Human history has a dark legacy from its creative and elaborate torture devices. With chilling and haunting names like the Scavenger's daughter, the pillory, knee splitter, head crusher, and the Spanish boot, physical devices have long been an instrument for tormenting individuals.

In our modern world, we suffer from mental micro-tortures. These micro-tortures quietly degrade our quality of life. Some personal examples of mental micro-tortures are Postmates commercials, automobile traffic, micromanagement, cubicles, and 91% of Netflix's original content. We have to accept and learn to live with these micro-tortures.

However, sometimes, we put ourselves in a position for punishment. I did this last year when I purchased Grayscale's Bitcoin Trust, GBTC. I bought shares in my IRA because I don't have an easy low-fee way to diversify into Bitcoin in my retirement account.

Unfortunately, the GBTC has underperformed Bitcoin, and the narrative for holding the shares keeps worsening. I may be suffering from the sunk cost trap regarding my GBTC investment. If you need to get more familiar with the sunk cost trap, here's an excellent description from Investopedia.

Investors fall into the sunk cost trap when they base their decisions on past behaviors and a desire to not lose the time or money they have already invested, instead of cutting their losses and making the decision that would give them the best outcome going forward. Many investors are reluctant to admit, even to themselves, that they have made a bad investment. Changing strategies is viewed, perhaps only subconsciously, as admitting failure. As a result, many investors tend to remain committed or even invest additional capital into a bad investment to make their initial decision seem worthwhile.

While I (perhaps foolishly) remain committed to holding my GBTC position, I am not adding more. Today, another one of Grayscale's Trusts, the Grayscale Ethereum Trust (ETHE), is trading at a 59% discount from its net asset value (NAV).

Bold investors can take advantage of this discount and own a share of the trust for around $510 per Ethereum (ETH) compared to the ETH trading price of $1,210. But, unfortunately, I am not that bold. And in this post, I will give you a few reasons why I'm not running to acquire ETHE with its massive discount.

What are Grayscale Trusts?

Before going into the red flags preventing me from investing in the Grayscale Ethereum Trust, let's first go over what Grayscale Trusts are.

On its website, Grayscale describes the trust as follows: "Grayscale® Ethereum Trust is solely and passively invested in ETH, enabling investors to gain exposure to ETH in the form of a security while avoiding the challenges of buying, storing, and safekeeping ETH, directly."

Effectively, the trust allows investors to own a piece of the trust holding approximately 3 million ETH tokens. The benefits are that investors don't need to be fluent in purchasing crypto assets, don't need to handle custody, and can buy shares in the trust in a retirement account. If someone has a stock trading account, they can quickly gain exposure the Ethereum by purchasing ETHE stock.

Owning shares of the trust does not allow the shareholder to redeem their portion of the trust's Ethereum. The Ethereum within the trust is strictly held and managed by the trust. Grayscale manages the trust exclusively and charges a 2.5% annual fee, paid by the trust's Ethereum. For example, if the trust owns 3,000,000 ETH, Grayscale earns 75,000 ETH yearly.

Many investors would read the fee documentation and mistakenly think they are paying a 2.5% annual fee. However, due to ETHE's discount against its NAV, the fees are closer to 6% based on ETH trading at $1200. I will explain this in more detail in the next section.

How the ETHE discount works

According to their website, the Grayscale Ethereum Trust owns $3.6 billion worth of Ethereum at the time of writing. Ownership is split amongst slightly over 310 million stock shares (ETHE).

As mentioned earlier, the ETH in the trust is trapped in the trust. Investors can only buy and sell shares representing their ownership share in the trust. Today, ETHE is trading at $4.76. The market cap of the trust is approximately $1.475 billion (310,000,000 * 4.76). The ETHE market cap is $1.475 billion, and the value of Ethereum held by the trust is $3.6 billion.

If we divide the $1.475 billion by the $3.6 billion, we derive a discount of approximately 59%. Going back to management fees, if Grayscale gets 75,000 ETH from the trust and sells the ETH on the open market, it would result in about $91 million. If we divide the $91 million by the ETHE market cap, $1.475 billion, we get 6.1% which is how much investors pay Grayscale annually.

Why I won't be buying ETHE

Let's first get the obvious out of the way. After buying GBTC at a significantly higher price (and a lower discount to NAV), I suffer from being once bitten, twice shy.

But, three main logistical factors prevent me from risking capital at an enticing 59% discount to NAV.

Factor #1: Nobody trusts Grayscale

Grayscale is a division of the Digital Currency Group (DCG). Less than two months ago, Digital Currency Group froze withdrawals from another DCG division, Genesis Capital.

You may have read or heard in the news about the hundreds of thousands of Gemini Earn clients who can't access their funds. It's estimated that over $1 billion in crypto is being withheld by Genesis Capital.

Barry Silbert is the founder and CEO of Digital Currency Group. Unfortunately, he is receiving a lot of negative press that he most likely deserves. He needs to address more investors' issues, questions, and concerns.

Factor #2: Investors' issues, questions, and concerns

Following the abrupt downfall of FTX, Grayscale's investors want to be assured that the Grayscale Trusts are holding the assets they claim they own. Unfortunately, Grayscale isn't providing precise data and is using the excuse that "security concerns" prevent them from showing proof of reserves.

This leads to more questions. Does Grayscale genuinely own and have custody of the crypto they claim to possess? Is it possible Grayscale used some of the trust's crypto as collateral for loans? Are they not showing proof of reserves because they have something to hide?

In today's mistrusting (for a good reason) market, failing to address your shareholders' issues, questions, and concerns is inexcusable and supports the logic for the Grayscale discount widening.

Factor #3: Crypto allows me to take custody of my assets, so that is what I plan on doing moving forward

Celsius, Voyager, FTX, Gemini Earn, Vauld, Hodlnaut, and other centralized exchanges, lenders, and platforms have locked customers out of their crypto. And now, Grayscale trusts are trading at significant discounts on their net asset values.

What benefit do I have for trusting a third party to manage my crypto? On page 79 of their terms, Grayscale even spells out the conflict of interest in their instruments. Why would I risk more capital in an incestuous entity like Digital Capital Group?

Key Takeaways

I must accept that the government won't allow me to take custody of my crypto in my retirement account. But unfortunately, these measures have negatively impacted investors in the Grayscale Trusts who have invested in the trusts as part of their retirement accounts.

Regarding my GBTC holdings, I hope for the best and expect the worst. This isn't an excellent investing strategy, but it's the stand I've decided to take.

However, I won't get caught up in the "discount" knowingly investing in a questionable company that investors don't trust. Further, Grayscale could be impacted by DCG's predicament and issues with Genesis Capital.

I can't afford another mental micro-torture resulting from counterparty risk. If these bankruptcies, deceptions, and frauds have taught us anything, crypto isn't the problem, but the criminals allowed to run these corporations are.

What do you think? Is this just another episode of "who is crypto screwing next?" or should publicly traded centralized corporations be required to show proof of reserves? Do you have trust in DCG, Grayscale, or Genesis Capital? Have you already sold your GBTC or ETHE and are glad the widening discount isn't torturing you? Share your thoughts in the responses.