Can Grayscale's Ethereum Mini Trust Prevent a GBTC Redemptions Rerun?

By André Beganski

A question looming over Tuesday’s launch of spot Ethereum ETFs is whether any outflows from a flagship fund at Grayscale could dull investors’ initial excitement.

When spot Bitcoin ETFs launched in January, the Grayscale Bitcoin Trust (GBTC) shed more than $2 billion in its first five trading days, as investors took profits or flocked to funds from financial giants like Fidelity and BlackRock. Initially, Bitcoin’s price fell amid a Wall Street debut, somewhat stifling the buzz around their long-awaited launch.

Boasting over $9 billion in assets under management, the management fee for the Grayscale Ethereum Trust (ETHE) has remained steady at 2.5%. Meanwhile, competitors have positioned their products as cheaper alternatives with post-waiver fees ranging between 0.19% and 0.25%.

With its parallel launch of the Grayscale Ethereum Mini Trust (ETH), however, the asset manager has come prepared. In the lead-up to Tuesday’s launch, the spinoff fund’s management fee was slashed to 0.15%—an industry-wide low among the firms jockeying for inflows.

“The purpose of that exercise with the Mini Trust is to keep funds within Grayscale funds,” Andrew O’Neill, Managing Director for Digital Assets at S&P Global Ratings, told Decrypt. He described it as a “lower-cost option” for investors.

Greg Cipolaro, Global Head of Research at NYDIG, described Garyscale’s Mini Trust as a “strategic move” in a recent research note, arguing that “Grayscale is now positioned to compete for inflows” after a similar, low-cost alternative was lacking for GBTC in January. 

Grayscale plans to launch a mini-sized alternative for GBTC too, which will have an industry-low management fee of 0.15% too. The product is set to launch next week on July 31, according to Bloomberg ETF Analyst James Seyffart.

Billions in cash could eventually be directed at Ethereum long-term as a result of spot ETFs, but William Cai, Head of Indices at the research firm Kaiko, told Decrypt that initial outflows from ETHE should be expected as “arbitrageurs [...] redeem and close their trades.”

For years, ETHE’s shares traded at a discount relative to the amount of Ethereum the product holds because of its structure as a closed-end fund. Given the instant disappearance of that discount in May as spot ETFs were approved, Cai said, “There very likely will be fund outflows.”

Grayscale seeded its Mini Trust with $1 billion worth of Ethereum from its legacy product, representing 10% of ETHE’s underlying assets. At the same time, ETHE’s investors gained a corresponding amount of shares in the Mini Trust, which were distributed in a way that “is not expected to be a taxable event,” according to a press release from the asset manager.

Still, the prospect of taxes levied on would-be sellers of ETHE could be a key factor. A company executive from an asset manager, who declined to be named while speaking about a competitor, told Decrypt that a steep tax bill could prevent existing ETHE investors from exiting.

“Unless you have a massive capital gain and want to avoid paying taxes, you’re going to rotate to a lower-fee product,” they said. “The question is whether they will rotate to [Grayscale’s Mini Trust] or a competitor’s fund. I imagine you’ll see both.”

While an initial glimpse at the performance of spot Ethereum ETFs won’t be posted until U.S. markets close, Ethereum’s price fell as Tuesday trading progressed. As of this writing, Ethereum’s price had fallen 0.5% over the past day to $3,450, though Bitcoin's price has fallen more than 2% by comparison.

While any outflows could weigh on investors’ hopes within the coming days, Grayscale’s Head of Research Zach Pandl told Decrypt that the bigger picture is similarly important.

“Grayscale Research expects that spot Ethereum ETPs will see significant net inflows over the coming months,” he said, adding that in light of Tuesday’s launches, “investors may be under-appreciating the importance of this milestone.”

Edited by Andrew Hayward

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