Bitcoin Skyrocketing Prices (BTCUSD) plus increased institutional interest in crypto-investment firm cryptourrencies to its best-ever year in 2020. The New York-based company saw “unprecedented investor demand,” and increased its managed assets AUM) more than 10 times to $ 20.2 billion last year, according to a recent digital asset investment report. The last quarter of 2020 was particularly central to Grayscale’s operations, accounting for approximately $ 3.3 billion in inflows. That figure equates to approximately 58% of total investments for the year and nearly half of the $ 7 billion life cycle of investments to Grayscale products.
Last year, investors poured money into the Grayscale Bitcoin Trust (GBTC), an open-ended trust that provides indirect exposure to Bitcoin and trades on over-the-counter (OTC) markets. AUM GBTC jumped to $ 17.5 billion from $ 1.8 billion at the beginning of 2020. According to the digital asset investment report, investors plowed an average of $ 217.1 million each week into the trust.
Besides GBTC, Grayscale has seven other trust holdings of cryptocurrencies, including those for Ethereum (ETHUSD) and Litecoin (LTCUSD), and a large digital cap fund. Ethereum’s Grayscale Trust pulled in an average of $ 26.3 million a week last year, while other products focused on single assets have average weekly inflows of $ 33.6 million. Investments that flowed into these products totaled $ 1 billion for the entire year.
- Crypto investment firm Grayscale has reported record-breaking assets for 2020 as pandemic closures increase macroeconomic instability.
- The increase in GBTC shares trading is similar to last year’s Bitcoin price trajectory.
- The rise of AUM Grayscale is a function of its attractive share premiums and its vital place in the new crypto economy.
Institutional investors accounted for 93% of all investments that flowed into Grayscale funds. “There is no longer a professional risk of investing in the digital currency asset class,” Michael Sonnenshein, CEO of Grayscale, told CNBC. “There is probably an increased career risk of not paying attention to it.” According to Sonnenshein, the surge of inflows into Grayscale was largely the result of investors rotating out of gold, the traditional safe haven of market chaos, and into Bitcoin, which positions itself as digital gold.
“The kind of inflows we report should be evidence that investors are not waiting for an ETF to start participating in this asset class,” he said, referring to the prospect of a Bitcoin exchange-traded fund (ETF) that could provide investors. a cheaper way to access Bitcoin.
The increase in Bitcoin Grayscale Trust AUM last year was similar to the Brobdingnagian Bitcoin price trajectory. After a multi-year collapse, the price of Bitcoin shot up from around $ 7,000 in January 2020 to surpass $ 40,000 by mid-December on the back of macroeconomic instability due to rising government debt from the pandemic closure and increased interest from institutional investors. Other cryptocurrencies also came for the ride, which pushed the market cap for crypto markets past the $ 1 trillion mark.
As of this writing, Bitcoin is trading at $ 36,247.73, broadly unchanged in the last 24 hours. The overall market cap for cryptocurrency markets is $ 1 trillion, with Bitcoin valuation accounting for 66.3% of that figure.
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The figures for AUM for GBTC have increased even during a severe pullback in the price of Bitcoin. For example, Grayscale reported AUM of $ 359.5 million, or nearly three times the figure recorded during the 2017 digital asset bull market, in 2018. By 2019, that figure had moved to $ 607.7 million. The price of Bitcoin fell and then moved sideways for most of those two years. The latest surge in AUM is simply a continuation of the previous year’s trends, albeit different in scale and size.
In its digital asset investment report, Grayscale wrote that the latest GBTC inflows figures are “further evidence of institutions looking to Bitcoin as a reserve asset.” But that is a misleading statement. Investing into GBTC does not provide direct ownership of Bitcoin. Instead, it is a method to generate short-term profits off the cryptocurrency’s wild price swings without the associated ownership fees and custody costs.
The increase in GBTC AUM is a function of the fund structure and its vital position in the crypto economy. The fund creates shares in private locations, and redemption is only available to investors through public markets. They cannot redeem their shares for real Bitcoin and are subject to a mandatory six-month lock-in period. This practice increases liquidity for GBTC shares in secondary markets and creates price volatility.
Based on an SEC filing, Grayscale issued nearly 3.5 billion shares in GBTC alone in 2020. The number of Bitcoin per GBTC shares available to investors has declined over the years. It was 0.09242821 in 2017 and is 0.00094950 as of January 2021.
According to Capital IQ, the top three holders of the fund’s shares are crypto lender BlockFi, Three Arrows Capital, and Horizon Kinetics. The last two are hedge funds located in Singapore and New York, respectively. BlockFi offers attractive interest rates in exchange for investors who deposit Bitcoin and other cryptocurrencies on its platform. On the backend, it lends the Bitcoin to other players in crypto markets, especially GBTC. The volatility in the GBTC price gives the lender a ready source of liquidity to fulfill its customer commitments.
In addition to cash, GBTC investors can use buy-in mechanisms to buy shares. This means they can buy the fund’s shares by borrowing Bitcoin from a lender such as BlockFi and contributing to GBTC’s overall Bitcoin holdings. After the lock-in period, they sell the shares for a premium to another investor and buy back the Bitcoin. To hedge their position, the investors are also opening short positions against Bitcoin on futures platforms like the CME.
The absence of regulatory clarity about Bitcoin’s hold for both institutional and retail investors also meant that Grayscale was corner the market for those seeking to profit from their Bitcoin purchases. According to Bybt, a cryptocurrency derivatives data platform, Bitcoin GBTC payments jumped around 346,400 in the last year.
Not surprisingly, JPMorgan strategists wrote last month that Grayscale is key to Bitcoin’s price because inflows to its funds outweigh investments into Bitcoin or its related funds by momentum traders. But that supremacy may not last long. Grayscale faces new competition from the likes of Bitwise and Ospreys, which promise similar services at reduced costs.
Clarity about custody regulation and the prospect of Bitcoin ETF approval can also eat into Grayscale’s business. In addition, not all investors may be able to stomach the volatility of prices and the volatile premium of GBTC shares over the price of Bitcoin.