It is said that 2017 is a bull market for retail investors, and 2020 is a bull market for institutions. In the current round of Bitcoin’s growth in November, Grayscale is considered to be the biggest driver behind the scenes. On December 1, when the Thanksgiving holiday came back, Grayscale BTC Trust increased its holdings again, which led to further strengthening of many parties. The price of Bitcoin exceeded the historical highest price of US$19,763 and reached a new record of US$19,832.29.

The data shows that in the six months since the Bitcoin halving on May 13th, the number of Bitcoins that Grayscale increased its holdings was basically equal to its mining volume during the same period. As of December 1, the total holdings of Gray BTC were 535929 BTC.

Although it is well-known, the market, especially the retail leeks, know nothing about grayscale except for its name, and there are many questions surrounding grayscale: who is controlling grayscale? Why does Grayscale keep increasing its holdings of BTC? How does Grayscale make money?

Today, Yan Ge mainly shares knowledge about grayscale with you.

01 Where is gray scale sacred?

Grayscale is the world’s largest cryptocurrency asset management company. Its cryptocurrency trust scale has exceeded 10 billion U.S. dollars. As of November 30, 2020, its holdings are shown in the following figure:

Grayscale Investment Trust was established in 2013 by the Digital Currency Group. DCG is one of the most active and influential crypto capitals in the world, and its investment landscape spans various segments of the blockchain industry. Grayscale Fund was founded by DCG in 2013 and is a trust fund dedicated to the management of encrypted assets under Grayscale Investment.

Obviously, Grayscale Fund is a company that fully focuses on cryptocurrency investment. Moreover, Grayscale is an investment fund based on the market value of the bitcoin price it holds. It serves institutional investors and investors through compliant fund operations. Services for qualified investors with high net worth. Grayscale manages multiple funds such as BTC and ETH. Among them, BTC and ETH have passed the SEC certification, becoming the only choice for legal investment by institutions and retail investors in US stocks.

02 Grayscale business

What Grayscale Trust does is to accept investors’ funds or bitcoins to build a portfolio of assets based on bitcoins, and distribute trust stocks to investors to prove that investors hold equity in the asset group. When investors no longer want to hold the rights, they can transfer the trust stocks through the secondary market, or redeem Bitcoin to Grayscale Trust with the trust stocks.

However, due to regulatory reasons, Grayscale Trust currently does not provide redemption operations. In this way, investors can obtain income effects similar to those of investing in Bitcoin by investing in Grayscale Trust. As the trust sponsor, Grayscale Investment is responsible for the daily management of the trust, quarterly and annual reports, selection and supervision of the trust’s various intermediary service agencies.

The investment goal of Grayscale Trust is to “track the market price of Bitcoin.” This investment goal means that the trust product is not to create excess income. As long as the trust income can be basically consistent with the Bitcoin price changes, then its mission will be fulfilled.

03 What is Grayscale Bitcoin Trust (GBTC)?

Grayscale Bitcoin Trust (GBTC) is Grayscale’s largest encrypted digital asset trust product, and its scale accounts for more than 90% of Grayscale’s overall asset management scale.

GBTC is essentially a private equity trust fund. It conducted its first private placement in 2013 and opened subsequent primary market subscriptions from time to time. Initially, only qualified investors can participate. One GBTC is 0.00095744BTC, and the minimum subscription amount is 50,000 U.S. dollars. In March 2015, GBTC was publicly traded on OTCQX, officially announcing that the share of GBTC private equity trust funds will be listed in the secondary market, and public investors can participate.

Investment in GBTC is divided into cash contribution and in-kind contribution (Bitcoin). Buying GBTC is equivalent to buying the corresponding share of Bitcoin in a gray position. Since GBTC was investigated by the SEC in 2014, Grayscale suspended the redemption mechanism of GBTC on the grounds that the SEC would not approve it. Therefore, the GBTC shares subscribed by investors of the two types of capital contributions cannot be redeemed.

In addition, Grayscale will also charge a 2% custody fee, which is also its main profit method. The collection method is deducted from the number of bitcoins held, that is, the currency-based method collects management fees.

In addition to the Bitcoin trust fund, Grayscale Investment also launched a total of nine cryptocurrency trust funds including ETH, BCH, ETC, LTC, XRP, Horizen, XLM, and ZEC, as well as a complex cryptocurrency trust fund containing mainstream currencies ( Grayscale Digital Large Cap Fund).

04 Who are the big guys behind the grayscale?

Due to the relatively complex regulatory environment, imperfect infrastructure, and high risk of current cryptocurrency, most institutional investors in traditional financial markets cannot directly invest in cryptocurrencies through exchanges. Because of the threshold of market supervision, many institutions have increased their demand for “safe” investment in cryptocurrency, so this has spawned a “compliance” platform that caters to traditional regulatory requirements-Grayscale.

According to reports, 80% of the purchases of GBTC are institutional investors, and as of November 2020, a total of 23 companies (a total of 29 institutional-level accounts) hold shares of Grayscale Bitcoin trust. Second are qualified investors, pension accounts, and family offices (an institution that provides comprehensive wealth management for super wealthy families).

Encrypted asset lending company BlockFi is the largest holder of Grayscale Bitcoin Trust, holding approximately 24,235,500 trust shares; the second holding position is Three Arrow Capital, which is currently one of the most active cryptocurrency hedge funds.

It is worth noting that the institutions hidden in this list have accounts of well-known private wealth management institutions or family offices, including the famous Rothschild Investment Corp (Rothschild Investment Corp).

05 Why can’t the gray scale only enter and not exit?

According to the latest data officially released by Grayscale, as of November 29, the total holdings of Grayscale Bitcoin Trust reached 535,929 BTC, which continues to push BTC toward the highest price in history.

In fact, GBTC does not “should timing” its investment in Bitcoin, but aims to track the trend of its price itself and serve its investors. Therefore, its Bitcoin investment strategy is “passive”. Why?

1. The source of demand for increasing holdings of BTC is the continuous entry of large funds from arbitrage institutions. After buying out the share of GBTC, it prompts Gray to increase holdings. But the ultimate source of demand still comes from the secondary market. The extremely high premium has attracted many institutions to carry out arbitrage activities, and this situation is often more obvious in a bull market. Therefore, when Grayscale continues to increase its holdings of Bitcoin, it means that arbitrage institutions are optimistic about the GBTC premium.

2. The unredeemable mechanism of Grayscale Bitcoin Trust will make it manage more and more positions, and the 2% management fee makes Grayscale earn a lot of money.

06 How does Grayscale sell digital currency?

The grayscale exchange “selling” Bitcoin or Ethereum is actually divided into two steps:

The first step is to conduct a private placement and open the subscription of GBTC (you can understand it as a gray-scale issued bitcoin voucher) to qualified institutional investors. After the institutional investor buys it, it cannot be unlocked for six months (previously 12 month).

In the second step, after the unlocking period is up, the institution can sell GBTC to retail investors including the U.S. stock market, and retail investors in the stock market are responsible for receiving GBTC.

Therefore, this is an order-taking game for an exchange that does not open withdrawals.

07 What is the premium of Grayscale Trust?

At present, the stock price of Grayscale Trust is significantly higher than the market price of its corresponding Bitcoin asset portfolio. That is to say, for the same amount of money, the amount of Bitcoin corresponding to the purchase of Grayscale Trust stock is less than that of directly buying bitcoin from the exchange. This is a premium. .

 The top $23.19 is the grayscale trust stock price, and the bottom $18.16 is the bitcoin value corresponding to each grayscale trust stock. The stock price is higher than the value of the corresponding asset, that is, the trust stock has a premium.

One view is that the premium is because Grayscale Trust saves investors the work of keeping Bitcoin, and investors are willing to pay a higher price for this. However, this view is obviously untenable, because Grayscale Investment, as an asset manager, charges a management fee every year, and the management fee already includes the cost of paying for third-party bitcoin management. In addition, the trust’s daily operating expenses and supervision requirements Expenses will also be deducted from the use. So there is no reason to pay more on the trust stock price to save the worry of custody.

Another view is that because Grayscale Trust has a 6-month lock-up period for stocks, there are fewer trust stocks circulating in the market, which makes the imbalance between supply and demand in the secondary market generate a premium, and the premium will shrink as the trust stocks are unlocked. However, Grayscale Trust has been issuing for some years. Even when the issuance was not many in the previous years, the premium has always existed, and it has not been significantly reduced after the stock is unlocked. Therefore, supply and demand cannot reasonably explain the existence of premium.

From a historical point of view, the premium of Grayscale Trust’s stock price has always existed (the green line is the trust stock price, and the black line is the value of Bitcoin per share)

08 Summary

Grayscale Trust itself has no investment position. However, Grayscale Investment makes money through management fees. Naturally, it is hoped that the rise of Bitcoin will attract more investors to buy its products to contribute management fees. Therefore, Grayscale Investment advocates nothing wrong with virtual currencies. The impact of Grayscale Trust on the Bitcoin market is mainly due to its suspended redemption mechanism. Once redemption is opened, it will break the current Grayscale Trust’s influence on Bitcoin price support. Prior to this, the increase in holdings of Grayscale Trust can be regarded as capital entry, which is greatly beneficial to the currency price.

Image source: https://grayscale.co, grayscale official Twitter, non-small