What is Grayscale Investments?

23.05.2022

Intermediate

#Grayscale Investments #Institutional Investors and Whales #Stock Market

Key points

Grayscale Investments is an asset manager running cryptocurrency trusts and other investment products.
Grayscale’s bitcoin trust, GBTC, was the first regulated vehicle that allowed institutional investors to gain exposure to BTC.
A cornerstone of the company’s strategy is converting GBTC into an exchange-traded fund (ETF).

Who founded Grayscale?

The American firm Grayscale Investments was launched in 2013 by Barry Silbert, the owner of the crypto-focused venture company Digital Currency Group. DCG also owns other assets, including the lending platform Genesis Global Trading and the media outlet CoinDesk.

Soon after its founding, Grayscale placed its first and best-known cryptocurrency trust — Bitcoin Investment Trust (GBTC). Shares in the trust were available to accredited investors. Later GBTC received trading approval from FINRA, after which it was listed on the regulated over-the-counter platform OTCQX.

What is a trust?

A trust is a legal structure to which various assets can be added. Any legal, valuable asset can be placed in a trust — money, business equity, securities, property and even cryptoassets.

Trust shares can trade on exchanges or over the counter. Buyers effectively invest in the underlying asset, but indirectly rather than directly.

Who invests in Grayscale’s trusts, and why?

Crypto trusts often trade at a premium to the spot price of the underlying asset, and Grayscale charges a 2% management fee. As a result, these products tend to suit long-term horizons and large investors. They do, however, solve an important problem: legal certainty.

For professional market participants, the legality of the investment vehicle is a basic requirement. Grayscale’s products therefore became the first way for institutional investors to make passive allocations to cryptocurrencies in the absence of a clear legal framework.

Crypto trusts also offer other advantages. Notably, they spare investors the challenge of securely storing large amounts of cryptocurrency. At the time Grayscale launched its trusts, U.S. tax rules for digital assets were still fuzzy; GBTC and similar products are traditional securities with a clear tax treatment.

In 2022, retail investors using the Robinhood app gained access to trading Grayscale’s investment products.

How are Grayscale trusts priced?

Each Grayscale trust share is backed by a fixed amount of the underlying cryptocurrency, yet prices can diverge.

The crypto industry is familiar with the “Grayscale premium”: a trust trading above the price of its underlying asset on crypto exchanges while still attracting demand. This trend is a gauge of institutional sentiment.

If “whales” are willing to pay up for a trust, sentiment is bullish.

The reverse also happens: if a Grayscale trust trades at a discount to its underlying, a bearish trend prevails.

Which cryptocurrencies have Grayscale trusts?

Grayscale Investments’ first and most popular product is the bitcoin trust, GBTC. As of May 2022 the firm manages similar products based on a number of other cryptoassets:

Ethereum (ETH)
Basic Attention Token (BAT)
Bitcoin Cash (BCH)
Decentraland (MANA)
Chainlink (LINK)
Ethereum Classic (ETC)
Filecoin (FIL)
Horizen (ZEN)
Litecoin (LTC)
Livepeer (LPT)
Solana (SOL)
Stellar (XLM)
Zcash (ZEC)

Where to check the current “Grayscale premium”

Grayscale publishes data on the divergence between its trusts and their underlying assets on its website. For example, on this page you can see statistics for the largest Grayscale trust — Grayscale Bitcoin Trust.

How much money is in Grayscale’s products?

Grayscale acquires underlying assets for its trusts according to demand and the capital committed. As the principal gateway for large allocations to digital assets, the firm’s assets under management (AUM) not only rose with the crypto market but often outpaced it.

In April 2019 AUM was a little over $1bn; two years later, in spring 2021, it topped $50bn. By May 2022, after a market correction, AUM had fallen to roughly $26bn, of which more than $18.7bn related to GBTC.

Given the popularity of bitcoin among institutions, Grayscale Investments became the world’s largest known holder of the cryptocurrency. According to Bitcoin Treasuries, in May 2022 the firm held almost 655,000 BTC.

What other investment products does Grayscale offer?

Beyond single-asset trusts, Grayscale offers funds with baskets of cryptocurrencies as the underlying:

Grayscale Decentralized Finance Fund — tokens of DeFi projects.
Grayscale Digital Large Cap Fund — large-cap cryptoassets.
Grayscale Smart Contract Platform Ex-Ethereum Fund — native coins of smart-contract platforms, excluding Ethereum.

In February 2022 Grayscale launched its first exchange-traded fund (ETF) — Grayscale Future of Finance (GFOF). Its underlying assets are shares of more than 20 public companies operating in the cryptocurrency sector. It trades on the New York Stock Exchange (NYSE).

A few months later Grayscale listed a new UCITS ETF that serves as a “wrapper” for GFOF.

How is Grayscale progressing?

The company sees a U.S. spot bitcoin ETF, built on GBTC, as the key to its strategy. It would open bitcoin exposure to millions of individual investors active in public markets. Surveys show significant potential demand for such a fund.

When this might happen is unclear. Launching the vehicle requires approval from the SEC, which many financial firms have unsuccessfully sought for spot crypto ETFs since 2018. Grayscale has said it is prepared to sue the regulator if approval is denied.