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The Impact of Grayscale on the Crypto Market

The Impact of Grayscale on the Crypto Market

By Oreld Hadilberg
Reviewed by Tony Spilotro

Table of Contents

Definition

Grayscale is a digital currency asset management company that has stood out, especially recently, for its commitment to Bitcoin and other digital assets. Founded in New York in 2013 under the name Grayscale Investments, the company has played a significant role in cryptocurrency. Grayscale's main distinction lies in managing the world's largest Bitcoin fund. Its portfolio of Bitcoin assets exceeds USD 45 billion, spanning various funds.

The company has established a solid and transparent track record by operating within existing regulatory frameworks. Grayscale offers investors access to various investment products, approximately 10, presented in the form of securities. These products allow investors to participate in the cryptocurrency market without dealing directly with the challenges and risks associated with the purchase, custody, and storage of digital assets.

In summary, Grayscale acts as an investment vehicle that allows stakeholders to gain exposure to digital assets, especially Bitcoin, through regulated and securely structured products, thus simplifying the investment process in the complex world of cryptocurrencies.

How Does Grayscale Bitcoin Trust Work?

The Grayscale Bitcoin Trust's operation resembles a closed-end fund's structure. Large institutional investors transfer funds (or Bitcoin) to Grayscale, which then invests those funds in Bitcoin and issues trust shares in the stock market. This mechanism provides one of the few avenues for US investors to gain exposure to Bitcoin through the stock market.

The trust shares can be traded at a price above or below the actual value of Bitcoin. Historically, these shares have tended to sell at a higher price. While this benefits Grayscale and its investors by generating profits with that premium, it may be less favorable for individual investors.

This approach allows Grayscale to channel institutional investor interest toward Bitcoin, providing a regulated way to participate in the cryptocurrency market through conventional financial instruments.

History of Grayscale and Barry Silbert

Grayscale, a key player in the crypto market, was founded by Barry Silbert, known as "the king of cryptocurrencies" and a pioneer in Bitcoin investment. Silbert, one of the first investors to trust Bitcoin, started investing in 2012 and became an influential leader in the space. Barry Silbert established Digital Currency Group (DCG) in 2015, backed by prominent companies such as MasterCard and Western Union.

DCG has become a prolific investor, supporting over 150 companies in 30 countries, including prominent names like Coinbase, Ripple, and BitPay. DCG's family includes subsidiaries such as Genesis Trading, a leading digital currency brokerage; CoinDesk, a major media company in the crypto ecosystem; and Grayscale Investments, the world's largest digital currency asset manager.

Achievements of Grayscale in its Early Days

Grayscale has launched various products, including Grayscale Bitcoin Trust (GBTC), Grayscale Ethereum Trust, and others linked to different cryptocurrencies. GBTC, launched in 2013, was the first publicly traded Bitcoin investment vehicle and the first to report to the SEC.

Some noteworthy milestones include:

2017: Grayscale managed investments worth $208 million in Grayscale Bitcoin Investment Trust.

2018: Investment funds were created for Ethereum, Ethereum Classic, Litecoin, XRP, Bitcoin Cash, and Zcash, managing over $2.1 billion in investment funds.

2018: An investment trust for Horizen (Zen), a privacy-focused digital currency, was launched. •

2019: Reuters called them the world's largest digital currency asset manager.

2020: Grayscale initiated the registration of new trusts for six cryptocurrencies and, by December, managed over $20.2 billion in assets.

2021: Six more trusts were added for different digital assets, and Grayscale reported managing $20.2 billion in assets.

Why Investors Might Choose GBTC Over Direct Bitcoin Purchase

  1. Investing in a Bitcoin Trust provides individuals with the opportunity to gain exposure to Bitcoin without dealing with the complexities of storage, legal compliance, or filing separate tax returns. Acquiring Bitcoin directly involves numerous concerns, including managing storage, potential third-party custody fees, and security against key losses or wallet hacks. Grayscale's Bitcoin Trust, being a publicly traded entity reporting to the SEC, simplifies this process for investors.
  2. Publicly traded Bitcoin trusts offer various tax advantages. Specific investor accounts, such as IRAs, Roth IRAs, and other brokerages that don't provide tax benefits for direct Bitcoin investments, do so for investments in publicly traded trusts. Grayscale's Trust provides these investors with tax-friendly exposure to Bitcoin.
  3. Cryptocurrency trading tends to be quite limited. It's not possible to trade Bitcoin directly against stocks of companies like Tesla or Apple (unless using cryptocurrency stock derivative platforms). This creates a disconnect between the cryptocurrency economy and traditional markets. However, as soon as Bitcoin is listed on the stock exchange, albeit expensively and limitedly, traditional investors can participate in the cryptocurrency economy. Grayscale also offers several other exchange-traded products, although its Bitcoin product is considerably the largest. In addition to the Bitcoin Trust, they offer an Ethereum Trust, with nearly $5 billion in assets under management; other funds include Decentraland, Chainlink, and Foilcoin. While U.S. investors await a Bitcoin ETF, Bitcoin trusts could emerge as an attractive alternative.

Grayscale's Strategies in the Cryptocurrency Market

One of the key elements driving Grayscale's growth and prominence as a global financial vehicle is its approach as a "trusted partner." This feature has piqued the interest of millions of investors, both individual and institutional, looking to participate in the world of digital currencies. Tactics employed by this entity to gain the trust of investors and regulators include:

  1. Expertise: Grayscale offers the most extensive investment track record in the cryptocurrency industry, backed by a team of experts. This element is especially valuable in such a complex and dynamic digital economy.
  2. Regulation: Grayscale's products comply with U.S. stock market regulations. These products are pioneers in reporting to the Securities and Exchange Commission (SEC).
  3. Ease of Access: Acquiring Grayscale's products is done easily and directly through accounts that offer tax benefits. Shares are eligible to be held in IRA, Roth IRA, and other brokerage or investment platforms.
  4. Adaptability: Grayscale's products and services stand out for their adaptability, both in terms of liquidity and investment opportunities.

Products Offered

In Grayscale's realm, products are presented as private placement investment vehicles designed to cater to individual, institutional, and accredited investors through respective private placements. Grayscale's specialized products encompass a variety of personal assets, providing exposure to Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Ethereum Classic (ETC), Horizen (ZEN), Litecoin (LTC), Stellar Lumens (XLM), and Zcash (ZEC).

In contrast to this diversity, the Grayscale Digital Large Cap Fund represents a more generalized offering. This diversified fund provides exposure to the top liquid digital assets based on their market capitalization, currently including BTC, ETH, LTC, and BCH in its portfolio.

The fundamental purpose of each product is to ensure that the value of its shares, based on digital assets per share, reflects the performance of the underlying digital assets' prices, net of fees and expenses. Following the model of established commodity investment products, each of Grayscale's products has been created to meet the needs of investors seeking exposure to digital assets through a traditional investment approach.

Why GBTC Is Important for the Crypto Market

  1. Institutional Access to Bitcoin: GBTC provides institutional investors with a path to gain exposure to Bitcoin through conventional financial instruments. This is crucial because many institutional investors, such as pension funds and asset managers, operate within regulatory limits that require traditional investment vehicles.
  2. Eases Investment for Retail Investors: For retail investors, GBTC offers a simpler and regulated way to invest in Bitcoin without directly dealing with the purchase, custody, and security of the cryptocurrency. GBTC shares are traded on traditional markets, facilitating access for those who prefer conventional investment structures.
  3. Public Listing and Transparency: GBTC is a publicly traded investment vehicle, meaning its shares are traded on secondary markets, providing transparency and liquidity. This is particularly valuable compared to the direct purchase of Bitcoin, which may lack the same accessibility and liquidity.
  4. Indirect Exposure to Bitcoin: Investors can gain exposure to Bitcoin through GBTC without directly owning the cryptocurrency. This eliminates the need to address technical issues related to the custody and security of cryptocurrencies, which can be a hurdle for some investors.
  5. Price Reference for Bitcoin: Since GBTC holds Bitcoin in its portfolio, its market value can influence the overall market's perception of Bitcoin's price. Movements in GBTC's share price are often seen as an indirect indicator of market sentiment toward Bitcoin. In summary, GBTC facilitates the participation of institutional and retail investors in the Bitcoin market by providing a regulated and accessible investment vehicle. Its public listing and transparency contribute to the integration of Bitcoin into conventional financial markets.

Conclusion

In the fascinating universe of cryptocurrencies, Grayscale emerges as a central figure, leading the way with an impressive track record and considerable influence. Founded by visionary Barry Silbert, Grayscale is the world's largest digital currency asset manager and triggered a revolution by introducing the first publicly traded Bitcoin investment vehicle.

Grayscale's story intertwines with the exponential growth of cryptocurrencies, marking milestones from its inception in 2013 to becoming a key player in 2021, managing assets of over $20.2 billion. Its focus on regulatory compliance and offering diversified products, such as the Grayscale Bitcoin Trust (GBTC) and other trusts for various cryptocurrencies, reflects an adaptable and visionary strategy.

The backing of Digital Currency Group (DCG), the parent company of Grayscale, with investments in over 150 global companies related to Bitcoin and Blockchain, underscores its impact on the digital financial landscape. In summary, Grayscale has witnessed the rise of cryptocurrencies and has been a fundamental driver of institutional adoption.

Its role as a "trusted partner" for both individual and institutional investors, combined with its ability to overcome challenges and adapt to market evolution, positions Grayscale as a crucial component in the journey toward the maturity and widespread acceptance of digital currencies.