Crypto Firm Grayscale Reports Record AUM for 2020

Skyrocketing Bitcoin (BTCUSD) prices coupled with greater institutional interest in cryptocurrencies propelled crypto investment firm Grayscale to its best year of 2020. The New York-based firm witnessed “unprecedented investor demand” and its assets under management (AUM) increased more than 10-fold to $20.2 billion last year, according to a recent report on digital asset investment. The last quarter of 2020 was particularly pivotal for Grayscale’s operations, accounting for approximately $3.3 billion in inflows. This figure equates to approximately 58% of the year’s total investments and nearly half of the $7 billion lifetime investment in Grayscale’s products.

Last year, investors poured money into the Grayscale Bitcoin Trust (GBTC), a indefinite trust which provides indirect exposure to Bitcoin and trades on over the counter (OTC). GBTC’s AUM has grown from $1.8 billion at the start of 2020 to $17.5 billion. According to the Digital Asset Investment Report, investors invested an average of $217.1 million per week in the trust.

In addition to GBTC, Grayscale has seven other cryptocurrency fiat holdings, including those for Ethereum (ETHUSD) and Litecoin (LTCUSD) and a large-cap digital fund. The Grayscale Ethereum Trust withdrew an average of $26.3 million per week last year, while other single-asset-focused products saw average weekly inflows of $33.6 million. The total amount of investment in these products totaled $1 billion for the entire year.

Institutional investors accounted for 93% of all investments entering Grayscale funds. “There is no longer any professional risk in investing in the digital currency asset class,” said Michael Sonnenshein, CEO of Grayscale, told CNBC. “There are probably more occupational hazards in not paying attention to it.” According to Sonnenshein, the influx of inflows into Grayscale was primarily the result of investors turning away from gold, the traditional refuge market chaos, and in Bitcoin, which positions itself as digital gold.

“The kind of inflow we are reporting should be proof that investors are not waiting for an ETF to start participating in this asset class,” he said, referring to the prospect of a Bitcoin. exchange traded fund (ETF) that could provide investors with a cheaper way to access Bitcoin.

Grayscale Bitcoin Trust’s AUM increase last year followed Bitcoin’s Brobdingnagian price trajectory. After a multi-year slump, the price of Bitcoin fell from around $7,000 in January 2020 to over $40,000 in mid-December due to macroeconomic instability due to rising government debt. to the pandemic shutdown and increased interest from institutional investors. Other cryptocurrencies have also come for the journey, and the market capitalization for the crypto markets has surpassed the $1 trillion mark.

As of this writing, Bitcoin is trading at $36,247.73, roughly unchanged over the past 24 hours. The global market capitalization of the cryptocurrency markets stands at $1 trillion, with Bitcoin Evaluation accounting for 66.3% of this figure.

Grayscale and cryptocurrency markets

The AUM figures for GBTC have increased even during steep declines in Bitcoin price. For example, Grayscale reported an AUM of $359.5 million, nearly three times the figure recorded during the 2017 digital asset bull market, in 2018. By 2019, that figure had risen to $607.7 million. dollars. Bitcoin price crashed and then moved sideways for most of those two years. The latest surge in assets under management is simply a continuation of trends from the previous year, although it differs in scale and magnitude.

In its digital asset investment report, Grayscale wrote that the latest GBTC inflow figures are “further evidence that institutions view Bitcoin as a reserve asset.” But this is a misleading statement. Investing in GBTC does not provide direct ownership of Bitcoin. Rather, it is a method of generating short-term profits from wild swings in cryptocurrency prices without the associated ownership and custody fees.

The increase in GBTC’s assets under management is a function of the fund’s structure and its critical position in the crypto-economy. The fund creates shares in private placementsand redemption is only available to investors on public markets. They cannot redeem their shares for actual Bitcoin and are subject to mandatory action blocking period six months. This practice increases liquidity for GBTC shares in the secondary markets and creates price volatility.

Based on SEC filings, Grayscale issued nearly 3.5 billion shares in GBTC alone in 2020. The number of Bitcoin per GBTC share available to investors has decreased 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 lending firm BlockFi, Three Arrows Capital, and Horizon Kinetics. The last two are hedge funds based in Singapore and New York respectively. BlockFi offers attractive interest rates in exchange for investors depositing Bitcoin and other cryptocurrencies on its platform. On the backend, it lends Bitcoin to other players in the crypto markets, including GBTC. GBTC’s price volatility provides the lending company with a source of cash ready to meet its commitments to its customers.

In addition to cash, GBTC investors can use purchase-in-kind mechanisms to purchase shares. This means they can buy the shares of the fund by borrowing bitcoin from a lending company like BlockFi and contributing to GBTC’s global bitcoin holdings. After the lock-up period, they sell the shares at a premium to another investor and buy back the Bitcoin. To hedge their position, investors also open short positions against Bitcoin on futures platforms like the CME.

The lack of regulatory clarity around Bitcoin custody for institutional and retail investors also meant that Grayscale cornered the market for those looking to profit from their Bitcoin purchases. According to Bybt, a cryptocurrency derivatives data platform, GBTC’s bitcoin holdings jumped by around 346,400 over the past year.

Unsurprisingly, JPMorgan strategists written last month that Grayscale is key to the price of Bitcoin because inflows into its funds exceed investments in Bitcoin or its associated funds by momentum traders. But this dominance may not last long. Grayscale faces new competition from Bitwise and Ospreywho promise similar services at a lower cost.

Clarity around custody regulations and the prospect of Bitcoin ETF approval could also hurt Grayscale’s business. Also, not all investors may be able to withstand price volatility and rapidly fluctuating premium of GBTC shares on the price of Bitcoin.