Are Investors Rational?

By Charlie Bilello

17 Jun 2020


Would you pay someone $205 for an asset worth only $21.87?

Of course not; what a ridiculous question.

And yet, investors in the Ethereum Trust ($ETHE) are doing just that, paying a stunning 837% premium above the net asset value (NAV) of the underlying holdings (Ethereum, a cryptocurrency).

Chart via YCharts

Why would anyone do such an irrational thing?

Because many investors are anything but the rational beings the efficient-market hypothesis (EMH) presumes.

In this case, the love for Ethereum is so great that some investors will literally buy anything with Ethereum in its name, doing no research on what they actually own.

As the premium in ETHE has widened throughout the year, assets in the fund have actually moved higher. Demand for the product has increased as it became more and more divorced from reality.

Under EMH theory, no investor would buy ETHE at an 837% premium when they could buy the underlying holdings (Ethereum) at no premium at all. And in a truly efficient market, such a premium would never happen in the first place, as arbitrageurs would have stepped in long ago, shorting the trust while buying the underlying holdings to earn a “riskless” profit.

And yet, here we are.

The lesson is as old as time. Markets are not entirely efficient because investors are far from rational.

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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. For our full disclosures, click here.

About the author

Charlie Bilello

Charlie is the founder and CEO of Compound Capital Advisors.

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