Grayscale Investments: Trends and Analysis for Institutional Investors

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Investment firms have long been a popular option for institutional investors looking to participate in traditional financial markets. Now, with the increasing popularity of cryptocurrencies, investment firms are aiming to take on this ever-evolving market as well. In this article, we examine the role of Grayscale Investments as a big player in this space – everything from its history to its impact on the current and future cryptocurrency market.

Grayscale Investments: Well-Established in the Crypto Investment Space

Digital Currency Group launched Grayscale Investments as a subsidiary in September 2013. Since that time, Grayscale Investments has continued to offer a number of cryptocurrency investment trusts on the Over-the-counter (OTC) market.

As of August 2018, Grayscale Investments’ single-asset investment trusts include the following cryptocurrencies: Bitcoin, Ethereum, Ethereum Classic, Zcash, Bitcoin Cash, Ripple, and Litecoin. The Grayscale Investments product line also features the Digital Large Cap Fund, a market cap-weighted, diversified portfolio which features Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin.

Grayscale Investments has continued to offer new OTC market products in its early history.
Grayscale Investments has continued to offer new OTC market products in its early history.

Investor Backgrounds, Profits, and Losses

Looking at the H1 2018 Grayscale Investments report, potential investors can learn a lot about the company’s successes and failures as well as its role in the current cryptocurrency market. Let’s take a look at some of the most important statistics from this report.

A majority of investment (56%) comes from institutional investors. Other categories include accredited investors (20%), retirement accounts (16%), and family offices (8%). This is important to note because it helps all investors gain better insights into some of the strategies that large investors have taken. 

According to H1 2018 stats, all investment trusts suffered losses. This should come as no surprise since this reflects the general downward trend of cryptocurrency prices throughout the first half of 2018.

Despite this fact, it’s also essential to highlight the long-term success of Grayscale Investments’ more established products. For example, the Bitcoin Investment Trust has seen a 4,107.1% increase in returns from its inception through the end of H1 2018. Additionally, the Ethereum Classic Investment Trust, the 2nd oldest product offering, realized a 270.3% increase. 

How Has the Bitcoin Dip Affected Large Investments?

The bitcoin dip has certainly had a negative impact on investors who invested in Q4 2017 or early Q1 2018.

While one might expect to see this lead to a decline in inflow investments, the stats published in the H1 2018 report show otherwise. When looking at weekly investment inflows for the first half of 2018, many purchases came during weeks with relatively bear markets. For instance, three weeks during the month of June surpassed the average weekly inflow investment amount of $9.55 million.

Additionally, it is becoming clear that more investors are looking to diversify beyond BTC. Yes, the firm’s BTC investments still had a higher average investment at $6.04 million/week vs. $3.52 million/week for non-BTC investments. However, it’s essential to note that four of Grayscale Investments’ non-BTC assets were only introduced in March 2018.

Now, let’s examine some of the advantages and disadvantages of choosing Grayscale Investments vs. buying cryptocurrencies directly. 

Grayscale investment inflows were quite diverse in H1 2018.
Investment inflows were quite diverse in H1 2018.

Possible Reasons For Choosing Grayscale Investments

Grayscale Investments potentially offers better security for large investors. For those who don’t want to keep cryptocurrency on an exchange, there are a number of hardware wallets to choose from. Nonetheless, many people fear the possibility of losing their wallets or having them stolen. Grayscale can help with the purchasing, storing, and transferring of assets.

All investments are created as shares and are labeled as titled securities. Because they are not held by investors as actual cryptocurrencies, it is possible to set up better financial and tax structures. For example, investments are eligible to be held in certain IRAs, 401ks, and other brokerage and investment accounts. This creates a bridge to help cryptocurrency investors enter the market in a way that is similar to traditional investment options.

Possible Reasons Against Choosing Grayscale Investments

Participation in various investment trusts is costly. Grayscale Investments charges a 2.5% fee on annual administration and safekeeping for most product offerings. The only deviations are BTC at 2.0%, ETC at 3.0%, and the Digital Large Cap Fund at 3.0%. In a bull market, some investors would consider this to be a minimal amount to pay from profits. However, in an extremely bear market, high fees could certainly discourage many investors.

While having shares instead of actual cryptocurrency might make tax compliance easier, it’s also easy to view this as a negative aspect. The reality is that the fund owns less than one-tenth of one bitcoin per share. Since investors are getting shares and don’t have direct access to assets, it can be difficult to make immediate sells. Therefore, it lacks much of the liquidity and convenience of cryptocurrency exchanges.

Grayscale Investments' annual fees range from 2 to 3%.
Grayscale Investments’ annual fees range from 2% to 3%. Returns vary but are generally reflective of cryptocurrency market price trends.

Outlook on the Future of Regulations

It can be difficult to predict the future of Grayscale Investments in the cryptocurrency market. Yes, many consider this company to be well-established in the space. However, there are still a lot of questions that need to be answered. Technically, Grayscale Investments is not a bitcoin ETF. It’s classified as a grantor trust. For the moment, this means that it can avoid some of the more stringent limitations put on other types of funds.

Still, regulations and rulings on similar firms could be critical in the future of this particular one. As of August 2018, the US Securities and Exchanges Commission (SEC) has rejected most bitcoin ETF applications. Regardless of which way the SEC ruling of the proposed Coinbase ETF goes, it will likely have some impact on all ETFs and firms similar to Grayscale Investments.

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Throughout the early history of Grayscale Investments, the firm has attracted major investments from wealthy investors. However, at least for individual investors, the possibility of access to these offerings is practically non-existent. The company has found a lot of success in a market devoid of ETF (or ETF-like) options. Even for wealthy investors, choosing to purchase cryptocurrencies directly could be a better move. However, for those looking to go with a more traditional investment route, this firm could provide a more than adequate solution.

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