearly identical, but they have different sets of developers working on their underlying protocols,” Sonnenshein explains. “And each has instituted different economic and governing principles that dictate things like the overall supply and how new tokens enter circulation.”

And they differ from a markets perspective. Ethereum is the second-largest digital currency with a market cap of $28.8 billion, while ethereum classic is 18th at $908.8 million, according to ShapeShift, a digital currency website and platform.

In late-Tuesday trading, the market price for ethereum was $272 versus $8.22 for ethereum classic.