Introduction
In a recent interview with Ram Ahluwalia, the CEO of Lumida Wealth, he expressed his theory on the potential recovery of ETH prices and why it could outperform Bitcoin. Ahluwalia pointed to the closing discount of the ETHE chart and the shift from ETHE to ETH spot as key factors in this prediction.
ETH Discount Closing
Analyzing the ETHE chart, Ahluwalia noted a consistent reduction in the discount over the past few months, with a 4% gain observed on December 22. According to his analysis, this suggests that institutional investors, previously opting for the regulated ETHE product by Grayscale, are now choosing to buy ETH directly in the spot market.
The “Cheapest-to-Deliver” Contract Theory
Ahluwalia attributes this shift to the “cheapest-to-deliver” contract theory. In the derivatives market, ETHE serves as a futures contract tracking the price of ETH through a regulated exchange, specifically CME. Institutional investors find ETHE to be the most cost-effective method of gaining exposure to ETH.
Capturing Staking Yield
As the ETHE discount closes, Ahluwalia predicts that marginal flows will move towards the ETH spot market to capture the staking yield. Institutions are unlikely to allocate more funds to ETHE due to diminishing gains. Ethereum’s proof-of-stake model allows users to stake ETH and earn a yield of around 4.3% as compensation for securing the network.
Influence of Staked Amount and Yield
At present, over 28.6 million ETH is staked, with a reward rate of 4.32%, as reported by Staking Rewards on December 22. The reward rate is correlated with the amount of ETH staked, meaning that as more users choose to stake their ETH, the yield decreases.
Potential Price Increase
As the ETHE discounts narrow, institutions and significant players may shift their funds from ETHE to ETH in the spot market. This movement has the potential to drive up ETH prices. However, for a significant upward trend, ETH needs to surpass a comprehensive close above $2,400 first, potentially reaching $2,500 and even surpassing it in a continuation of the upward trend.