Tracking the institutional landscape of digital asset investments (I): Grayscale

Original title: "Institutional Landscape of Digital Asset Investment (I) Grayscale"

Original source: OKLink

Every year there are things with good market conditions, such as the liquor from the year before last, the liquor from last year, the liquor from this year, and the liquor from next year - liquor is always the best; Bitcoin is often a superb product.

(Photo source: Sina Weibo)

Over the past 10 years, the price of Bitcoin has increased by 12 million times.

Since September last year, Bitcoin has entered a bull market, rising from $9,000 to a record high of $41,950. As of press time, the price has fallen back to around $35,000. Bitcoin's recent gains have driven the overall growth of the industry. On January 7, the total market value of crypto assets crossed the $1 trillion threshold for the first time.

There are probably several reasons for this market situation.

First, in the context of the global epidemic, the economies of most countries in the world are clearly declining, the Federal Reserve is implementing unlimited quantitative easing, and investors are beginning to turn to safe-haven assets. As a decentralized payment system based on the blockchain network, the total number of Bitcoin tokens is limited to 21 million, which is absolutely scarce, making it an investment option for investors.

Secondly, as a private currency, Bitcoin currently lacks effective supervision, and hype and speculation have also become a factor driving up the price of the currency.

(Data source: OKLink)

But overall, this Bitcoin bull market is mainly attributed to the entry of institutional investors and high-net-worth investors. From Grayscale to Paypal, from MicroStrategy to Fidelity Investments, from Square to Galaxy Digital, institutional and corporate investors continue to purchase Bitcoin and other crypto assets, which is both a disguised lock-up and stimulates retail investors, pushing the Bitcoin market to a high point. These institutional investors have injected new impetus into the Bitcoin market and the digital asset market. Taking this opportunity, OKLink launched a series of articles on the "Institutional Landscape of Digital Asset Investment" to review the "chess players" behind the digital asset market.

Barry Hilbert - The Man Behind Grayscale

Grayscale is a pioneer among "institutional investors". And everything starts with its founder Barry Silbert.

Hilbert is an amazing person. He started investing in Bitcoin in 2012, and in 2013 he also invested in Coinbase, Ripple, Bitpay and other institutions, all of which have now become crypto giants.

In 2004, he founded a private equity trading platform, SecondMarket. In 2013, he pushed SecondMarket to set up two institutions, Grayscale and Genesis Trading. In 2015, SecondMarket was acquired by Nasdaq, retaining the crypto asset-related business. Later, Barry Silbert integrated these two businesses with his personal investment business and established the well-known DCG (Digital Currency Group) in the industry.

After its establishment, DCG has developed rapidly. It now has five subsidiaries: Grayscale, Genesis, Coindesk, Foundry, and Luno. Each of them is a leading institution in its respective field. It has also directly invested in more than 160 companies related to cryptocurrency and blockchain.

How much crypto assets does Grayscale hold?

Grayscale Trust currently holds a total of 10 trust funds and 9 single-asset trust products, corresponding to 9 digital assets such as Bitcoin and Ethereum; there is also a digital large-cap fund, which includes 4 digital assets, with the proportions determined by market value, namely Bitcoin (81.63%), Ethereum (15.86%), Bitcoin Cash (1.08%), and Litecoin (1.43%).

(Data source: qkl123.com)

As of the date of publication, excluding the assets in the Digital Market Fund, Grayscale Bitcoin Trust's holdings have reached 606,776 coins, accounting for 3.263% of the total circulation. Ethereum Trust holdings also have 2,935,513 coins, accounting for 2.571% of the total circulation. It can be called the "industry Pixiu."

Now, Grayscale's Bitcoin and Ethereum trusts have become companies that report to the SEC, and are listed on OTCQX, the highest-level over-the-counter market in the United States, ranking among the top ten in terms of trading activity.

How does Grayscale Trust work?

The 10 trust funds of Grayscale Trust have basically the same operating model. Let’s take ETH Trust as an example.

First, Grayscale Trust will periodically open private placements to qualified investors in the primary market, and the opening period is determined by Grayscale. During the opening period, Ethereum Trust supports two funding methods: cash and Ethereum. If the funding is cash, Grayscale will hand over the subscription funds to the authorized broker Genesis, which will buy Ethereum on the spot market; investors can also directly provide physical ETH funding.

After that, Grayscale will hand over Ethereum to Coinbase Custody for custody, and then issue the corresponding Ethereum trust shares according to the number of assets subscribed. After the investment to obtain the Ethereum trust shares, there will be a 6-month closed period. After the closed period ends, it can be freely transferred on the secondary market.

It should be noted that all trusts under Grayscale currently have no redemption clauses, only inflows and no outflows, and continuous lock-up. Because of this feature, the industry often compares Grayscale to a "crypto Pixiu". Of course, if Grayscale is willing in the future and obtains SEC approval, it is also possible to open redemption.

(Source: https://grayscale.co/faq/)

In addition, each fund of Grayscale will charge a management fee ranging from 2% to 3%, which is calculated daily and paid in the form of digital assets every month. For example, the current handling fee for Ethereum is 2.5%. Grayscale's trust products will track the price of underlying assets based on the TradeBlock ETX Index (24-hour VWAP, a price index based on transaction volume weight), but at present, there is a relatively high positive premium overall. The lower the circulation rate, the higher the premium.

(Ethereum Trust and Ethereum price curve)

This is partly because the non-redeemable, long lock-up period and limited circulation have led to a situation of supply exceeding demand in the secondary market, causing trust shares to be at a premium for a long time. As the lock-up period is lifted, some investors will choose to sell in the secondary market. As the market supply share increases, the premium will continue to decrease.

Grayscale's Outlook

Grayscale is a pioneer in crypto asset trusts. Thanks to Barry Silbert's forward-looking vision, Grayscale has gained an excellent first-mover advantage.

From the perspective of holdings, as of the date of publication, more than 38 institutional investors have publicly held positions in Grayscale’s Bitcoin Trust. These include some well-known crypto asset lending companies and hedge funds, such as BlockFi and Three Arrows Capital. The company under the legendary Rothschild family is also on this list.

(Data source: https://fintel.io/)

Looking at the scale of fund management, as of the date of publication, Grayscale's total scale has reached US$28.4 billion. Among them, Bitcoin Trust has about US$24.1 billion, accounting for 84%, Ethereum Trust has about US$3.51 billion, accounting for 12.3%, Digital Large Cap Fund has US$351 million, and the rest are relatively small.

The trend has created a huge siphon effect, and some followers have gradually emerged behind Grayscale. Companies such as 21Shares, 3iQ, Fidelity Investments, and Skybridge Capital have successively launched Bitcoin funds. However, at present, they are still a little behind Grayscale in terms of management scale and secondary market liquidity.