Crypto Firm Grayscale Reports Record AUM for 2020

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Crypto Firm Grayscale Reports Record AUM for 2020

Crypto investing company Grayscale had its greatest year yet in 2020, because to skyrocketing Bitcoin (BTCUSD) values and increased institutional interest in cryptocurrency. According to a recent digital asset investment report, the New York-based business had “record investor demand,” and its assets under management (AUM) increased by more than tenfold to $20.2 billion last year. Grayscale’s activities were notably important in the fourth quarter of 2020, contributing for around $3.3 billion in inflows. This amount represents around 58% of all investments for the year and over half of the $7 billion lifetime flow of investments into Grayscale’s products.

Investors poured money into the Grayscale Bitcoin Trust (GBTC) last year, an open-ended trust that gives indirect Bitcoin exposure and trades on over-the-counter (OTC) marketplaces. The AUM of GBTC increased to $17.5 billion from $1.8 billion at the start of 2020. According to the digital asset investment report, investors poured an average of $217.1 million into the trust each week.

Aside from GBTC, Grayscale has seven additional cryptocurrency trust holdings, including Ethereum (ETHUSD) and Litecoin (LTCUSD), as well as a digital large-cap fund. Last year, the Grayscale Ethereum Trust received an average of $26.3 million per week, while other single-asset oriented products received an average of $33.6 million per week. The total amount invested on these items for the full year was $1 billion.

Key Takeaways

  • Grayscale, a cryptocurrency investing business, announced record assets under management for 2020 as the congressional shutdown heightened financial volatility.
  • The surge in GBTC share trading corresponds to the price trend of Bitcoin last year.
  • Grayscale’s AUM has grown as a result of its appealing share premiums and crucial role in the emerging crypto industry.
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93% of all investments into Grayscale funds came from institutional investors. “There is no longer a professional risk to investing in the digital currency asset class,” Grayscale CEO Michael Sonnenshein told CNBC. “It’s definitely more dangerous to your career if you don’t pay attention to it.” According to Sonnenshein, the spike in Grayscale inflows was mostly the consequence of investors shifting away from gold, the traditional safe haven from market turmoil, and toward Bitcoin, which is marketing itself as digital gold.

“The type of inflows that we’re receiving should be proof that investors aren’t waiting for an ETF to start engaging in this asset class,” he added, alluding to the possibility of a Bitcoin exchange-traded fund (ETF) that would give investors with a cheaper option to acquire Bitcoin.

Last year, the Grayscale Bitcoin Trust’s AUM increased in lockstep with Bitcoin’s astronomical price rise. Following a multi-year decline, the price of Bitcoin increased from roughly $7,000 in January 2020 to over $40,000 by mid-December, owing to macroeconomic instability caused by mounting government debt from the pandemic shutdown and increased interest from institutional investors. Other cryptocurrencies joined in on the fun, as the market value for crypto marketplaces surpassed $1 trillion.

Bitcoin is now trading at $36,247.73, largely steady in the last 24 hours. The total market capitalization of cryptocurrency marketplaces is $1 trillion, with Bitcoin accounting for 66.3% of that total.

Grayscale and Cryptocurrency Markets

Even despite significant drops in the price of Bitcoin, the numbers for AUM for GBTC have climbed. Grayscale, for example, reported an AUM of $359.5 million in 2018, over three times the level recorded during the 2017 digital asset bull market. That value has risen to $607.7 million by 2019. For the most of those two years, the price of bitcoin fell and then went sideways. The most recent increase in AUM is merely a continuation of past year patterns, but on a larger scale and to a greater degree.

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Grayscale said in its digital asset investment report that the new GBTC inflow data are “more indication of institutions turning to Bitcoin as a reserve asset.” However, it is a deceptive statement. Purchasing GBTC does not provide you actual ownership of Bitcoin. Rather, it is a technique of making short-term gains from the cryptocurrency’s extreme price fluctuations without incurring ownership or custody expenses.

The rise in GBTC’s AUM is due to the fund’s structure and crucial role in the crypto economy. The fund issues shares via private placements, and investors may only redeem their shares through public markets. They cannot redeem their shares for real Bitcoin and are subject to a six-month statutory share lockup period. This strategy boosts secondary market liquidity for GBTC shares while increasing price volatility.

Grayscale issued about 3.5 billion shares in GBTC alone in 2020, according to SEC filings. Over time, the quantity of Bitcoin per GBTC share accessible to investors has decreased. In 2017, it was 0.09242821, and it will be 0.00094950 in January 2021.

According to Capital IQ, the fund’s top three shareholders are crypto lending startup BlockFi, Three Arrows Capital, and Horizon Kinetics. The final two are hedge funds with offices in Singapore and New York. BlockFi provides investors who deposit Bitcoin and other cryptocurrencies on its platform with enticing interest rates. On the backend, it loans Bitcoin to other crypto market participants, most notably GBTC. The fluctuation in the price of GBTC offers a rapid supply of cash for the lending organization to satisfy its client obligations.

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In addition to cash, GBTC investors may acquire shares via in-kind acquisition channels. This means individuals may buy shares in the fund by borrowing Bitcoin from a lending company like BlockFi and contribute to GBTC’s total Bitcoin holdings. Following the lockup period, they sell the shares at a profit to another investor and buy back the Bitcoin. To hedge their position, investors initiate short contracts against Bitcoin on futures exchanges such as the CME.

Because of the lack of legislative certainty on Bitcoin custody for institutional and individual investors, Grayscale effectively monopolized the market for those looking to benefit from their Bitcoin purchases. According to Bybt, a cryptocurrency derivatives data portal, GBTC’s Bitcoin holdings have increased by almost 346,400 in the last year.

Not unexpectedly, JPMorgan analysts stated last month that Grayscale is important to Bitcoin price because inflows into its funds surpass momentum traders’ bets in Bitcoin or its affiliated funds. That domination, though, may not last long. Grayscale is seeing new competition from companies such as Bitwise and Osprey, who provide comparable services at cheaper prices.

Clarity on custody regulations, as well as the possibility of a Bitcoin ETF approval, may cut into Grayscale’s revenue. Furthermore, not many investors may be able to tolerate the price volatility and fast changing premium of GBTC shares over the price of Bitcoin.

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