Grayscale, the giant whale, may be honey at this time and ***** at that time

Original title: "The Conspiracy of the Giant Whale Grayscale"

On the evening of December 3rd, Beijing time, Grayscale Trust held an online investor conference. Executives from well-known institutions such as JPMorgan Chase, Barron's Group, and Mastercard attended the conference, conveying to the outside world the imagination of capital giants discussing the future of the encryption industry.

Grayscale's continued increase in crypto assets shows its compliance background and its unremitting efforts in promotion. As a result, more and more investment institutions are entering the world of crypto assets. By issuing funds such as GBTC and ETHE, it has successfully put crypto assets on the US OTC trading market, extending a formal route.

Grayscale made this generous move, and investment institutions and qualified investors are the sponsors. On the one hand, they are optimistic about the anti-inflation and scarcity characteristics of crypto assets and make value investments; on the other hand, they also hope to take advantage of the premium of GBTC over BTC to arbitrage in the US stock market.

Due to the suspension of the redemption mechanism, analysts in the crypto asset market believe that Grayscale has a low risk of dumping the stock in the short term. This means that if the premium rate of assets such as GBTC drops or even becomes negative, the investors behind Grayscale may be the first to dump the stock, and Grayscale will stop increasing or even reduce its holdings. An "avalanche" is not impossible, it's just a matter of time.

The giant whale Grayscale may be honey at this time and **** at that time. However, from another perspective, the exploration of compliance by institutions such as Grayscale and Paypal will help new funds enter the market. More importantly, their endorsement will push this emerging financial market out of a small circle.

The bulls who are like "rescuers"

On December 3, when BTC was fluctuating around the $19,000 mark, the institutional whale Grayscale Trust once again made a move, increasing its holdings by 7,188 BTC and 12,188 ETH that day, setting a record for the largest single-day increase in nearly half a month.

The familiar plot is here again. On that day, both BTC and ETH showed an upward trend. BTC rose from $18,900 to a peak of $19,500, an increase of more than 3%, and ETH also rose from $589 to $618.8, an increase of 5%.

Grayscale once again demonstrated its influence on this new market with its strong purchasing power. Grayscale Trust, established in 2013, has become a force that cannot be ignored in the crypto asset market. Especially in this round of market upswing, Grayscale's continued increase in holdings has been talked about with great relish.

Interestingly, this financial giant that caters to investment institutions does not seem to care much about the 24/7 real-time trading habits of the cryptocurrency market. They follow the trading hours of the traditional U.S. financial markets, such as Grayscale, which has holidays.

In the past month, if we observe the trend of BTC and Grayscale’s actions, we can see an obvious pattern - once Grayscale is "off duty" on weekends, BTC can easily break out of the downward trend; and when Grayscale is back to work, it becomes a "bullish bull" and the market immediately rises.

November 26th of this year was Thanksgiving in Western countries, and Grayscale was on holiday. As a result, BTC opened at $19,051 and fell to $16,904, with a drop of more than 10% on the day, setting the largest single-day drop since March 12. Later, the market began to improve as Grayscale "opened". From November 29th to 30th, BTC rebounded sharply, rising from $17,516 to a maximum of $19,888, setting a new historical high.

Grayscale always seems to be able to pull the market back to the upward channel, just like the "savior" of the crypto asset market.

According to QKL123 data, as of December 3, Grayscale Trust held 546,544 BTC, accounting for approximately 2.95% of the current total BTC circulation. Based on the closing price of US$19,542 on that day, the market value of BTC assets managed by Grayscale exceeded US$10.6 billion.

In addition to BTC, Grayscale also offers 8 other single crypto asset trust investment products, opening exposure to BCH, ETH, ETC, ZEN, LTC, XLM, XRP, ZEC, and 1 diversified large-cap fund product. Among them, Bitcoin Trust (GBTC), Bitcoin Cash Trust (BCHG), Ethereum Trust (ETHE), Ethereum Classic Trust (ETCG), Litecoin Trust (LTCN) and Digital Large Market Fund (GDLC) have been listed on the highest-level trading market in the United States, OTCQX, and can be freely traded by secondary market investors.

Grayscale Trust Investment Products at a Glance

Since the beginning of this year, Grayscale Bitcoin Trust and Ethereum Trust have been successfully registered with the U.S. SEC (Securities and Exchange Commission) and have become cryptocurrency investment tools that report to the SEC. At present, the scale of these two trust products accounts for about 95% of the total market value of Grayscale's holdings, of which the scale of Bitcoin Trust accounts for more than 80%.

Recently, Coin98 Analytics released a set of statistics on Twitter, showing that in November 2020, the amount of BTC held by Grayscale was nearly twice the amount of BTC mined by miners during the same period. Reflected in the market, BTC opened at $13,710 that month and closed at $19,310, a 40.8% increase in a single month.

Today, in the eyes of many crypto-asset investors, Grayscale is one of the biggest drivers of the bull market. Whenever the market goes down, there are always people in the community praying that Grayscale will quickly buy up and revive. To some extent, Grayscale's willful "buy, buy, buy" has become an operating indicator for some cryptocurrency investors.

No redemption yet, only in and no out?

Grayscale played a leading role during the rapid rise of Bitcoin. Some investors who did not get on board in time joked that Grayscale only bought but did not sell, which was "unethical". However, as the price of BTC broke through the historical high, some people began to worry that once Grayscale shipped, it might cause an avalanche in the crypto asset market.

Most people only know that Grayscale is a crypto asset whale. To find out whether it will crash the market, you need to understand the operating mechanism behind it, including who is buying or custodial crypto assets and whether there is a "lock-up" mechanism.

As a crypto asset investment management company, Grayscale was established by Digital Currency Group in 2013. At its inception, it was determined to follow the compliance route and only supported subscriptions from "qualified investors".

According to Grayscale's official website, qualified investors must meet one of the following conditions: annual personal income of at least $200,000 (or $300,000 with a spouse); net assets of more than $1 million alone or with a spouse (excluding residential properties); holding Series 7, Series 65 or Series 82 financial industry certificates. For institutions, they need to have more than $5 million in liquid assets, or all shareholders are qualified investors.

From the perspective of rules, Grayscale itself does not pay any money. Its main income comes from charging management fees to its customers on an annual basis. The rates of various investment products are different. The management fee for Bitcoin Trust is 2%, and for BCH and ETH it is 2.5%.

Grayscale investment product management fees at a glance

You can always see such descriptions in the information, "Grayscale purchased XX bitcoins from the market". In fact, this is inferred based on the trust data it publishes. Grayscale's various trust products currently accept cash contributions and physical contributions (such as BTC).

Taking BTC as an example, under the cash contribution model, investors submit their US dollar assets to Grayscale, which hands the assets over to authorized brokers and then buys BTC in the spot market and deposits it in the cold wallet of custodian Coinbase. At the same time, it issues equal value of Bitcoin trust shares GBTC to investors.

In-kind investment does not involve buying in the spot market. Investors only need to hand over BTC to Grayscale, which then deposits BTC into Coinbase custody and issues GBTC. According to Grayscale's 2019 third quarter report, in-kind investment accounted for 79% and cash investment accounted for 21%.

This operation model is similar to that of a gold trust fund. Some gold producers consign physical gold to fund companies, which then use this physical gold as a basis to publicly issue fund units on exchanges and trade them in the secondary market. Investors who purchase gold funds can freely redeem physical gold during the fund's existence. Grayscale is different. Since October 28, 2014, Grayscale Bitcoin Trust has suspended its redemption mechanism and currently does not allow redemption of units. In the future, a redemption mechanism may be set up at the discretion of the trust sponsor and after obtaining regulatory approval from the SEC.

At present, it seems that Grayscale has no intention to submit a redemption plan to the SEC. This means that Grayscale's current management of assets such as BTC and ETH is equivalent to "only in, no out". However, the stocks such as GBTC and ETHE issued by Grayscale through "mapping" can enter the secondary market of US securities trading after the closed period, and retail investors can also invest.

According to the US SEC "Rule 144", after investors receive GBTC and other stocks from Grayscale, they still need to go through a certain closed period before they can enter the secondary market. Among them, the closed period for GBTC and ETHE reported to the SEC is 6 months, and other trust products are 12 months. This is equivalent to a hard "lock-up".

Therefore, some analysts believe that Grayscale has a low risk of a market crash in the short term as it currently has no redemption mechanism and related assets are in a closed period before entering the secondary market. However, this does not mean that Grayscale will continue to hold these assets. If crypto assets such as BTC plummet, variables will follow.

Positive premium brings money-making power

According to Grayscale's public 2020 Q3 report, among investors who subscribed to its trust product shares, institutional investors accounted for 81%, including crypto asset lending company BlockFi, Three Arrows Capital, etc. In addition, individual qualified investors accounted for about 8%, family offices accounted for 8%, and retirement account funds accounted for 2%. In terms of the geographical distribution of investors, 43% of the capital inflows came from US investors, and 57% of the capital inflows came from offshore investors.

Why are over 10 billion US dollars of assets keen to flow into Grayscale? Especially behind the main force of institutional investors, are these smart investors really believers in crypto assets?

On December 3, Grayscale held an investor conference. At the conference, Michael Saylo, CEO of Micro Strategy, a global BI software giant, said that many people do not realize that in the next five years, holding only cash will reduce 10% to 15% of wealth, and cryptocurrencies are a safe haven. Micro Strategy is the first listed company to use BTC as its capital allocation. In addition to believing that crypto assets have anti-inflation properties, Michael Saylo also compared stocks and gold. He believes that stock returns are limited, gold production is increasing every year, and is highly manipulated by banks. "In the next decade, cryptocurrencies will be dominated by institutions."

Obviously, it is too naive to talk about faith in front of capital, and returns are the focus of their consideration. In recent years, GBTC has a positive premium compared to BTC in the secondary market of US stocks, which means there is room for arbitrage.

According to statistics, the highest premium rate of GBTC reached 132%, and the average premium rate in the past five years was 38%. According to QKL123 data, the recent premium rate of GBTC is still fluctuating around 20%, and on December 3, the premium rate exceeded 30%.

GBTC premium rate fluctuation trend

Simply put, the price of GBTC in the U.S. stock market has long been higher than that of BTC. For some investors who are concerned about regulatory risks and fund security, buying GBTC in a compliant market is a better choice. The resulting higher premium rate continues to attract wealth owners who are seeking investment returns.

The most basic arbitrage method is for investors to buy Grayscale GBTC shares with cash or Bitcoin through conventional means. After the closed period, they can choose the right opportunity to sell them in the secondary market of US stocks and obtain good profits.

In the eyes of smart capitalists, there are more advanced ways to play. Some institutional investors first borrow BTC from lending platforms, then exchange it for GBTC through Grayscale, wait for profit and sell it in the secondary market, and then buy BTC back to the lending platform to complete arbitrage. This method can obviously improve the utilization rate of funds. Grayscale's account shows that its holdings have increased again.

In theory, as long as assets such as GBTC and ETHE continue to have a premium, Grayscale's qualified investors will have the motivation to increase their holdings, but the premise is that there must be sufficient funds and liquidity in the US OTC market to provide buying for assets such as GBTC. If the market plummets, the prices of assets such as GBTC will also fall, and investors will no longer be willing to buy GBTC, and Grayscale's increase in holdings may stop. When there is not enough money willing to take over GBTC in the secondary market, it may have a negative premium compared to BTC, and Grayscale is more likely to reduce its holdings of BTC.

It is not difficult to see that behind the capital and Grayscale's "buy, buy, buy", the most important thing is still the trend of crypto assets such as BTC. Once the signs are not right, the financiers behind Grayscale may take the lead in acting as market crashers in the US OTC market. In this case, it is unrealistic to expect Grayscale to continue to act as a savior.

Compliance "Signboard"

Currently, under the effect of Grayscale's increased holdings, the prices of crypto assets such as BTC, ETH, and LTC have all risen. The reason is that Grayscale, on the one hand, provides a large amount of buying to the market, and on the other hand, as a compliant institution regulated by the SEC, it also brings in capital injection from the traditional market. Compliance continuously introduces new funds to the crypto market, which is the more important significance that Grayscale brings to this emerging market.

Compared with traditional assets such as stocks and gold, crypto assets such as BTC have long been criticized by the mainstream financial world due to factors such as high volatility and uncertain value. Some people think it is a scam, while others praise it as digital gold.

Until January this year, Grayscale Bitcoin Trust officially became a company reporting to the SEC, and the crypto asset industry was re-examined by the traditional capital market. The data does not lie. In the first three quarters of this year, the amount of funds flowing into Grayscale accounted for 68% of its historical accumulated funds. Institutions began to enter the world of crypto assets in a big way.

Industry insiders believe that the existence of Grayscale allows large institutions and qualified investors who want to enter the crypto asset industry to avoid having to purchase, transfer and store digital assets themselves, nor to manage other personal accounts, wallets and private keys. All assets are cold-stored in crypto wallets, which is safer and will not suffer asset losses due to being stored in centralized exchanges with regulatory and runaway risks. In addition, these investors can trade in more compliant and regulated markets, which largely avoids the risk of black box manipulation.

In addition to Grayscale, fintech companies such as PayPal and Square are allowed to provide support for BTC and other crypto assets under the regulatory framework, which also drives the price growth of "coin assets."

According to the analysis of Pantera Capital, a hedge fund that invests in blockchain and digital currency, most of the daily new BTC supply in the market is bought by customers of online payment giant PayPal and the US version of Alipay Square. CoinGecko data shows that since PayPal launched its BTC business, the transaction volume of Paxos, a compliant stablecoin issuer that cooperates with it, has more than doubled.

In the more than 10 years of the development of the crypto industry, supervision and compliance have always been like the sword of Damocles. While practitioners are walking on thin ice, they are also showing an attitude of embracing it. Trading platforms such as Binance, OKEx, and Huobi continue to seek compliant operations around the world, and institutions such as Grayscale and PayPal have also jointly accelerated the compliance process of the crypto industry.

Recently, Grayscale has been placing large-scale Bitcoin advertisements in mainstream media in the United States. Michael Sonnenshein, managing director of Grayscale, said that after the outbreak, investors' participation in Bitcoin investment has substantially increased. Quantitative easing policies are being implemented in the global monetary field, and the financial market has launched a wider range of investment portfolios, and investors' willingness to invest in Bitcoin is increasing.

With the blessing of compliance, Grayscale and others are more attractive, and "new money" continues to pour in. The native cryptocurrency army that regards "decentralization" as a utopia cannot escape a reality at present - if you want to do business, compliance is the only guarantee for long-term success.