Wall Street's 1,150% Ether Premium, DeFi on Bitcoin

Happy Friday defiers! This was the first full week of this newsletter and I’m so happy with the response. Please let me know what you think responding to this email or sending me a DM @CamiRusso. Today I cover:

  • The launch of the Grayscale Ethereum Trust

  • Some developers want Bitcoin to get in on DeFi action


Ethereum Investment Trust Debuts With Wild Premium

The market price for shares in Grayscale’s Bitcoin Investment Trust is usually higher than its actual net asset value, and people (like I did at Bloomberg :)) will explain that by saying GBTC is one of the few regulated vehicles for institutional investors to get their hands on bitcoin without all the complications of actually owning it, so they’re willing to pay a premium.

I’ll buy that for a 30 percent, 50 percent, even for a 100 percent premium at the top of the 2017 bubble. But when the Ethereum version of the fund started trading over-the-counter yesterday, there was a 1,150 percent premium to its net asset value.

Ether holdings per share in the fund were worth $25.88, while market price per share was $300 –I find it hard to believe that can be explained away with “institutional investor demand.” As a reference, GBTC bitcoin holdings per share are trading at $9.13, while market price per share is at $12.54. That’s more reasonable. And by the way, that gap is starting to widen again, another sign we have left the bear market.

Ether has been doing well lately but there’s no wild market hype that could cause that gap. The Ethereum fund, ticket symbol ETHE, has 42 shareholders, compared with GBTC’s 97, according to OTCMarkets, and assets under management of $7.5 million, compared with GBTC’s $1.9 billion, so maybe we can chalk it up to lack of liquidity.

Somebody wanted to desperately buy ETHE shares, there weren’t many sellers and that’s the only price they were able to get. Maybe they messed up and thought they had to pay the real ether price (just under $280 yesterday)? It wasn’t an avalanche of buyers coming in and driving up the price. Only 824 shares were traded, compared with GBTC’s 5.8 million.

Presumably, prices will be smoothed out as more liquidity comes in, and ETHE will be a way to gauge institutional appetite for ether, just like GBTC is for bitcoin, at least until the SEC approves bitcoin and ether exchange traded funds. ETFs can track the price of the underlying asset more closely, they’re usually more liquid because retail investors can buy them, and they have lower management fees, so if they ever get approved it might dampen demand for Grayscale’s products.

The SEC has said crypto market isn’t mature enough for an ETF. That may be true, but the result is that investors it wants to protect end up paying these crazy premiums (and that’s not counting the 2 to 2.5 percent management fees).

Some Developers Want Bitcoin To Do DeFi

Developers are proposing to build an accounting layer on top of Bitcoin that will be able to support decentralized finance applications .

While the the team behind the DEBNK project shares the vision for an open financial system being built mostly on Ethereum, they disagree with the use of tokens and say that the underlying asset, ether, doesn’t have the store-of-value properties of Bitcoin. They argue that payment channels and side chains remove the need for a Turing-complete computer and smart contracts, according to the white paper.

They propose that the building block for Bitcoin’s accounting layer should be a contract for difference settled in bitcoin. (Fun fact, Vitalik Buterin was thinking about how to build contracts for difference on Mastercoin right before inventing Ethereum).

Separately, there’s another project that’s seeking to issue tokens, similar to Ethereum’s ERC20, on top of Bitcoin.

It will be interesting to see how these efforts evolve. So far (and without getting into the which chain is more or less decentralized and censorship resistant argument) each blockchain is moving towards dominating a couple of use cases. Looking at the most used platforms, Ethereum dapps are mostly focused on finance, games and collectibles, EOS dapps are focused on finance and gambling, and TRON’s are primarily gambling.

Maybe some of these projects succeed in spurring more Bitcoin-based dapps and they’ll find a niche too. But more likely, Bitcoin already found a great use case: The “digital gold” throne throne it has occupied, its reign undisputed, since it went live. A store of value, an investment, and a way to transfer that value peer to peer. The very first DeFi app.