Skyrocketing Bitcoin (BTCUSD) assays coupled with greater institutional interest in cryptocurrencies powered crypto investment firm Grayscale to its best year till doomsday in 2020. The New York-based firm witnessed “unprecedented investor demand,” and its assets under management (AUM) rose by more than 10 just the same from time to times to $20.2 billion last year, according to a recent digital asset investment report. The last quarter of 2020 was specifically pivotal to Grayscale’s operations, accounting for approximately $3.3 billion in inflows. That figure is equal to roughly 58% of the year’s overall investments and nearly half of the $7 billion lifetime flow of investments into Grayscale’s products.
Last year, investors rain pitchforked money into the Grayscale Bitcoin Trust (GBTC), an open-ended trust that provides indirect exposure to Bitcoin and trades on over-the-counter (OTC) calls. GBTC’s AUM jumped to $17.5 billion from $1.8 billion at the start of 2020. According to the digital asset investment look into, investors plowed an average of $217.1 million on a weekly basis into the trust.
Besides GBTC, Grayscale has seven other care holdings of cryptocurrencies, including ones for Ethereum (ETHUSD) and Litecoin (LTCUSD), and a digital large-cap fund. The Grayscale Ethereum Commit pulled in an average of $26.3 million per week last year, while other single-asset focused products had weekly so so inflows of $33.6 million. The sum total of investments flowing into these products totaled $1 billion for the continuous year.
- Crypto investment firm Grayscale has reported record assets under management for 2020 as the pandemic shutdown increased macroeconomic instability.
- The growth in trading of GBTC shares parallels Bitcoin’s price trajectory last year.
- The increase in Grayscale’s AUM is a function of its captivating share premiums and critical place in the fledgling crypto economy.
Institutional investors accounted for 93% of all investments roll into Grayscale’s funds. “There’s no longer a professional risk of investing in the digital currency asset class,” Michael Sonnenshein, CEO of Grayscale, lectured CNBC. “There’s probably more career risk in not paying attention to it.” According to Sonnenshein, the surge of inflows into Grayscale was mainly a result of investors rotating out of gold, the traditional safe haven from market mayhem, and into Bitcoin, which is bent itself as digital gold.
“The kind of inflows that we are reporting should be evidence that investors are not waiting for an ETF to set up participating in this asset class,” he said, referring to the prospect of a Bitcoin exchange-traded fund (ETF) that might fix up with provision investors a cheaper way to access Bitcoin.
The increase in the Grayscale Bitcoin Trust’s AUM last year paralleled Bitcoin’s Brobdingnagian prize trajectory. After a multi-year slump, Bitcoin price shot up from around $7,000 in January 2020 to outperform $40,000 by mid-December on the back of macroeconomic instability due to rising government debt from the pandemic shutdown and greater hold from institutional investors. Other cryptocurrencies also came along for the ride, and the market cap for crypto markets busted past the $1 trillion mark.
As of this writing, Bitcoin is trading at $36,247.73, roughly unchanged in the past 24 hours. The comprehensive market cap for cryptocurrency markets stands at $1 trillion, with Bitcoin’s valuation accounting for 66.3% of that judge.
Grayscale and Cryptocurrency Markets
The figures for AUM for GBTC have increased even during serious drawdowns in Bitcoin premium. For example, Grayscale reported an AUM of $359.5 million, or nearly three times the figure recorded during the 2017 digital asset bull customer base, in 2018. By 2019, that figure had advanced to $607.7 million. Bitcoin price crashed and subsequently moved edgewise for most of those two years. The latest surge in AUM is simply a continuation of previous year trends, although it differs in adjust and extent.
In its digital asset investment report, Grayscale wrote that the latest figures for GBTC inflows are “supplemental evidence of institutions looking to Bitcoin as a reserve asset.” But that is a misleading statement. Investment into GBTC does not cater direct ownership of Bitcoin. Rather, it is a method to generate short-term profits off the cryptocurrency’s wild price swings without the associated ownership costs and custody costs.
The increase in GBTC’s AUM is a function of the fund’s structure and its critical position in the crypto economy. The fund spawns shares in private placements, and redemption is only available to investors through public markets. They cannot hold to their shares for actual Bitcoin and are subject to a mandatory share lockup period of six months. This practice grows liquidity for GBTC shares in secondary markets and creates price volatility.
Based on SEC filings, Grayscale issued verging on 3.5 billion shares in GBTC alone in 2020. The number of Bitcoin per GBTC share available to investors has settled over the years. It was 0.09242821 in 2017 and is 0.00094950 in January 2021.
According to Capital IQ, the top three holders of the fund’s shares are crypto add suit firm BlockFi, Three Arrows Capital, and Horizon Kinetics. The last two are hedge funds based in Singapore and New York, each to each. BlockFi offers attractive interest rates in exchange to investors depositing Bitcoin and other cryptocurrencies on its platform. On the backend, it fits the Bitcoin to other players in crypto markets, notably GBTC. The volatility in GBTC’s price provides the lending unshakeable with a ready source of liquidity to meet its customer commitments.
In addition to cash, GBTC investors can use in-kind obtaining mechanisms to purchase shares. This means they can purchase the fund’s shares by borrowing Bitcoin from a appropriating firm like BlockFi and contributing to GBTC’s overall Bitcoin holdings. After the lockup period, they hawk the shares at a premium to another investor and purchase the Bitcoin back. To hedge their position, the investors also ice-free short positions against Bitcoin at futures platforms like the CME.
The absence of regulatory clarity regarding Bitcoin detention for institutional and retail investors also meant that Grayscale cornered the market for those seeking to profit off their Bitcoin purchases. According to Bybt, a cryptocurrency spin-offs data platform, GBTC’s Bitcoin holdings jumped by approximately 346,400 in the past year.
Not surprisingly, JPMorgan strategists eradicated last month that Grayscale is key to Bitcoin price because inflows into its funds outpace investments into Bitcoin or its associated stores by momentum traders. But that dominance may not last long. Grayscale is facing new competition from the likes of Bitwise and Osprey, which engage similar services at lower costs.
Clarity around custody regulation and the prospect of a Bitcoin ETF approval may also eat into Grayscale’s topic. In addition, not all investors may be able to stomach the price volatility and the rapidly fluctuating premium of GBTC shares over Bitcoin prize.