Grayscale, the world’s largest bitcoin and cryptocurrency asset manager, has taken the investment world by storm and helped propel crypto onto Wall Street.
New York-based Grayscale, owned by Barry Silbert’s expanding Digital Currency Group, currently boasts over $5 billion in assets under management—up around 40% since its last quarterly report in June and largely driven by its flagship bitcoin trust.
Grayscale publicly launched two new cryptocurrency funds last week, a litecoin trust and a bitcoin cash trust, with demand driving one of the funds to a staggering 1,000% premium—sparking suggestions some investors might be “unaware” they’re paying significantly above the token’s market rates and causing doubt that the cryptocurrency market has much matured since bitcoin’s 2017 boom and bust.
Grayscale’s flagship Bitcoin Trust Fund has proven very popular with investors since it was launched … [+]
Both the Grayscale Litecoin Trust and the Grayscale Bitcoin Cash Trust began trading publicly almost two weeks ago and have seen swinging triple-digit premiums since. The litecoin fund was briefly trading at a premium of over 1,200% on the underlying litecoin price, data produced by analysts at Arcane Research showed. It’s now down to a mere 600% premium.
The funds have collected almost $50 million from accredited investors over the last two years and can now be traded like stocks, allowing over-the-counter investors to gain exposure to the cryptocurrencies without having to deal with clunky bitcoin and crypto exchanges that can appear risky.
Elsewhere, the Grayscale Bitcoin Trust, which debuted as the Bitcoin Investment Trust in 2013, has this year consistently traded at a premium of around 20% on bitcoin, while the premium for the ethereum fund, created in December 2017 during the height of the crypto bubble, recently fell under 100% for the first time this year—down from over 800% in June.
“These trusts are based solely on single assets, and should thus not outperform its underlying asset over time,” Arcane Research analyst Vetle Lunde wrote. “The excess return should be arbitraged away.”
The funds’ premiums emerge as public investors buy into existing shares of the fund, with the original accredited investors being the sellers.
“For accredited investors, the custody provided by Grayscale is most certainly of value,” Lunde said via email.
“Setting up self custody is a complicated process, and over time Grayscale has gained confidence in their services as a custody provider.”
However, the huge and wildly swinging premiums have caused some concern for bitcoin and cryptocurrency market watchers who fear investors might be unaware of the premium they’re paying.
The Grayscale Litecoin Trust has been trading at a triple-digit premium since it launched, climbing … [+]
“Bitcoin exposure as an inflation hedge amidst the current financial instability seems to be a trending topic among some of the most renowned macro investors,” Arcane Research analyst Vetle Lunde said via email.
A number of high-profile investors, led by famed hedge fund manager Paul Tudor Jones in May, have named bitcoin as potential hedge against the inflation they seem coming as a result of the unprecedented central bank stimulus measures put in place to blunt the economic damage wrought by the coronavirus pandemic.
“This could make new investors more open to allocating some of their portfolio into bitcoin, and thus lead to an increased demand for bitcoin exposure,” Lunde added.
Grayscale’s managing director Michael Sonnenshein accepts that the funds’ shares are high but argues the asset manager “has no control over that market.”
“We’re creating the ability for these markets to happen,” Sonnenshein said, speaking over the phone. “But it’s not something we’re directly making or facilitating.”
The public demand for exposure to cryptocurrencies via Grayscale’s funds has led to fresh calls for a fully-fledged bitcoin and cryptocurrency exchange-traded fund (ETF)—a financial product that allows people to buy shares in indexes that track baskets of assets.
However, the U.S. Security and Exchange Commission (SEC) has repeatedly rejected proposals for a bitcoin ETF, arguing the bitcoin and crypto market is vulnerable to manipulation.
“The addition of more financial products widens asset exposure,” Sonnenshein said, adding “investors are eager.”
While Arcane Research’s Lunde argues that Grayscale’s “premiums show that the public demand for crypto exposure is high, and that the market is ripe for an ETF,” the SEC still has concerns.
“We were trying to get the bitcoin fund registered as an ETF but the regulators still had a criteria,” Sonnenshein said. “They wanted to see change in the underlying bitcoin market before they were comfortable.”
The bitcoin price, along with the wider cryptocurrency market, remains highly volatile, bouncing from over $10,000 per bitcoin earlier this year to under $4,000 during the March coronavirus crash—only to sharply rebound along with the stimulus-inflated stock market. But Sonnenshein remains upbeat.
“It’s a question of when these market dynamics improve, not if,” he said.