Automatically tracking the Grayscale Trust Premium with Python3 and Twitter’s API.
Grayscale Investments has caused a ruckus lately due to the extreme premium of the Grayscale Investments’ Ethereum Trust (ETHE) over the underlying asset Ethereum (ETH). A premium is the difference between the price paid for a security traded (ETHE), and face value of the underlying asset (ETH). In this case, it costs 800% more to hold the equivalent of 1 ETH from purchasing ETHE. For the Grayscale Ethereum trust, 1 ETHE is worth 0.09485996 ETH. Many speculate, the cause of the premium hike is due to retail and institutional demand for Ethereum. Other Grayscale products such as GBTC, Grayscale Bitcoin Trust, are also seeing a significant premium compared to the underlying asset. As of today, GBTC trades at a near 20% premium over Bitcoin.
To better understand and track the premium in real time, I created a twitter based tool, titled Grayscale Trust Bot (@grayscaletrust). Please keep in mind, I am not a financial advisor and this is for educational purposes only. To fully understand the use case of the bot, let’s answer the following questions:
- What is Grayscale Investments ?
- Why is there a premium on Grayscale Assets?
- Why is there demand for Ethereum?
- How does the Twitter Bot work?
- What does this mean for me ?
1. What is Grayscale Investments?
To better grasp the importance of the bot, one needs to understand Grayscale Investments. which is an investment company that specializes in cryptocurrency funds. Investors can purchase Bitcoin (GBTC), Ethereum (ETHE), and other digital asset trusts to suit their cryptocurrency risk appetite. Grayscale has demand because funds can be purchased through traditional brokerages, similar to purchasing a stock.
2. Why is there a premium on Grayscale Assets?
In the last few weeks, Grayscale has seen significant demand and made headlines for buying more Bitcoin than was mined. The investment company currently has over 4 billion dollars in assets under management. Grayscale has an early competitive advantage for driving institutional digital asset adoption. Accredited investors are contributing “in kind” assets directly to Grayscale and selling them back on the secondary market. Messari, a digital asset analytics platform reports, “Grayscale relies on a ‘Rule 144 exemption’ that allows Grayscale and its investors to resell investment trust shares to the public after an initial restricted ‘Reg D’ accredited-only offering and a 12 month holding period (now 6-month for GBTC)”. The Grayscale premium hike is due to little selling on the secondary market while maintaining high demand. Since the trust shares are traded OTC, the 6–12 month lockup period aids with liquidity.
“06/16/20 UPDATE: Net Assets Under Management, Holdings per Share, and Market Price per Share for our Investment Products.
Total AUM: $4.0 billion
$BTC $BCH $ETH $ETC $ZEN $LTC $XLM $XRP $ZEC”
3. Why is there demand for Ethereum?
Ethereum “ETH” is a public blockchain based platform for creating smart contracts (executable code ex. Applications, protocols). Smart contracts facilitate agreements and can automatically execute the terms and payout. For example, your boss says they will pay you $100 if you submit all the completed company tax forms. Your boss could theoretically program an Ethereum smart contract to pay you automatically when all of the forms are submitted. The contract is saved digitally and executes on its own. Smart contracts can become even more complex by building out applications or protocols that govern themselves.
Advancements within Decentralized Finance (DeFi) on the Ethereum blockchain has given the digital asset immense activity and exposure. Many speculators are purchasing ETH due to “Fat Protocol” theory. In short, Fat Protocol theory explains how value is stored in the protocol rather than the application layer. This is possible through governance tokens like ETH, while protocols like TCP/IP (protocol for the internet) hold little to no value.
Another speculative event is Ethereum 2.0 which refers to the major new updates coming to the Ethereum blockchain. The biggest change is the move from proof-of-work (mining) to proof-of-stake (staking) consensus mechanism. In short, the platform will remove the need for miners, and use staking to validate new blocks. Any users staking their Ethereum on the network can expect a return from 4%- 10% through staking pools. To run your own validator the network only requires a minimum of 32 ETH roughly $7,500 from time of writing (ETH: $235).
4. How does the Twitter Bot work?
The Grayscale Trust Bot was created with the intention of providing simplistic transparency of the Bitcoin and Ethereum Grayscale Trust. Besides tracking premium, the Bot aggregates the prices of the Trusts shares and underlying assets. The automated posting is done using Python, Coinmarketcap, Yahoo Finance, and Twitter’s API. Remember, 1 ETHE is worth 0.09485996 ETH. In the last few weeks, it would cost over $2,500 to hold the equivalent of 1 ETH with ETHE. The calculated premium is then populated daily within the app using the equation and script listed
I made an expression to calculate the premium, seen below. With a little debugging help from a friend, the calculations were made possible through python script.
ETH per ETHE share: 0.09485996
e_x = eth_price * 0.09485996
ethe_trust_premium = (1 — (ethe_price/e_x)) * 100
= 786.23% Premium
5. What does this mean for me ?
With all of this said, it is important for speculators to understand why the premium is so high. Especially if investors would rather gain exposure through a Grayscale product than the underlying asset. Many speculators have added $ETHE and $GBTC to their Roth IRA accounts to capture the gains with favorable taxation. I am not a financial or tax advisor so please consult an expert on this. Others might add Grayscale products to hedge their portfolios without being digital asset custodians. Either way, potential clients should make sure they understand what they are paying for.
In conclusion, Grayscale is an amazing product giving exposure to retail and institutional investors, by making digital asset ownership easier. Though, it is important for speculators to understand Grayscale Investments’ products such as the Grayscale Investments Ethereum Trust (ETHE) are trading at high premiums. Following the Grayscale Trust bot on twitter is a great way to monitor the speculative health of the top Grayscale Trusts.
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