There are changes underway in the crypto world after U.S.regulators moderated their harsh rhetoric towards cryptos, but not all of them, including Ethereum Classic ( [ETC-USD](https://seekingalpha.com/symbol/ETC-USD)).These are held by the Grayscale Ethereum Classic Trust ( [ETCG](https://seekingalpha.com/symbol/ETCG)) and, the last time when I covered the trust in my November 2021 bullish [thesis](https://seekingalpha.com/article/4470095-grayscale-ethereum-trust-and-grayscale-ethereum-classic-trust-comparison), it was trading at around $26, but it is now trading at less than half that price at $12.85.One of the reasons for my forecast turning out wrong was December 2021 marked the start of the crypto bear market, implying that not only Ethereum Classic suffered but also Bitcoin ( [BTC-USD](https://seekingalpha.com/symbol/BTC-USD)) and Ethereum ( [ETH-USD](https://seekingalpha.com/symbol/ETH-USD)).Noteworthily, when looking to the right of the chart, ETC has surged recently compared to its two peers as depicted in orange, a price action that this thesis aims to explore further to determine whether it can translate into a sustained upside for ETCG.First, for the sake of clarity, this thesis primarily covers Ethereum Classic which is ETCG’s underlying asset and is different from either Ethereum (or Ether or ETH) which most of us are familiar with.Looking at the Price Action to Highlight the Risks Starting by making a more detailed comparison of the 5-day price action with Ether in the chart [below](https://seekingalpha.com/symbol/ETC-USD/charting?compare=ETC-USD,ETH-USD&interval=5D&metric=priceReturn), ETC has gained more than 40% with the upside starting around January 10, or the day the U.S.
SEC (Securities and Exchange Commission) [approved](https://seekingalpha.com/news/4054095-sec-at-long-last-approves-spot-bitcoin-etps) the launch of several BTC (Bitcoin) spot ETFs, after holding back for years.Noteworthily, this approval, in a way, removes some of the associated legal and regulatory issues of holding Bitcoins and paves the way for its wider adoption, especially for passive investors who are not ready to open crypto wallet accounts, and instead prefer the ETF wrapper.From this perspective, ETC’s outperformance of ETH by nearly four times could mean that it remains a viable option for investors and users looking for an alternative to Ether.
For this purpose, Ethereum classic is essentially the original Ethereum blockchain, which was [forked](https://help.coinbase.com/en/coinbase/getting-started/crypto-education/eth-hard-fork) (modified) to create Ethereum.It possesses some key features, like decentralization similar to Bitcoin, and, there is also the utility aspect namely because of its smart contract functionality just like Ethereum.
Therefore, ETC can be credited with boasting the best of both worlds and, on top, just like Bitcoin, its algorithm is based on proof-of-work (P-O-W) which is used for validating transactions on a blockchain.In these circumstances, ETC’s outperformance could be due to its decentralized nature and having more use than Ether.Looking forward, this in turn means more demand.However, looking at historical performance, another time when the same scenario occurred (ETC outperforming ETH considerably) was during Ethereum’s long-awaited [transition](https://ethereum-org-fork.netlify.app/en/roadmap/merge) to a new transaction confirmation algorithm, or from P-O-W to proof-of-stake (P-O-S).
This took place in September 2022 as part of an event called the Merge, all resulting in a surge in ETC’s price as illustrated by the chart [below.](https://seekingalpha.com/symbol/ETC-USD/charting?compare=ETC-USD,ETH-USD&interval=3Y&metric=priceReturn) By the way, this was largely due to miners or those producing crypto assets who were not ready to switch from mining (P-O-W) to staking (P-O-S) being forced to look for new coins.For many, ETC became the obvious [option](https://techcrunch.com/2022/09/15/miners-ethereum-classic-the-merge/).However, eventually, interest in ETC subsided rapidly.Therefore, based on previous trends, there are risks in investing in ETCG solely based on the current upside of its underlying assets, as, it is not sure that ETC’s uptrend will be sustained.Furthermore, despite this upside, ETC’s market cap amounts only to $3.9 billion, which is far less than Ethereum which has a market capitalization of over $300 billion and is the second most valuable digital coin after Bitcoin.Moreover, in addition to uncertainty about its underlying asset being able to outperform Ethereum, ETCG which has been designed to [track](https://www.grayscale.com/crypto-products/grayscale-ethereum-classic-trust) ETC’s market price could also suffer from competitive investment vehicles.ETCG and Potential Competitors In this respect, incepted in 2017 as shown below, the Grayscale trust was one of the first securities to provide Ethereum exposure, while avoiding investors the challenges of buying and storing the crypto directly.However, because ETCG invests in and derives value from the price of ETC, there is another factor that is currently playing to its disadvantage.
In this respect, after the developments around the approval of spot Bitcoin ETFs, investors may no longer sustain the same level of interest in the Grayscale trust namely because of the [2.5%](https://www.grayscale.com/crypto-products/grayscale-ethereum-classic-trust) management fees it charges because lower-cost ETF alternatives may emerge.For this matter, Grayscale got the go-ahead to transform its Grayscale Bitcoin Trust ( [OTC:GBTC](https://seekingalpha.com/symbol/GBTC?hasComeFromMpArticle=false&source=content_type%253Areact%257Csection%253Amain_content%257Cbutton%253Abody_link%257Cfirst_level_url%253Anews)) into an ETF that would charge [1.5%](https://www.theblock.co/post/271553/heres-how-the-slashed-fees-for-spot-bitcoin-etfs-compare-to-traditional-funds) compared to the initial 2.0%.Looking further, the iShares Bitcoin Trust ( [IBIT](https://seekingalpha.com/symbol/IBIT)) launched by BlackRock ( [BLK](https://seekingalpha.com/symbol/BLK)) charges only [0.12%](https://seekingalpha.com/symbol/IBIT?hasComeFromMpArticle=false) which means that in a market where new opportunities are starting to be unlocked, investors may be prepared to wait.Looking beyond Bitcoin, after Blackrock filed for the ” [iShares Ethereum Trust](https://www.investopedia.com/blackrock-may-be-considering-an-ether-etf-ether-price-jumps-8400047)” in November, the price of Ether spiked (briefly jumped) showing that there is interest in getting exposure through an ETF.
I further support this possibility of users adopting a wait-and-see approach through a comparison of the price action of ETC and ETCG which shows that the trust has significantly underperformed, by 30.93% (31.87.%-0.94%) during the last month as shown in the chart [below](https://seekingalpha.com/symbol/ETC-USD/charting?compare=ETC-USD,ETCG&interval=1M&metric=priceReturn), a period marked by the SEC approval.The opposite was the case when a one-year performance was considered when it was ETCG which [outperformed](https://seekingalpha.com/symbol/ETC-USD/charting?compare=ETC-USD,ETCG&interval=1Y&metric=priceReturn) ETC by 110.2% (131.53%-21.27%).This means that after Ethereum Classic’s price appreciation, investors seem not to be putting as much money in ETCG as before.Discussion and Identifying a Fair Price Moreover, the approval of an ETF, whether it is for ETH or ETC, is not likely to be obtained in the immediate future, as a key question about what exactly is a crypto asset has to be answered first.
This relates to whether the ETC is a security, which involves taking an ownership stake in an asset or a commodity, which is a basic good that can be exchanged.In this respect, one factor that facilitated the approval of a Bitcoin spot ETF emanates from the fact that it is classified as a ” [non-security commodity](https://www.cnbc.com/2024/01/11/ether-price-spikes-on-hope-of-eth-etf-but-will-the-sec-approve-it.html)” by the SEC which may not be the case for other cryptos (other than BTC).Thus, related spot ETF applications may be subject to additional scrutiny by regulators.Consequently, investors willing to be positioned on ETC may be left with few options, and after the initial euphoria instilled by the availability of spot ETFs, ETCG may gradually make up for its underperformance relative to its underlying assets.
On the other hand, the trust faces downside risks because historical performance shows volatility when the value of its underlying assets suffers as was the case after the Merge in September 2022.In these circumstances, I have a Hold position, and, for those willing to position themselves for the long term, the actual price of $12.85 may be on the high side.To make my point, I have plotted a chart of the ratio of the holdings per share as per [Grayscale](https://www.grayscale.com/crypto-products/grayscale-ethereum-classic-trust#section3876) (or the ETC price) to the ETF share price for different time stamps as shown in the table below.This shows that from a value of under 1, the ratio had climbed to 2.8 during the merge event back in September 2022 showing the peak in interest for the crypto asset relative to ETCG.
Subsequently, the ratio descended to less than 2 to 1.88 as of January 12.This means that you are no longer getting the same premium for each share of ETCG purchased.
Now, based on the ratio of 2.8, and the actual price of an ETC at $26.56, I obtain the $9.49 (26.56/2.8) per share for ETCG, which represents a fair price for the Grayscale trust in a context where volatility may gain the upper hand.ETCG is a Hold In conclusion, the price action shows that there is currently a lot of enthusiasm for Ethereum Classic which is ETCG’s underlying asset.
However, this enthusiasm has not been fully translated into gains for the Grayscale trust, possibly because investors are waiting for ETF-like investment vehicles.In this respect, a Bloomberg analyst thinks that there is a [70%](https://www.bsc.news/post/bloomberg-analyst-predicts-70-chance-of-spot-ethereum-etf-approval-by-may) chance of an Ethereum ETF being approved by May, and this could give a boost to ETC as well as other cryptos.However, given the risks involved in trading this asset class, it is better to be patient and wait for the SEC to request applicants for additional [clarifications](https://www.reuters.com/technology/us-bitcoin-etf-issuer-talks-with-sec-have-advanced-key-details-sources-2023-12-07/), as was the case for the Bitcoin approval process.In this case, you may miss some of the potential gains, but this is better than incurring losses in case ETC loses its appeal over Ether, as was the case after September 2022..
