LTCN ETF: Coming Back Down To Earth (OTCMKTS:LTCN)

It’s been four months since we last covered Grayscale Litecoin Trust (OTCQX:LTCN) for Seeking Alpha. This trust is a closed-end fund that exists primarily to provide traditional market investors with direct exposure to the native asset. of Litecoin (LTC-USD) blockchain. I made no bones about my affinity for Litecoin as a network. However, despite my bullishness about Litecoin in general, I called LTCN “hold” each of the two times I covered the fund. At the beginning of April, I concluded with the following:

At a share price of $46.85, LTCN implies a Litecoin price of $438. I would love an LTC price of $438 as much as the next Litecoin bull, but the LTCN premium just has no fundamental justification. This fund traded at an even higher premium about 3 years ago. That doesn’t mean we’ll see those NAV rate levels return this time.

As it turns out, my last LTCN article was published on the day of the biggest close for the fund in 2021:

Over time, we’ve seen the fund’s shares collapse by about 80%. This highlights the danger when playing the grayscale crypto proxy game of upscaling.

Silly NAV Rate Games, Silly NAV Rate Prizes

As of 08/07/24, the premium rate for LTCN shares was only 97.5%. You can see in the chart below that while it is still overvalued on a NAV basis, the premium rate is down from 400% in April. To put this into proper context; each share of LTCN represents 0.085 LTC. So for a crypto investor who wants to value LTCN based on the Litecoin exposure that each share actually has, they need to multiply the LTC per share by the LTC price.

In this case, we multiply 0.085 by a Litecoin price of $56.26 and get a net asset value per share of $4.79. Essentially, LTCN longs are willing to pay $9.46 for $4.79 in underlying value. And again, this is actually an improvement over what the bulls were doing just a few months ago.

The good thing is that LTCN doesn’t have much to go before it gets to what I would see as a fairer valuation. And beyond that, LTCN is by no means the worst example of speculative scum in Grayscale’s single-asset closed-end funds. Grayscale Filecoin Trust (OTCPK:FILG) still holds that honor at a premium to NAV of over 800%.

Private placements

Over the years, I’ve noticed that the NAV rates for Grayscale’s closed-end fund products have swung dramatically in both directions. During the “crypto winter”, most of these products traded at deep discounts to net asset value – often as much as 50-60% of NAV. These proved to be wonderful opportunities for patient bulls to play the arbitrage game. One of the major reasons these NAVs could go so extreme in either direction is that they are not ETFs. Thus, the underlying assets of the fund cannot be redeemed at NAV as they could through the ETF.

However, there is a mechanism to combat the first extremes. Earlier this year, Grayscale reopened private placements for funds that were trading at large premiums to net asset value. Through private placements, accredited investors can buy new shares in the fund at NAV and wait a one-year lock-up period to sell those newly issued shares in the secondary market. Private placements are essentially hoping premiums stay high until the lock-in expires so they can buy at NAV, sell at a premium and pocket the spread.

Click to enlarge

Source: Grayscale, author’s calculations

In the table above, I show the year-to-date change in shares outstanding for four of Grayscale’s single-asset crypto funds. Litecoin’s year-to-date share growth was only 25.9%. It might seem big, but compared to the FileCoin pool mentioned above, it’s minimal. We can even see that the outstanding shares of Solana and Chainlink funds have doubled and tripled year to date. In my view, this is largely due to the fact that these funds have had and continue to have dramatically higher NAV rate premiums than LTCN over the past few months. Thus, the post-lock-up spread potential from the private placement was much more attractive in each of these funds.

Litecoin

To borrow a phrase from fans of another cryptocurrency, it was largely tictock, the next block for Litecoin, despite the premium revaluation in LTCN. In terms of utility, Litecoin is the only PoW coin that even comes close to Bitcoin (BTC-USD) in terms of 30-day average active address:

Although clearly down since the launch of spot ETFs, Bitcoin’s 30-day active address count still stands at 711k at the time of posting. That’s up from June lows, but still well behind the grid at the end of last year. Litecoin’s story here is a bit more encouraging, with 30-day active addresses at 367k. Although off the highs, this is well ahead of where the Litecoin network was in November 2023, before transaction fees appeared on Bitcoin. Which brings me to why I’m still bullish on LTC despite its weakness this cycle.

When Bitcoin fees come in and small transactions are no longer economical on the Bitcoin network, Litecoin usage increases and we have even seen LTC active addresses eclipse BTC active addresses for short periods. Existing Bitcoin Lightning nodes can still transfer value more cheaply when BTC fees increase, but opening and closing new channels during periods of high fees makes Lightning less viable. Thus, Litecoin activity increases instead.

Valuation comparison is always difficult in crypto. Individual chains are often optimized for different actions. For proof-of-work coins more focused on payments, I like to look at the NVT ratio. This is the market cap divided by the USD value traded on the network. Here we see LTC at a 30-day average NVT ratio of 56. By comparison, BTC trades at 186 and other proof-of-work coins like Dogecoin (DOGE-USD) and Bitcoin Cash (BCH-USD) trade at very similar multiples to BTC despite having fewer users. LTC is very cheap in my opinion.

Recommendations for investors

Rating is really subjective and it’s important to recognize that. As an advocate for public blockchain and the utility these networks enable, I find the LTC vs LTCN scenario very interesting. On the one hand, I think LTC is too cheap compared to peers. On the other hand, I think LTCN is too expensive compared to LTC. Despite what I believe are flaws in the product itself, LTCN is a fund we’ve held for a long time in the past and one we certainly wouldn’t rule out wanting again in the future. That said, I don’t want to pay double what LTC is currently worth. I still think the better approach is to own LTC directly versus owning LTCN stock. I still call LTCN “pending” today. If we see LTCN return to a NAV rate more in line with how the market values ​​LTC, I will consider going long.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.