Summary The Grayscale Litecoin Trust premium has collapsed from 400% to 97.5%. However, it's still overvalued based purely on NAV rate valuation. Private placements allow accredited investors to buy new shares at NAV and sell at a premium after lockup period. We've seen 26% YTD growth in LTCN shares outstanding. Litecoin's utility and active addresses show promise despite weakness in this cycle, with NVT ratio suggesting LTC is undervalued. It's been four months since I last covered the Grayscale Litecoin Trust ( LTCN ) for Seeking Alpha. This trust is a closed-end fund that exists primarily to offer traditional market investors direct exposure to the native asset of the Litecoin ( LTC-USD ) blockchain. I've made no bones about my affinity for Litecoin as a network. However, despite my bullishness on Litecoin overall, I've called LTCN a "hold" each of the two times I covered the fund. In early April, I concluded with the following: At a $46.85 share price, LTCN is implying a $438 Litecoin price. I'd love a $438 LTC price as much as the next Litecoin bull, but LTCN's premium simply has no fundamental justification. This fund traded at an even larger premium about 3 years ago. That doesn't mean we'll see those NAV rate levels return this time around. As it turns out, my last LTCN article was published the day of the highest close for the fund since 2021: LTCN Daily (TrendSpider) In the time since, we've seen the fund shares collapse by roughly 80%. This highlights the danger when playing the number go up game with crypto proxies via Grayscale. Silly NAV Rate Games, Silly NAV Rate Prizes As of 8/7/24 close, the premium rate on LTCN shares was just 97.5%. You can see in the chart below that, while still overvalued based on NAV, the premium rate has collapsed from 400% back 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 holds, they have to multiply the LTC per share by the price of LTC. LTCN NAV Rate Trend (CoinGlass) In this case, we multiply 0.085 by a Litecoin price of $56.26, and we get a net asset value per share of $4.79. In essence, LTCN longs are willing to pay $9.46 for $4.79 in underlying value. And, again, this is actually an improvement over what bulls were doing just a few months ago. Grayscale Fund Comparison (CoinGlass) The good thing is, LTCN doesn't have much further to go before it gets to what I'd view as a more fair valuation. And beyond that, LTCN is by no means the worst example of speculative froth from Grayscale's single asset closed end funds. The Grayscale Filecoin Trust ( FILG ) still claims that honor at a premium to NAV of over 800%. Private Placements Over the years, we've seen the NAV rates for Grayscale's closed end fund products deviate dramatically in both directions. During 'crypto winter,' most of these products traded at deep discounts to net asset value - often as low 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 NAV rates have been able to get so extreme in both directions is because they aren't ETFs. Thus, the assets underlying the fund can't be redeemed at NAV as they could through the ETF wrapper. However, there is a mechanism for combating extreme premiums. Earlier this year, Grayscale re-opened private placements for the 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 through a one year lockup period to sell those newly issued shares on the secondary market. Private placers are essentially hoping the premiums stay high through their lockup expiration so they can buy at NAV, sell at a premium, and pocket the spread. Grayscale Crypto Fund Ticker 8/7/24 Shares 12/31/23 Shares Change Litecoin LTCN 21,663,000 17,204,700 25.9% FileCoin ( FIL-USD ) FILG 1,618,700 111,400 1,353.1% ChainLink ( LINK-USD ) ( GLNK ) 987,310 321,010 207.6% Solana ( SOL-USD ) ( GSOL ) 1,296,427 633,627 104.6% Source: Grayscale, Author's calculations In the table above, I'm showing the year to date change in shares outstanding for four of Grayscale's single asset crypto funds. Litecoin's year to date share growth has been just 25.9%. That might seem high, but compared to the aforementioned FileCoin fund, it's minimal. We can even see the Solana and Chainlink fund shares outstanding have doubled and tripled year to date. In my view, this is largely because those funds have had, and still have, dramatically higher NAV rate premiums than LTCN over the last several months. Thus, the post-lockup spread potential from private placement has been much more attractive in each of those funds. Litecoin To borrow a phrase from fans of a different cryptocurrency, it's largely been ticktock, next block for Litecoin despite the premium re-rating in LTCN. As far as utility goes, Litecoin is the only PoW coin that is even close to Bitcoin ( BTC-USD ) from a 30-day average active address standpoint: 30 Day avg active addresses (CoinMetrics) While clearly in decline since the launch of spot ETF products, Bitcoin's 30-day active address number still stands at 711k as of article submission. This is a bump over the lows from June, but still well behind where the network was at the end of last year. Litecoin's story here is a bit more encouraging, with 30 day active addresses at 367k. While off the highs, this is well ahead of where the Litecoin network was in November 2023 before transaction fees popped on Bitcoin. Which brings me to why I'm still bullish LTC despite its weakness in this cycle. When Bitcoin's fees pop and small transactions are no longer economical on the Bitcoin network, Litecoin usage picks up and we've even seen LTC active addresses eclipse BTC active addresses for brief periods. Existing Bitcoin Lightning nodes can still transfer value more cheaply when BTC fees spike, but opening and closing new channels during times of high fees makes Lightning less viable. Thus, Litecoin activity surges instead. 30 Day avg NVT Ratio (CoinMetrics) Comparing valuation is always tricky in crypto. Individual chains are often optimized for different actions. For the more payment-focused proof of work coins, I like to look at the NVT ratio. This is the market cap divided by the USD-denominated value transacted over 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 less users. In my opinion, LTC is very cheap. Investor Takeaways Valuation is really subjective, and it's important to recognize that. As an advocate for public blockchain and the utility that these networks enable, I find the LTC vs LTCN scenario very interesting. On one hand, I think LTC is too cheap relative to peers. On the other hand, I think LTCN is too expensive relative to LTC. Despite what, I believe, are flaws in the product itself, LTCN is a fund that I've held long in the past and one that I certainly wouldn't rule out longing again in the future. That said, I don't want to pay double what the LTC is currently worth. I still think the better approach is owning LTC directly over holding LTCN shares. I'm still calling LTCN a "hold" today. If we see LTCN come back down to a NAV rate more inline with how the market is valuing LTC, I'll consider going long.
