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Not long ago, Grayscale Investment released its investment report for the fourth quarter of 2020. As a "whale" that has always been bullish on the market, Grayscale's holdings have steadily increased over the past year, especially compared with the previous two years, the scale of various assets has grown rapidly. The total size of Grayscale's custodial assets was US$825 million at the end of December 2018, which soared to US$2.1 billion by the end of 2019, and exceeded US$20 billion by the end of 2020, a 10-fold increase in one year. It has become an important and prominent whale in the crypto world. 01
Grayscale, the “buy, buy, buy” company, is now the spokesperson for “institutional whales” As a subsidiary of Digital Currency Group DCG (Digital Currency Group) established in 2013, Grayscale Investments provides investors with compliant investment channels in the form of trust funds. The scale of cryptocurrency management (AUM) has exceeded US$20 billion by the end of 2020, and more than 90% of the funds come from institutional investors and retirement funds . It is currently the world's largest digital asset management institution. After the liquidation of the XRP Trust on January 14, Grayscale’s current single trust fund still includes 8 types of cryptocurrency assets: BTC, ETH, BCH, LTC, XLM, ETC, ZEC, and ZEN . These are basically mainstream assets and old currencies. ZEN is currently an exception as a small currency. Grayscale’s parent company DCG is also one of its major investors. Grayscale Trust’s Management Scale Before 2020, the public's main expectation for the entry of "over-the-counter incremental funds" was on "Bitcoin ETFs". At that time, everyone expected that "Bitcoin ETFs" would open up the way for mainstream investors to enter the cryptocurrency market, bring in a huge amount of incremental funds, and accelerate the wider recognition and acceptance of Bitcoin. Since institutions represented by Grayscale "openly entered the market" in 2020, it seems to have taken over everyone's expectations for the "Bitcoin ETF", and even played the role of a "bull market engine" for a time in the second half of last year. Grayscale attracted widespread attention from the market in 2020, but in 2018 and 2019 when the market was once desperate, Grayscale publicly stated that the next bull market was already brewing and would be led by institutional investors. " Many institutional investors believe that the current situation is worth entering, and their position in crypto assets will be strengthened in the future ." Grayscale's prediction has been verified by the market. Institutional investors rushed into the market in 2020. In 2020, new investment in Grayscale products exceeded US$5.7 billion, more than four times the cumulative US$1.2 billion from 2013 to 2019. GBTC Trust's share in Grayscale Trust In the fourth quarter of 2020, Bitcoin Trust accounted for 87% of the capital inflows of all Grayscale's crypto trust products, and the proportions in the other three quarters were also over 50%. Bitcoin's Matthew effect is also reflected in institutional investors. If compared with the current Bitcoin mining rate, the inflow of Bitcoin to Grayscale alone in the fourth quarter of 2020 was equivalent to 194% of the Bitcoin mining volume . The amount of Bitcoin that Grayscale increases daily is about twice the amount of all newly mined Bitcoin (about 900 BTC/day), which shows the strong growth in deposits. 02
Grayscale Trust - a coin-swallowing behemoth that only takes in but never gives out The recent liquidation of Grayscale's XRP Trust was interpreted as a negative for the cryptocurrency market. This is actually a misunderstanding. Grayscale is a trust institution and a compliance institution that helps investors manage crypto assets. Under normal circumstances, Grayscale's cryptocurrency trust currently has no clear exit mechanism . Grayscale liquidated the XRP trust because XRP received a compliance investigation from the SEC. Grayscale's liquidation of trusts with compliance issues is a risk-avoidance operation . Grayscale's other trust products that do not have compliance issues currently have no exit mechanism. Grayscale is like a giant coin-eating Pixiu, which only takes in but never takes out. Coin holders can give their coins to Grayscale in exchange for Grayscale's trust quota. It is also not possible to directly purchase shares of Grayscale Trust such as GBTC. Grayscale holds crypto assets corresponding to the shares sold. This not only makes the scale of Grayscale Trust continue to grow, but also reduces the selling pressure in the market, which helps to increase the price of coins when demand remains unchanged. The proportion of Grayscale Trust's holdings in the total circulation of the currency As shown in the figure above, as of the fourth quarter of 2020, the Bitcoin held by Grayscale has accounted for 3.31% of the market's circulation, of which ETC holdings account for the largest proportion and have reached 10.55% of its circulation . In some WeChat groups, you can often see group members discussing: Attention everyone, Grayscale has begun to reduce its holdings, and the Bitcoin Trust has decreased by 0.02%. This is actually a misunderstanding. From the data, it can be seen that sometimes the number of Grayscale's holdings does decrease by a small percentage. This is because after deducting the management fee of the trust, Grayscale Trust charges management fees based on the currency standard ratio . Among Grayscale's various trust products, BTC trust has the lowest fee rate of 2% per year. The management fee of other single-currency cryptocurrency trust products is 2.5% per year, and the management fee of Grayscale® Digital Large Cap Fund (trading code GDLC) has also been reduced from 3.0% to 2.5% since January 1, 2021. Based on the management fee of 2.5%, with the current asset scale of over 10 billion US dollars, Grayscale's revenue from management fees alone in 2020 will exceed 500 million US dollars . For this reason, a business with obvious money-making effects is destined not to be dominated by Grayscale alone, and it is only a matter of time before other players enter the market. Just recently, Osprey Funds, a digital asset subsidiary of REX Shares, announced that it will also launch the Osprey Bitcoin Trust (OBTC) in the over-the-counter market. In the future, more and more traditional institutions will rush into the market. There is a common misunderstanding in the market about Grayscale Trust. It is believed that Grayscale Trust has stopped increasing its holdings, which will be a huge negative for the market. Grayscale Trust's suspension of new investments is actually a routine operation of Grayscale . In December 2020 and July 2020, Grayscale suspended new investments twice to conduct "private placements." The main reason for suspending investment is that the GBTC in the last six-month cycle will begin to be unblocked, and then there will be more GBTC in the market. After the unblocking, GBTC holders will complete their arbitrage and generally need to buy back Bitcoin in the market. Therefore, historically, the GBTC premium will become lower after the investment suspension period. 03
Grayscale Trust provides investors with arbitrage opportunities Currently, the most concerned issues in the market are Grayscale Trust's Bitcoin Trust (GBTC) and Ethereum Trust (ETHE) in the U.S. OTC market. They provide investors with compliant cryptocurrency investment channels in the form of trust funds and can be traded in the U.S. OTC market. They are regarded as one of the main channels for large funds to enter the crypto market. Currently, the Grayscale trust products that can be purchased on the U.S. OTC market include GBTC, ETHE, LTCN and BCHG . The stocks of several other currency trusts have not yet been approved by the U.S. Financial Industry Regulatory Authority. Taking Bitcoin as an example, there are currently two ways for investors to obtain BTCG shares: one is to purchase directly in the secondary market of US stocks; the other is to deposit the corresponding BTC, which can be unlocked after the lock-up period to obtain the corresponding proportion of GBTC. The OTC price of Grayscale Trust GBTC has long been at a premium to Bitcoin. Grayscale GBTC Trust’s premium rate to BTC This provides investors with room for arbitrage. For example, investors deposit BTC into Grayscale Trust in exchange for corresponding GBTC shares, and after the 6-month lock-up period, sell GBTC and buy BTC again. As long as the premium income of GBTC can cover the Grayscale management fee, investors in the currency standard can arbitrage from it . If you are a fiat currency investor who is worried that the price of Bitcoin will fall, you can borrow Bitcoin from other platforms and deposit it into Grayscale Trust in exchange for the corresponding GBTC shares. After the 6-month lock-up period, sell GBTC and buy BTC again. As long as the premium income of GBTC can cover the Grayscale management fee and the interest on the borrowed currency, investors based on fiat currency can make arbitrage from it . There are more than two ways to arbitrage using GBTC, and the two mentioned above have relatively small risks. From the above figure, it can be seen that the premium of GBTC has a clear downward trend, and arbitrage investors should pay attention to the risks. 04
Summarize As various cryptocurrency ETF applications have been delayed, the United States allows trusts to invest in crypto assets such as Bitcoin and Ethereum, and allows such trust shares to enter the over-the-counter market. Grayscale Fund has a compliance license to manage crypto assets, which makes it the preferred channel for many institutional investors to enter Bitcoin, Ethereum and other cryptocurrencies. If the monetary policies of various governments are the root cause of this bull market, then Grayscale Trust is the powerful engine that accelerated the start of this bull market. Grayscale allows investors to buy and sell BTC, ETH, etc. in the US OTC market like trading stocks, bringing a steady stream of incremental funds to the cryptocurrency market, and most of them are institutional funds that are not short of money, including BlockFi, a crypto asset lending company, Three Arrows Capital, one of the most active cryptocurrency hedge funds, and Rothschild Investment Corp, an investment company under the famous Rothschild family. Grayscale has brought tremendous vitality to the cryptocurrency market and achieved great success, but it also faces challenges. Recently, Eric Balchunas, a senior ETF analyst at Bloomberg, said that Grayscale needs the U.S. Securities and Exchange Commission (SEC) to continue to deny the Bitcoin ETF because if the SEC allows GBTC to be converted into an ETF at the same time as the ETF is approved, they may liquidate. Grayscale founder and former CEO Barry Silbert responded on Twitter: "Grayscale is capable of meeting the challenge." In addition to the potential pressure from ETFs, asset management companies such as Osprey Funds , Wilshire Phoenix, 3iQ, and 21Shares are all potential competitors. If 2020 was the year when Grayscale stood out, then in 2021, the field of cryptocurrency asset management has the opportunity to win a year of "a hundred flowers blooming" and "a hundred schools of thought contending" . Let us wait and see. Risk warning : The content of this article is only the author’s personal opinion, does not represent the views or position of Zhikuang University, and does not constitute any investment opinion or recommendation.
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