14 Jan, 21
Grayscale Trusts: Crypto at a premium
Grayscale, established in 2013 and based in New York, is the largest digital asset manager with $23.3 billion AUM as of 5th January 2021. Offering a set of digital asset trusts, such as the Grayscale Bitcoin Trust (GBTC) and the Grayscale Ethereum Trust (ETHE), they provide the infrastructure for traditional investors and institutions to easily invest into digital assets. GBTC alone has seen an inflow of 346 thousand BTC in 2020, worth $11.76 billion as of 5th Jan.
These trusts are registered with the U.S Security and Exchange Commission (SEC). Shares of the trust are titled securities, which are eligible to be held in certain Individual Retirement Accounts (IRAs), 401 (k) Plans (401ks), and other brokerage and investment accounts.
Grayscale Trusts – How it works
Investors can access Grayscale trusts in two ways: through private placements or through the secondary market, OTCQX. New shares are issued when accredited investors proceed with private placements, which they are eligible to sell after a six to twelve-month holding period.
Grayscale Trusts – Premiums
Grayscale trusts trade significantly over its net asset value, with GBTC and ETHE trading at 29.27% and 27.12% premium respectively as of 5th Jan. This opens an arbitrage opportunity for accredited investors or institutions to acquire shares at its net asset value via private placements, driving even more demand. Case in point, the ETHE premium dropped from 103% to 14.91% after 116 million shares were unlocked on 4th Jan. However, the strong demand for the digital asset led it back to the 27.12% premium the next day.
But why is its demand so strong?
Regulation, custody and safety
Having digital assets available as traditional investment vehicles allows for U.S investors to utilise their IRA, Roth IRA, 401ks for more favourable tax benefits. As a security regulated by the SEC, investors can be confident buying the product for exposure to BTC without the trouble of storing and safekeeping BTC themselves. Shares are also titled in the investors’ name, allowing for beneficiaries and estate planning.
Investment funds usually have restrictive fund mandates dictating what the firm can or cannot hold. A fund that would otherwise be unable to purchase non-financial products such as Bitcoin would be able to do so through Grayscale.
On top of the premium, Grayscale’s management fees range from 2% to 3%, signalling a strong demand for digital asset exposure despite the costs involved.
Grayscale’s Q3 report indicates that over 80% of investment capital comes from institutional investors, an increase from 71% in the year 2019, with an average allocation of $2.9 million per institution. Investment inflows into Grayscale trusts increased exponentially, from 261 thousand to 607 thousand BTC (i.e. 133% increase) in the GBTC trust, and 496 thousand to 2.94 million ETH (i.e. 493% increase) in the ETHE trust for the period from 31st December 2019 to 31st December 2020.
Prominent institutional investors have also disclosed holdings of the GBTC trust, such as Ark Investments Management LLC, Churchill Management Corp and Rothschild Investment Corp. Most notably, Ark holds 5,295,778 shares worth $209 million at market price as of 5th Jan.
Grayscale’s Trusts are a large driver of demand for digital assets. As of 5th January 2021, GBTC holds 606.87k BTC, approximately 3.26% of the circulating supply. ETHE holds 2.94m ETH, approximately 2.58% of the circulating supply. In 2020, GBTC purchased approximately 346 thousand BTC, which is 76% of the total BTC mined during the year; ETHE purchased approximately 2.49 million ETH, 49% of the total ETH mined during the year. If the increasing purchases through Grayscale trusts are indicative of future growth, the demand for digital assets will far outpace the supply. Grayscale had temporarily closed private placements late December last year, opening again as of 12 Jan. We foresee large investment inflows to their trusts in 2021.
At Zerocap, we provide the same class of security as the Grayscale trusts via a different structure. GBTC is a SEC reporting company that issues restricted securities which are subjected to a minimum six-month holding period. This structure allows for traditional investment vehicles like 401ks or investment funds with particular fund mandates to gain exposure to digital assets. Our structure allows you to directly hold the underlying asset without restrictions, to trade at your convenience or utilise in our yield offerings of up to 10% p.a. Registered with AUSTRAC, we offer deep liquidity and best pricing for digital assets with institutional-grade security for digital asset custody, further covered by insurance. Our solution allows you to set up a governance model and quorum for operations, business continuity and estate planning, similar to the functions of a security.
If you would like to learn more or are ready to purchase digital assets, contact us at:
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