The Grayscale Ethereum Trust at Risk of Exacerbated DeclineETPs such as Grayscale's ETHE here utilizes APs (Authorized Participants) which are essentially broker dealers and large financial institutions such as banks, hedge funds and other investment firms to maintain liquidity of the Exchange Traded Product. These APs capitalize on the spread between the ETHE shares and the underlying product, in this case Ethereum, to make a yield through arbitrage.
Put simply, if demand for ETHE begins to rises above current supply, Authorized Participants can create new shares by depositing actual ETH with Grayscale. In return, Grayscale grants the AP newly minted ETHE shares. The AP then is able to list these shares on the secondary market where retail traders can buy them.
Historically these APs were able to mint new ETHE through this process of depositing ETH to Grayscale but they weren't able to redeem their ETHE shares back to ETH, however with the very recent onset of In-kind redemption and creation being permitted by the SEC , we are more likely to see a huge shift in the trend of redemptions.
Now that the SEC has enabled these in-kind redemptions, we could see these APs opt to redeem their ETHE shares for ETH just so they could sell said ETH on the open market or use it as liquidity for privately negotiated block trades on CME futures market during times of stress.
Say if there were sudden inflationary shocks, bond yields rose, or we had systemic banking risks, or even margin risk due to the underperformance of other sectors these institutions may have exposure to, we would likely see them let go of their riskiest assets first before resorting to selling other assets such as stocks and equities, especially those within the defensive categories. This would put Grayscales ETPs in direct danger of collapse as they lose liquidity from their APs and more importantly so it would put these underlying assets at risk of significant decline as the APs continue redeeming, adding supply to the open market, and selling.
This would not only result in negative pressure being put on the underlying assets but will also most likely result in Grayscales ETPs falling a significant amount more than the underlying due to the drainage off liquidity and the resulting widening of spreads. Asa result I think the end game for a lot of these crypto adjacent ETPs and Stocks will be that they go bust especially the leveraged products even including stocks like MSTR which effectively act as a leveraged exposure ETF to Bitcoin. In spite of this negative view I do have some optimism for XRP but overall I am quite bearish on the crypto market and all of the adjacent products being created from it.
In short: ETH along with BTC, which started out to as something to separate itself from the fiat banking system is now completely integrated and at the mercy of the fiat banking system along with all the macroeconomic risks that come with it.
Technical Outlook for the Grayscale Ethereum ETP:
We have a Bearish 5-0 that is completing at the 0.786 retrace we've recently made higher highs but that was likely on the onset of the SEC news release from a couple days ago being interpreted at a bullish capacity, however as the news settles I think it will be more of a negative outcome and us trading to the PCZ off that news provides a good opportunity to sell call spreads and buy puts on ETHE here.
