Grayscale Investments is one of the famous Bitcoin whales. It is a subsidiary of the Digital Currency Group established in 2013. It is a world-renowned investment company and the world’s largest Asset management fund for cryptocurrency investment. At present, it has 9 single-type asset trust funds including mainstream currencies such as BTC and ETH, and 1 managed fund focusing on portfolio investment in large-market capitalization currencies. As of November 18, the total assets of Grayscale Fund have reached 10.8 billion US dollars. This article takes you to understand the real gray fund.
At present, the most well-known product of the Grayscale Fund is the Grayscale Bitcoin Trust Fund (GBTC), which held 386,000 BTC on July 1 this year, which had grown to 515,000 by November 18th. Especially after late October, the Grayscale BTC Fund continued to increase its holdings of BTC, which became an important boost for this round of BTC’s rise.
According to the 2020 Q3 Quarterly Report of Grayscale Fund, its investor structure is mainly composed of institutional investors, qualified investors, family offices, retirement account funds, etc., of which institutional investors account for more than 80%, and more than half of investors ( 57%) come from countries and regions outside the United States. Therefore, Grayscale Bitcoin Fund has become the most important channel for institutional investors to enter the BTC market.
Gray scale fund application and redemption system
In the subscription mechanism of the Grayscale Bitcoin Trust Fund, there are currently two forms of capital contribution: cash contribution and in-kind contribution (minimum $50,000).
In the cash contribution mode, investors submit subscription funds to Grayscale, and Grayscale will hand over the subscription funds to an authorized broker, which is also Grayscale’s brother company, Genesis Global Trading, Inc. (hereinafter referred to as “Genesis”), which is owned by Genesis Buy BTC spot in the spot market and give it to Grayscale. Grayscale received the spot and deposited it in the custodian Coinbase Custody for cold storage and custody, and at the same time issued the equivalent bitcoin trust share GBTC to investors.
In-kind investment means that investors hand over Bitcoin to Grayscale, and Grayscale deposits the bitcoin in the custodian Coinbase Custody, and at the same time issues an equivalent bitcoin trust share GBTC to investors.
In the redemption mechanism, currently Grayscale Bitcoin Trust does not support share redemption, that is, once an investor subscribes for a trust share, the share cannot be exchanged for bitcoin, and investors can only sell bitcoin trust shares in the secondary market of US stocks GBTC. Moreover, GBTC needs to be locked for at least 6 months. Therefore, GBTC traded in the U.S. OTC market has become one of the few compliant BTC trading products. Due to the huge market demand, the price of GBTC in the secondary market often has a premium relative to its net value.
At the beginning of this year, Grayscale registered as a company that needs to report to the SEC, which means that GBTC is the first cryptocurrency investment tool to report quarterly to the SEC, inform the company of all unplanned events or changes, and send relevant information to the SEC. The report has been reviewed. In October this year, Grayscale Ethereum Trust Fund also passed the approval of the SEC, becoming its second licensed digital currency investment tool.
Gray scale fund management fee
Like traditional trust funds, Grayscale mainly relies on management fees to make money. As long as investors’ demand for deposits in Grayscale continues to increase, Grayscale will have a steady stream of management fees.
The annual management fee of GBTC is 2%, calculated according to the existing asset management scale, and collected in the form of BTC. With just one product of GBTC, Grayscale can collect 10,300 BTC of net profit in one year (currently about US$180 million).
GBTC becomes an arbitrage tool
Since GBTC has a long-term positive premium, this creates an arbitrage space between the primary and secondary markets. Institutions can borrow BTC to participate in the private placement of GBTC in the primary market, obtain GBTC share, wait 6 months to sell in the secondary market, and then buy BTC to repay the loan. The GBTC premium minus the borrowing interest is the profit part. This zero-risk operation only needs to pay 6 months of time cost. In addition, institutions can also directly buy BTC in spot, deposit GBTC shares, and open short hedging with futures. After GBTC is unlocked, it is sold in the secondary market, and the futures are closed for arbitrage. The difference between GBTC’s premium and interest is profit.
Although the existence of arbitrage opportunities has increased the potential market selling pressure, due to the inability to redeem the gray fund mechanism and isolate the listed and circulating market of GBTC shares, investors cannot sell their trust shares in the encrypted market and can only choose to invest in U.S. stocks OTC Selling in the market is equivalent to transferring market selling pressure to the US stock market.
In summary, the unique redemption mechanism of Grayscale BTC Trust Fund can easily bring external incremental funds into the encrypted market, increase the demand for BTC, and transfer all the selling pressure of the market to the U.S. stock OTC market, which makes Grayscale Bit Coin Trust is becoming a “buy but not sell” long power in the market.