In a recent interview, Michael Sonnenshein, the managing director of crypto investment firm Grayscale Investments, LLC (“Grayscale”), discussed institutional interest in his company’s cryptoasset-based investment products.
Grayscale is wholly-owned subsidiary of Digital Currency Group, Inc. (“DCG”), which is the world’s largest asset manager in the blockchain/crypto space. DCG is an investor in some of the best-known businesses in the crypto space, such as Abra, Coinbase, Coindesk, BitGo, and Ripple.
Grayscale was founded in 2013 by Barry Silbert, who is the current CEO of Grayscale, as well as the founder and CEO of DCG.
Grayscale is the sponsor of nine single-asset investment products—Grayscale Bitcoin Trust, Grayscale Bitcoin Cash Trust, Grayscale Ethereum Trust, Grayscale Ethereum Classic Trust, Grayscale Horizen Trust, Grayscale Litecoin Trust, Grayscale Stellar Lumens Trust, Grayscale XRP Trust, and Grayscale Zcash Trust—and the manager of one diversified investment product (Grayscale Digital Large Cap Fund).
Grayscale’s two most popular investment products are Grayscale Bitcoin Trust and Grayscale Ethereum Trust.
On July 15, Grayscale released its “Digital Asset Investment Report (Q2 2020)“. According to this report, Grayscale “recorded its largest quarterly inflows, $905.8 million in 2Q20, nearly double the previous quarterly high of $503.7 million in 1Q20.”
Here were the main highlights for Q2 2020:
- “Total Investment into Grayscale Products: $905.8 million”
- “Average Weekly Investment – All Products: $69.7 million”
- “Average Weekly Investment – Grayscale® Bitcoin Trust: $57.8 million”
- “Average Weekly Investment – Grayscale® Ethereum Trust: $10.4 million”
- “Average Weekly Investment – Grayscale Products ex Bitcoin Trust3: $11.9 million”
- “Majority of investment (84%) came from institutional investors, dominated by hedge funds.”
Below, we look at some highlights from this interview.
Who Is Investing in Grayscale’s Products?
“I’d say overwhelmingly our inflows into the products where we actually are directly raising assets is probably over 80% these days coming from institutional investors; so I’d say we’re talking primarily about non-crypto hedge funds, but that also means that we serve a whole swatch of high networth individuals, family offices, other types of institutions, financial advisors, RIAs, and then because some of the Grayscale products are also publicly quoted, we also serve really any investor that has access to the public markets where they can trade in Grayscale products in their brokerage accounts, IRA accounts, etc.”
How Does the Current Macro Environment Affect Institutional Interest in Crypto?
“If you look back at 2019, before the pandemic hit, Grayscale had a record year. We raised over $300 million last year, and we’d never seen inflows like that before. That momentum really carried itself into the first quarter of 2020 when we raised over half a billion dollars in just one quarter and it really wasn’t until the pandemic hit in late or mid-march of 2020, I believe, that we really started to see kind of what the fallout of that was gonna be across different asset classes.
“And so, you know, definitely, being long volatility was a winning trade in the first quarter but then what we saw is that really subdued in the second quarter of 2020 and while a lot of risk assets sold off after the pandemic hit, we saw the resilience of the digital currency market be a lot more pronounced than it was for other asset classes…
“And so, the second quarter of 2020 broke yet another record for Grayscale. We brought in over $900 million in the second quarter of 2020, and I think we have to think about what’s driving that, and to some extent, you know, one might think that economic uncertainty and not really knowing what the outlook is going to be when C)VID may subside, when we may have a vaccine may just be causing people to take risk off and be on the sidelines.
“But I think now what we’re seeing is assets like Bitcoin and just digital currencies in general are being sought out by investors looking for uncorrelated return streams, you know, new sources of alpha and again that digital gold narrative is still really playing out.
“When things go bad, investors are looking historically at things like bonds and gold but now that subset of investments you might choose when things go bad include assets like Bitcoin and I think especially in the wake of how government intervention has come into the fold in the wake of the pandemic, you’ve just seen this unlimited fiscal stimulus being injected into the financial system and when you think about that it’s causing a lot of investors and a lot of the conversations we’re having with investors to revisit some of the core attributes of digital currencies like Bitcoin that do in fact have a verifiable scarcity to the amount of Bitcoin that will ever be.
“And when you start having these conversations, investors really understand why not only the world has gone peacefully digital but why a digital currency has now more than ever a role in the world we’re living in and a role in the world that we’re going to be living in.”
How do Investors Buy One of Grayscale’s Products?
“If someone is an accredited investor, they can buy any one of the Grayscale products directly from us at net asset value. Now, it’s so far four out of the ten grayscale products that have been approved for a public quotation. So that’s our Bitcoin product, the Ethereum product, the Ethereum CLassic product, as well as the grayscale digital large gap fund.
“And so it’s important for me to reiterate here that we’re not market makers, we’re not dictating the price at which any of the four products I just mentioned are trading in the public market on any given day. Instead, these products are really driven by market demand and market sentiment.
“And so I think today the price at which these products trade in the market is really being driven by a couple of factors.
“I think, one, there is today very very few if any access products for digital currency, and so as an investor, if you’re typically used to having a brokerage account, an IRA, whatever it may be, and you’re used to accessing stocks, bonds, ETFs, mutual funds, etc through that platform, well now you can also get yourself digital currency exposure through any one of the Grayscale products that are that are publicly traded.
“And so there is kind of an ease of use of liquidity and then it also negates the need for investors to navigate buying, transferring, holding, storing, safekeeping digital currency directly.
“And I think one of the other big areas where we see a lot of uses of the Grayscale products is also in retirement accounts. So we do have not only have investors who want to make these allocations for the medium to long term, but they want to do so in a tax efficient way. And so, they look to deploy investments in Grayscale products inside IRAs, Roth IRAs, and 401Ks.
“And so, we’re not only facilitating that in our private placements which we do for investors often, but also on the public market as well. And so again, if you have one of those types of accounts, but you’re restricted to solely buying publicly listed equities or bonds or ETFs, well then, you really would have a very difficult time buying Bitcoin directly in that kind of account or buying Ethereum directly in that kind of account.
“So there again, having the Grayscale product really is providing a value to investors and giving them the ability to get exposure whereas otherwise [they] would not be able to.”