ETHE: Starting To Look Good With Discount To NAV And Improved Ethereum Tokenomics
In spite of the recent recovery of the crypto market, many people may be looking to buy shares of the Grayscale Ethereum Trust (ETHE) in order to get exposure to Ethereum. While ETHE is not the perfect investment vehicle for Ethereum, it can take you far enough if you are planning a long trip, the only type of trip I will consider, given the expected appreciation effects of the EIP 1559 and Ethereum 2.0 upgrades of the Ethereum network.
ETHE vs ETH
It is important to understand that investing in ETHE is not equivalent to investing in ETH, in the sense that as been a Trust Fund, ETHE does not have a redemption mechanism to prevent having some difference between Market Value and Net Asset Value (NAV). As ETHE has been trading at a discount to NAV for almost the entire year, this represents a buying opportunity for those who want exposure to Ethereum without directly holding it, similarly to investing in a Gold Trust Fund instead of carrying gold ingots yourself.
This difference between value and price is starting to disappear as more arbitrage traders take advantage of it. ETHE is starting to sync in correlation with ETH like a mirror, as it is evidenced in the next graph.
Ethereum Tokenomics
Tokenomics effects caused by the Ethereum network upgrades mentioned before (EIP 1559 and ETH 2.0), need to be analyzed in order to understand why I consider this asset a good long-term hold opportunity.
Under the recent implementation of EIP 1559 back in August, network fees are burned instead of being distributed to the miners. This algorithm reduces the available supply of Ether as more transactions happen in the network, creating a deflationary pressure that compete against the inflation rate of the network as new Ether are minted. This has the potential effect to move the supply curve to the left.
The historical data shows that since the launch of EIP 1559, the circulating supply of ETH is decelerating.
Ethereum 2.0 will be implemented in 2022, and with it comes staking rewards, a monetary incentive for investors willing to hold their Ether locked for a period so it can be used in the transaction validation process. This way, validators will be rewarded in proportion with the amount of Ether locked for staking and penalized if they try to attack it. Since more investors will be interested to buy and also lock their tokens (or, in other words, to take them out of circulation) this has the potential to move the demand curve to the right and also the supply curve to the left.
For the purpose of illustrating these effects, I drew a basic supply and demand model with arbitrary price and quantity points.
Utility as a Platform
Even with the best tokenomics in place, if the network does not have a utility that attracts further mass adoption and continued increase in transactions, it serves no good. Ethereum is the leader in many of the new innovations around blockchain. Many of the most popular dApps run through the Ethereum network and collect gas fees. This ecosystem is composed of many industry disruptions, such as:
- Smart Contracts.
- Decentralized Finance Applications (DeFi).
- Decentralized Exchanges (DEX).
- Non-fungible Tokens (NFTs) and Metaverse.
- Other Decentralized Apps (dApps)
Takeaway
ETHE trading at a discount represents a buying opportunity for those who want exposure to Ethereum without directly holding it. Ethereum upgrades (EIP1559 and ETH 2.0) foster appreciation due to lower supply and increased demand, higher scalability with the implementation of solutions that reduce network congestion, mass adoption due to lower gas fees, and utility due to the growing solutions running on the network.
THIS IS NOT INVESTMENT ADVICE
This article expresses my own opinion. Nothing contained in this article should be construed as investment advice.
