The CFA exam is next week and I’m making my final push to prepare. That said, here are some quick thoughts on Ether Capital, where management finally did the right thing. The company will wind down active business operations after six years and convert into an Ethereum staking ETF.
The Fund would invest in and hold substantially all of its assets in long-term holdings of Ether in order to provide its shareholders with a secure, convenient, lower-cost alternative to a direct investment in Ether. Purpose Investments, as manager of the Fund, intends to establish a program to stake a material portion of the Fund’s Ether through one or more staking service providers. As a result of any staking activity in which the Fund would engage, the Fund would expect to receive staking rewards of Ether.
I started buying shares of Ether Capital back in August of 2020. My investment thesis was the severe discount to the market price of the company’s Ether closing imminently, with multiple ways for that to happen:
- a crypto bull market
- a purchase or distribution of the underlying assets
- conversion to an ETF
- the company would hit on a successful business plan and start trading on an earnings multiple.
The catalyst arrived later than I thought. After two failed attempts at building an Ethereum-based operating business and a lengthy strategic review, the board chose conversion. The announcement immediately closed most of the 36% discount between the market price of Ether Capital’s shares and the value of its net assets. The shareholder vote approving the conversion is just a formality.
The ETF structure should also enhance liquidity; as a microcap listed only on the NEO, Ether Capital usually traded by appointment. Purpose Investments also plans to stake the Fund’s Ether portfolio. With a management expense ratio below 2% replacing the G&A costs of running a public company, per unit value of the ETF will increase over time as staking rewards compound.
Corporate taxes payable and any remaining NAV discount are not material to my thesis. The ETF conversion shouldn’t trigger a taxable event for shareholders and I’m a believer in the underlying protocol and the potential for reflexivity in a crypto bull market. I’m holding my Ether Capital shares with the expectation my Ethereum price range of $8,000-$12,000 leads to an ETF price of at least $15 in the next 18 months. That’s an acceptable IRR considering my cost base of ~$2.75 for Ether Capital, even with the extended holding period.
