Ethereum Fundamentals: Smart Contracts, Decentralization and Financial Applications

IMPORTANT INFORMATION:

RISK CONSIDERATIONS
Spot Crypto ETPs are exchange-based products that track the price of an asset, i.e., bitcoin, by holding the actual asset as the underlying asset.

Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.

Cryptocurrency (notably, Bitcoin) operates as a decentralized, peer-to-peer financial exchange and value storage that is used like money. It is not backed by any government. Federal, state or foreign governments may restrict the use and exchange of cryptocurrency. Cryptocurrency may experience very high volatility.

IMPORTANT DISCLOSURES:
The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.

This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.  Each Jurisdiction tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.

Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results.

This material is not a product of Morgan Stanley’s Research Department and should not be regarded as a research material or a recommendation.

The Firm does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Federal and state tax laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.

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Investing in digital assets involves risk, including possible loss of principal. An investment in Morgan Stanley Ethereum Trust (“MSSE” or the “Trust”) is subject to a high degree of risk and heightened volatility. MSSE is not suitable for any investor that cannot afford loss of the entire investment.

Morgan Stanley Investment Management Inc. is the Delegated Sponsor and Foreside Fund Services, LLC is the Marketing Agent for MSSE.

This information must be preceded or accompanied by a prospectus, click here to view or download the prospectus. You should consider the Trust’s objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Trust. Please read the prospectus carefully before you invest.

The Trust is not registered under the Investment Company Act of 1940, as amended (the “40 Act”) and is not subject to regulation under the 40 Act, unlike most mutual funds or ETFs. The Trust may trade at a premium or discount to its net asset value. The Trust is new and has a limited operating history upon which investors may base an evaluation of its likely performance.

The value of the Trust relates directly to the value of the underlying digital asset it holds, the value of which is highly volatile and subject to fluctuations due to a number of factors.

The Trust relies on third party service providers to perform certain functions essential to the affairs of the Trust. Some of these service providers may not be subject to federal regulation and oversight and the replacement of such service providers could pose a challenge to the safekeeping of the digital asset and to the operations of the Trust.

No guarantee or representation is made that the Trust’s investment strategy, including, without limitation, its investment objectives or strategies, will be successful, and investment results may vary substantially over time. Nothing herein is intended to imply that the Trust’s investment methodology or that investing may be considered “conservative,” “safe,” “risk free,” or “risk averse.”

This material is not an offer or solicitation of any kind to buy or sell any securities outside of the United States of America. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

 
Digital Asset Risk Disclosures
Many digital assets, including ether, have experienced significant volatility in trading prices in recent periods and may continue to experience such volatility in the future. Such volatility in digital asset prices could have a material adverse effect on the value of the Trust and the shares could lose all or substantially all of their value.

Digital assets represent a new and rapidly evolving industry. The value of the Trust depends, among other things, on the acceptance of the digital assets in general and ether in particular, the capabilities and development of blockchain technologies and the fundamental investment characteristics of ether.

Digital asset networks are developed and maintained by a diverse set of contributors and the perception that certain contributors will no longer contribute to the network or may decrease their contributions to, or involvement with the network could have an adverse effect on the market price of the related digital asset.

Digital assets may have concentrated ownership and large sales or distributions by holders of such digital assets could have an adverse effect on the market price of such digital assets.

As discussed in the prospectus, MSSE expects to stake certain of its assets in accordance with its staking and liquidity policy and, therefore, may receive staking rewards. Staking rewards can vary significantly over time and staking activity may, depending on future governance proposals on the Ethereum network, pose a risk of automatic “slashing penalties” in the event of validator misbehavior or poor performance. In the event automatic staking is implemented on the Ethereum network, there will be no guarantee that the Trust’s staked assets will avoid experiencing slashing or that the Trust will recover any of its staked assets, or the value thereof. In addition, bonding and unbonding periods may limit when assets become eligible to accrue staking rewards and when they may be unstaked, withdrawn and ultimately sold by the Trust in connection with redemption and creation orders and to pay for expenses. The length of these periods are monitored and considered as part of the Trust’s staking and liquidity policy, pursuant to which MSSE expects to stake less than all of its digital assets which will reduce the potential amount of staking rewards receivable by the Trust and by extension the value of Shares.

Staking may introduce a risk of loss of ether, which could adversely affect the value of the Trust’s shares if any such losses occur. Staking often includes activation and unbonding/withdrawal periods, during which ether cannot be sold or transferred and are therefore illiquid. Ether is generally not eligible to accrue staking rewards during staking bonding and unbonding periods. At each step in the staking process, ether may be exposed to risks such as security breaches, smart contract vulnerabilities, and validator or custodian failure or compromise, any of which could result in a complete loss of ether or associated staking rewards. There is no guarantee that the Trust will receive any staking rewards.

MSSE does not provide investors with direct exposure to spot ether, and an investment in the Trust is not a direct investment in ether. As a non-diversified and single industry fund, the value of the Trust’s shares may fluctuate more than shares invested in a broader range of industries. Because the value of the Trust is correlated with the value of ether, it is important to understand the investment attributes of, and the market for, the underlying digital asset. Please consult with your financial professional.

A substantial direct investment in a digital asset may require expensive and sometimes complicated arrangements in connection with the acquisition, security and safekeeping of the digital asset and may involve the payment of substantial fees to third party service providers through cash payments of U.S. dollars. Regulation of digital assets, including ether, continues to evolve across different jurisdictions worldwide, which may cause uncertainty and insecurity as to the legal and tax status of a given digital asset. As ether and other digital assets have grown in both popularity and market size, the U.S. Congress and a number of U.S. federal and state agencies have been examining the operations of digital asset networks, digital asset users and the digital asset spot market. Many of these state and federal agencies have brought enforcement actions and issued advisories and rules relating to digital asset markets. Ongoing and future regulatory actions with respect to digital assets generally or any single digital asset in particular may alter, perhaps to a materially adverse extent, the nature of an investment in the Trust.

The Delegated Sponsor does not store, hold, or maintain custody or control of the Trust’s digital assets, but instead has entered into Custodial Services Agreements with third parties to facilitate the security of its ether. The custodians control and secure the Trust’s ether in segregated custody accounts to store private keys, which allows for the transfer of ownership or control of the Trust’s ether on the Trust’s behalf. If a custodian resigns or is removed by the Delegated Sponsor or otherwise, without replacement, it could trigger early termination of the Trust.

COINDESK® and the name(s) of the CoinDesk index or indices referenced herein, including the CoinDesk 20 Index (“CDI Indices”) are trade or service marks of CoinDesk Indices, Inc. (with CC Data Limited, its affiliate which performs certain outsourced administration services on its behalf, “CDI”), and/or its licensors. CDI or CDI's licensors own all proprietary rights in CDI Indices. CDI is not the issuer, sponsor or producer of any financial product, derivative, portfolio, bundle, basket, separately managed account, or any other investment exposure that tracks, seeks to track, references, or settles against CDI Indices (collectively, “Products”) and CDI has no responsibilities, obligations, or duties to investors in or holders of Products. CDI Indices are licensed for use by the financial services provider named herein (“Provider”). CDI does not approve, endorse, review, or recommend any Product. CDI does not guarantee the timeliness, accurateness, or completeness of any data or information relating to CDI Indices and shall not be liable in any way to investors in or holders of any Product or other third parties in respect of the use or accuracy, completeness, or timeliness of any CDI Indices or any data included therein. CoinDesk Indices 2026.

Before making an investment decision in the Trust, you should carefully consider the risk factors and other information included in the Trust’s prospectus.

Investors should be aware that investing in MSSE is not equivalent to investing directly in ether.

Forward-Looking Statements

Certain statements contained herein and in any related materials may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can generally be identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "project," "seek," "should," "target," "will," "would," or similar expressions, or the negative of such terms. These statements are based on current expectations, estimates, assumptions, and projections and are subject to significant risks, uncertainties, and other factors that may cause actual results, performance, or developments to differ materially from those expressed or implied by such statements. Forward-looking statements speak only as of the date on which they are made. The Trust undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law.

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