Grayscale sees record institutional interest for crypto - icoinic
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Franklin Feringa - Fundamental Analyst - Icoinic B.V.
Franklin Feringa
Author
Analist

Institutional interest in the cryptomarket is seen by many as an important step, both for acknowledgement of the possibilities of cryptocurrency as well as additional capital flowing into the industry. Enough interest could result in further bullish price movement. So far, this year has seen record breaking investment from institutional investors which could result in further bullishness should this trend continue.

Grayscale Digital Asset Investment is the world’s largest digital currency asset manager that offers its products to accredited and institutional investors and is therefore a good indication of interest from institutional investment in cryptocurrency. It offers investors a range of publicly traded funds that track the largest cryptocurrency such as Bitcoin and Ethereum.

Record-breaking quarter

Grayscale recently released its investment report of the second quarter of 2020 in which it continued to break records regarding capital inflows from investors. A total of $905.8 mln was invested into the products that Grayscale offers during the quarter, resulting in $4 bln total assets under management and a cumulative capital inflow of $2.58 bln since inception in 2013. In the first quarter of 2020, $503.7 mln was invested in its products which was a record-breaking quarter as well.

Source: Grayscale Q2 investment report

 

The difference between the capital inflows in 2019 and 2020 are especially clear in the next figure.

Source: Grayscale Q2 investment report

 

The investments are more steady and frequent this year despite the economic uncertainty that Covid19 has brought. Especially after the drop of both the stock market and the cryptocurrency market in March of this year, the investment size has increased tremendously.

The Bitcoin Trust draws the most capital by far, followed by Ethereum. During the second quarter, the Ethereum Trust saw a record inflow of $135.2 mln while the Bitcoin Trust saw a record inflow of $751.1 mln. Since the halving of the mining rewards for Bitcoin in May, Grayscale even managed to add more Bitcoin to its trust than was mined.

Most of Grayscale’s investments come from institutional investors. During 2020, this was 84% of all investments, or about $1.2 bln.

Source: Grayscale Q2 investment report

Trading at a premium

Grayscale’s products are known to be trading at premiums to their Net Asset Value (NAV). This premium is currently quite low with its Bitcoin Trust at 12% but has fluctuated widely over the years.

Bitcoin Trust premium to NAV                        Source: ycharts.com

 

Its altcoin trusts like Ethereum Classic and Ethereum often show a wider premium.

Ethereum Classic Trust premium to NAV      Source: ycharts.com

Ethereum Trust premium to NAV                   Source: ycharts.com

 

The Ethereum Trust currently shows a premium of 274% to the NAV and has experienced a much higher premium in the recent past.

Premiums like these are hard to justify, although Grayscale is the only way for a lot of companies to gain any exposure to the cryptocurrency market. Besides that, a number of other services are offered through the fund. Compared to buying cryptocurrency directly from an exchange, investors through Grayscale do not have to worry about storage, clearance, or custody of their assets since Grayscale takes care of it all. There is also an inelastic supply as initial investors get shares that are locked for a year after which they become freely tradable.

The combination of all these factors have led to premiums to the NAV of the trusts which have shown extreme volatility.

Conclusion

The graphs clearly show that more institutional investors are entering the cryptocurrency market. The past two quarters have been record breaking in terms of capital inflow with more consistent investments than before. This all happened during the economic uncertainty caused by the Coronavirus. After the panic spread throughout the markets, institutional investors invested even more capital into cryptocurrency which is likely due to the need to diversify. The fact that the products still trade at a premium shows that there is still additional demand to be met.

Grayscale’s recent developments are a good sign. A continuation of this trend could be very bullish for the market in general.

Luc Correia Cabrito