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In the crypto-asset market, there is such a Bitcoin giant who has been hoarding coins in silence. It just buys BTC (and ETH as well), at its own pace, but never sells them regardless of market fluctuations as if buying BTC were its rigid demand. Low-key as it may be, it has still drawn much attention even beyond the crypto market. Recently, it has frequently hit the headlines in the industry. This giant is Grayscale.
Established in 2013, Grayscale, with its full name Grayscale Investment Trust, is a subsidiary of the Digital Currency Group (DCG), which is a trust fund dedicated to the management of encrypted assets under DCG.
As an investment fund based on the market value of the Bitcoin price it holds, Grayscale provides investors with a legal channel to buy and sell cryptocurrencies setting up a cryptocurrency trust fund; moreover, it is also the world's largest asset management fund dedicated to cryptocurrency investments.
It is worth mentioning that DCG is one of the most active and influential crypto capitals in the world, with many Wall Street financial giants as its backers. Following an operation pattern similar to Berkshire Hathaway Group at the helm of Warren Buffett, DCG is a diversified group that integrates holding and investment. Up to now, it has served more than 160 companies in over 30 countries, covering media, payment, exchanges, and other fields in the cryptocurrency industry. In addition to Grayscale, DCG's well-known subsidiaries also include GenesisTrading, a digital currency broker, CoinDesk, a blockchain media platform, and Foundry, a Bitcoin miner.
Before founding DCG, Barry Silbert, its founder and CEO, set up SecondMarket, a platform that streamlines the complex transaction process for private companies and investment funds.
In recent years, SecondMarket has received numerous accolades, including “the technology pioneer” honored by the World Economic Forum and also awards from Forbes, Fast Company, Deloitte, and other organizations. Barry Silbert has also got many honors in person, including being named the Entrepreneur of the Year by Ernst & Young and Crain and selected into the prestigious "40 under 40" list of the Fortune magazine. Before establishing SecondMarket in 2004, Barry was an investment banker with Houlihan Lokey. He graduated with honors from the Goizueta School of Business at Emory University.
At present, Grayscale has eight single-type asset trust funds, including mainstream cryptocurrencies such as BTC and ETH, and one management fund focusing on portfolio investment in large-market capitalization cryptocurrencies. By the type of cryptocurrencies held, Grayscale’s subordinate funds are divided into BTC Trust, BCH Trust, ETH Trust, ETC Trust, ZEN Trust, LTC Trust, XLM Trust, and ZEC Trust. (Days ago, Grayscale announced the dissolution of XRP Trust, which caused quite a stir in the industry)
Category of Grayscale’s Fund Trust Products (Source: Grayscale’s official website)
As we all know, the most well-known product of Grayscale is Grayscale Bitcoin Trust (GBTC), which holds 641,500 BTC up to now, valued at US$22.233 billion. In July 2020, Grayscale held 386,000 BTC, which had grown to more than 500,000 by mid-November. Especially after late October 2020, GBTC continued to increase its holdings of BTC, which became an important boost for BTC's rise.
Value of Grayscale’s BTC Holdings (Source: Feixiaohao)
指数 Index
BTC持仓价值 Value of BTC Holdings
BTC预估持仓成本 Estimated Value of BTC Holdings
BTC预估持仓均价 Estimated Average Price of BTC Holdings
Changes in Grayscale’s BTC Holdings (Source: Feixiaohao)
BTC全球指数 Global Index of BTC
BTC持仓量 BTC Holdings
持仓量 Holdings
66万 660,000
60万 600,000
50万 500,000
40万 400,000
The Latest Grayscale’s Holdings (Source: Grayscale’s official Twitter account)
In operation similar to the gold ETF fund, Grayscale earn profits through the management fee
The operation mode of Grayscale is quite similar to that of the gold ETF fund: the traditional gold ETF fund consigns physical gold from large gold producers to the fund company; then taking the gold as the basis, the fund company publicly issues fund shares on the exchange and sell them to various investors. In this case, commercial banks act as the fund custodian bank and the physical custodian bank respectively, and investors can freely buy, sell and redeem the fund during its existence.
Differently, Grayscale does not support redemption. After buying cryptocurrencies from Grayscale and selling the fund shares in the market, one needs to lock the shares. In addition, the coins deposited by qualified investors and institutional users cannot be redeemed but cashed out by selling the corresponding fund shares in the secondary market. Therefore, Grayscale’s holdings have taken on a unilateral upward trend since day one.
Like traditional trust funds, Grayscale mainly relies on management fees as its major source of profits. As long as investors’ demand for deposits in Grayscale continues to increase, it will have an inexhaustible flow of management fees. At present, this management fee is much higher than the general level in the traditional trust industry.
The annual management fee of traditional trust funds is generally set at 0.3-1.5%, while the figure for Grayscale is at 2%~3%, approximately twice the former. For example, with GBTC alone, whose annual management fee is 2%, Grayscale rakes in amazing net profits in one year. The figure below shows the annual management fee of Grayscale’s fund trust products.
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产品 Product
费用 Rate
灰度比特币信托（BTC） Grayscale Bitcoin Trust
灰度比特币现金信托（BCH） Grayscale Bitcoin Cash Trust
灰度以太坊信托（ETH） Grayscale Ethereum Trust
灰度以太坊经典信托（ETC）Grayscale Ethereum Classic Trust
灰度Horizen Trust (ZEN) Grayscale Horizen Trust
灰度莱特币信托 （LTC）Grayscale Litecoin Trust
灰度恒星流明信托（XLM） Grayscale Stellar Lumens Trust
灰度Zcash信托（ZEC） Grayscale Zcash Trust
灰度数字大型股基金有限责任公司 Grayscale Digital Large Cap Fund
Grayscale Bitcoin Fund has become the most important access to BTC for institutional investors
According to Grayscale’s quarterly report for Q4 2020, most investors (93%) are from institutions led by asset managers; at the beginning of 2020, Grayscale had US$2 billion under its management, and by the end of that year, the figure reached US$20.2 billion. In addition, Grayscale Bitcoin Trust has become one of the world's fastest-growing investment products in 2020, with the assets under management growing from US$1.8 billion to US$17.5 billion. That serves as an evidence that Grayscale Bitcoin Fund has also become the most important access to the BTC market for institutional investors.
Changes in Grayscale Bitcoin Trust’s Holdings in Q4 2020
· BTC – 灰度信托持仓量 BTC Holdings of Grayscale
· 币价 Price
· 持仓量 Holdings
· 12万 120,000
· 11万 110,000
· 10万 100,000
· 9万 90,000
· 8万 80,000
· 7万 70,000
· 6万 60,000
At the beginning of 2020, Grayscale was registered as a company that needs to report to the SEC. This means that GBTC is the first cryptocurrency investment tool to report quarterly to the SEC. Specifically, it needs to notify all unplanned events or changes within the company and send related audited reports to the SEC. In October 2020, Grayscale Ethereum Trust Fund also passed the approval of the SEC, becoming the group’s second licensed digital currency investment tool.
Under the unique redemption mechanism, Grayscale’s holdings gradually increase
Grayscale’s cryptocurrency trust products can be divided into two categories, i.e. those purchased in the form of capital contribution and those purchased in the form of in-kind contribution.
By capital contribution, investors directly pay cash to Genesis Global Trading, an over-the-counter cryptocurrency trading broker subordinate to DCG. After Genesis receives the payment, it converts the cryptocurrencies into the designated ones (such as BTC, ETH, or others) at the market price, and then delivers them to Grayscale which will then send them to Coinbase Custody for custody and issue the equivalent GBTC, ETHE, or other cryptocurrency trust shares.
Apart from capital contributions, Grayscale also allows in-kind contributions (with a minimum of US$50,000).
In-kind contribution refers to the direct delivery of cryptocurrencies (such as BTC and ETH) to Grayscale in exchange for trust shares in GBTC, ETHE, or other cryptocurrencies.
What’s more, several cryptocurrency trust products of Grayscale have been launched on the trading platform of the secondary market. With a U.S. stock account, investors can directly buy these products (including premiums) through the secondary market.
At present, Grayscale Bitcoin Trust does not support share redemption, that is, once investors subscribe for the trust share, they cannot redeem the Bitcoin but sell the Bitcoin trust share GBTC in the secondary market of the US stock, and GBTC needs to be locked. Therefore, GBTC traded in the US OTC market has become one of the few compliant BTC trading products currently. Due to the huge market demand, the price of GBTC in the secondary market often has a premium relative to its net value. The inability to redeem Grayscale Bitcoin Trust will increase its holdings, which constitutes a considerable source of profit given the 2% management fee.
The secret of high premium: GBTC becomes an arbitrage tool
The key factor that explains the charm of Grayscale among institutional investors lies in its high premium.
The need to increase BTC holdings comes from an endless stream of large funds from arbitrage institutions who clear GBTC's share and prompt Grayscale to increase its holdings. This is the reason why Grayscale keeps buying Bitcoin. However, the ultimate source of this demand is derived from the secondary market. The extremely high premium has attracted many institutions into arbitrage activities, which is more evident in a bull market. As a result, Grayscale’s increasing its holdings of Bitcoin can be taken as a signal of an optimistic sentiment about the GBTC premium among arbitrage institutions.
GBTC’s long-term positive premium has also created an arbitrage space between the primary and secondary markets. Institutions can borrow BTC to participate in the private placement of GBTC in the primary market, gain GBTC share, sell it in the secondary market after unlocking it, and then buy BTC to repay the borrowings. The GBTC premium minus the borrowing interest is the profit margin.
In addition, institutions can also directly buy BTC through spot trading, deposit GBTC shares, and do short hedging with futures. After GBTC is unlocked and sold in the secondary market, the futures are closed for arbitrage. The spread between GBTC's premium and interest is the profit.
Although the arbitrage opportunities have increased the pressure on potential market selling, Grayscale’s mechanism that does not allow redemption isolates GBTC shares from the circulating market. In that case, investors cannot sell trust shares in the encrypted market but in the OTC market of the U.S. stock. By doing so, Grayscale has shifted the market selling pressure to the US stock market.
All in all, the unique redemption mechanism of Grayscale BTC Trust Fund can easily bring external incremental funds into the encrypted market, increase the demand for BTC, and shift all the selling pressure of the market to the OTC market of the U.S. stock, which makes Grayscale Bitcoin Trust a long position that “only buys but does not sell shares”.
Bitcoin trusts are more easily accepted by traditional investors
Trust products, regulated by the US SEC that requires complete information disclosure, greatly reduce the risk of long-term holding of Bitcoin. Secondly, trust products enjoy certain tax concessions in the United States, which is a big plus for American investors, so do Grayscale trusts. Therefore, Bitcoin investment in the form of trusts is a big magnet for them.
Furthermore, the custody of virtual currency is not easy, and the leakage of the key and the damage of the hard disk will lead to losses in virtual currencies. Grayscale can complete a full set of custody procedures for investors and is regulated by the SEC; besides, with the help of Grayscale, investors only need to focus on fluctuations in Bitcoin, without the trouble of learning. This is why more investors choose the form of trust instead of buying Bitcoin directly.
Days ago, Barry Silbert, founder of Grayscale, tweeted to promote ZEN, pushing the price of ZEN to a new high. [Refer to “CoinEx Research Institute: What Is Exactly Horizon (ZEN) That is Advocated by Grayscale Boss?” in the series published by CoinEx Research Institute]. That is a telling evidence of Grayscale’s influence on the encrypted-asset market. In fact, Grayscale itself does not have an investment position, and, given the fact that its profit mainly comes from management fees, it naturally desires a rise in the currency price so that more investors will be attracted to buy its products, which will in turn contribute a big share to its management fees. Though having existed for a long time, Grayscale received widespread attention only in recent years. Its success is also attributed to the Bitcoin consensus that has been expanding and entered the vision of the traditional financial market.
References:
Bi Shi Jie: All Truths about Grayscale
Alpha Zone: Grayscale, the Biggest Institutional Investor of Bitcoin
