JPMorgan Chase report: Gold ETF funds outflow in October, Grayscale funds inflow momentum is strong

Crypto enthusiasts will remember this advertising slogan that Grayscale launched last year to attract investors to its crypto funds. Now, more than a year later, investors seem to be starting to take notice of the crypto asset manager’s advice.

"Grayscale experienced unprecedented capital inflows" in 2020, said Michael Sonnenshein, the firm's managing director.

“2019 was also a record-breaking year, and that momentum has continued into 2020,” Sonnenshein told The Block. “In the third quarter, Grayscale raised more than $1 billion in funding, and we are excited to share that two-thirds of the way into the fourth quarter, we are seeing this momentum continue to build.”

On October 14, digital asset management company Grayscale Investments reported its best quarterly results to date. In its third quarter 2020 financial report, Grayscale said that the company had $1.05 billion in inflows across all its products. So far this year, the figure is $2.4 billion, which is more than double the total amount raised from 2013-2019.

Its most popular product, Grayscale Bitcoin Trust, saw inflows of $719.3 million in the third quarter, while total Bitcoin assets under management (AUM) grew 147% in 2020. Crypto products other than the Bitcoin Trust accounted for 31% of the $1 billion in total investment. Grayscale's LTC and BCH trust funds and "Large Cap Fund" both saw quarterly inflows increase by 1,400%.

The firm said 81% of investments in the third quarter came from institutional investors and 57% from investors who invested in multiple products, reflecting the broadening of investor interest in crypto assets other than Bitcoin.

Three analysts including Nikolaos Panigirtzoglou of JPMorgan released a report saying that some gold ETF investors may be considering Bitcoin as a substitute for gold. The report explained that the inflow of Grayscale Investment Bitcoin Trust Fund in the past five weeks is in sharp contrast to the gold ETF, which has seen a certain degree of outflow since mid-October. The analysts said: "Some investors who previously invested in gold ETFs, such as family offices, may be considering Bitcoin as a substitute for gold."

In addition, institutional investors are viewing Bitcoin as a long-term investment. For example, the asset size of the Grayscale Bitcoin Trust Fund continued to expand in the fourth quarter, three times that of the third quarter. Cash APP under payment platform Square purchased $1.6 billion worth of Bitcoin in the third quarter of this year.

This contrast is not surprising to Sonnenshein, who said Grayscale believes that there will be a rotation into Bitcoin due to changing preferences.

“With the Drop Gold campaign, we looked at generational investment preferences, and now we’re seeing the beginnings of this wealth transfer,” Sonnenshein said.

The recent outflows from gold ETFs have been supported by a fall in gold prices since mid-summer. After a run-up to over $2,000 earlier this year, gold prices are down about 10% from their August peak.

Optimism related to the upcoming COVID-19 vaccine is said to be at work. In addition, inflation, which is considered a tailwind for gold, seems to be less of a concern among Wall Street. In fact, Goldman Sachs wrote in a note to clients that it believes it is "unlikely" for inflation to rise significantly in the coming years.

Analysts at Macquarie expect the situation for gold prices to get worse.

According to the Financial Times, the bank's analysts said the gold bull market has ended and expected gold prices to fall to $1,550 an ounce by next year, a 17% drop from current prices.