The Coming Grayscale Effect
Grayscale Investments announced on the 20th of July 2020 that it received approval from FINRA (Financial Industry Regulatory Authority) to proceed with the public listing of shares of the Grayscale Bitcoin Cash Trust and the Grayscale Litecoin Trust under the tickers BCHG and LTCN.
Trading will not begin until further requirements are met, but Grayscale disclosed the following in its press release;
“There will be no trading volume in the Shares’ public quotations until the respective Shares are DTC eligible, which BCHG and LTCN are expected to receive soon. Investors will be able to buy and sell freely-tradable BCHG and LTCN shares through their investment accounts in the same manner as they would other unregistered securities.”
Grayscale Investments, subsidiary of the Digital Currency Group, is a leading digital currency asset manager focused on creating easy onramps for traditional investors to gain exposure to digital assets.
In this article, we are going to have a closer look at Grayscale and briefly discuss possible ramifications of this news for Bitcoin Cash and Litecoin. At the same time, we’ll discuss some of the highlights & new trends emerging from the, recently published 2nd quarter 2020, Grayscale Digital Investment Report.
Understanding the importance of Grayscale investment products in the market.
Who is “Grayscale”?
Grayscale has become a powerhouse when it comes to providing digital assets exposure to the investor masses. Since the launch of the Grayscale Bitcoin Trust (GBTC) on the public markets, it has been growing rapidly both in numbers and in popularity with all of its products. At the time of writing, Grayscale has over $4 billion USD under management.
However, you might wonder where that growth comes from if you consider that GBTC is usually trading at a premium to the spot price of Bitcoin? Why are some investors more than happy to pay a premium?
In stark contrast to the early cryptocurrency adopters, traditional investors have had a hard time to adjust to the advent of digital assets. Whereas the first big barrier has been “education” in order to grasp the significance of digital assets as an emerging asset class, the second and more important part of the equation for them has been exposure. How can they allocate a portion of their portfolio and diversify into digital assets like Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and so on, without being worried about regulation and the safeguarding of these digital assets?
Grayscale has been completely focused on catering to that demand and has been successfully filling the void through its investment products.
Some of the benefits for traditional investors, once the shares are publicly tradable:
Offer investors Titled, auditable ownership through a traditional investment vehicle
Eligible for tax-advantaged accounts in certain IRA, Roth IRA, and other brokerage and investor accounts.
Publicly quoted investment products on OTCQX
Cold storage through Coinbase Custody Trust Company LLC.
How does a Grayscale Digital Asset Trust work?
In essence, in the first phase, Grayscale sets up a Trust for a specific underlying digital asset or basket of digital assets (ex: GDLC). These trusts are initially only available to accredited investors who can participate through a private placement and buy shares of the trust based on the NAV (Net Asset Value) of the underlying assets. Note that these placements initially offer an onramp for accredited investors to gain exposure, but no easy offramp to sell.
However, in a second phase, when the trust gets all the required approvals and starts trading publicly, early investors have a way to sell their shares. At the same time, however, it also means that a lot of regular investors can easily participate and gain exposure to the digital assets offered by Grayscale.
Current publicly tradable products are;
- Grayscale Bitcoin Trust (OTCQX: GBTC)
- Grayscale Ethereum Trust (OTCQX: ETHE)
- Grayscale Ethereum Classic Trust (OTCQX: ETCG)
- Grayscale Digital Large Cap Fund Trust (OTCQX: GDLC)
Grayscale’s second-quarter highlights:
In the second quarter of 2020 Grayscale has been experiencing a staggering growth in demand for its digital assets products. Average weekly investment grew to $69.7 million USD, of which roughly 83% or $57.8 million USD in the Grayscale Bitcoin Trust (GBTC), 15% in the Grayscale Ethereum Trust (ETHE), and around 2% in other Grayscale products.
So, what could this potentially mean for Bitcoin Cash and Litecoin in the future, if anything?
Let’s start with the beginning. Today, the Grayscale Bitcoin Cash fund has around $5.8 million USD of BCH assets under management, and the Grayscale Litecoin Trust around $2 million USD as can be viewed here. (Note that this is according to Grayscale’s data at the end of June 2020).
So, let’s discuss the first takeaway. If you consider that the Grayscale Bitcoin Trust (GBTC) totals 3.54 billion USD of Bitcoin assets under management, it’s fair to say that the BCH and LTC assets under management are not relevant at this time. So, while this might be somewhat disappointing if you support BCH or LTC and you take this data as a measurement of current interest by traditional accredited investors. It also means that opening up an offramp at this time will not create any significant selling pressure.
What is relevant, however, is that narratives can change, and if it would change at some time you might want to consider the effect a Grayscale publicly traded Trust can have on the market for any of the publicly traded digital assets. This is especially true if the current market capitalization of these assets is low in comparison to Bitcoin (BTC).
Why are these types of traditional investor onramps relevant?
Some different ways to think about this:
- Monthly supply of newly minted Bitcoin approx. 27000 BTC @ approx 9300USD per BTC, equals around 251 Million USD worth of new investment supply.
- Grayscale average investment inflows in Grayscale Bitcoin Trust during the second quarter 2020 were, 57.8 million USD per week @ roughly 4.5 weeks per month equals $260 million USD at current price levels.
If the Grayscale demand is already outpacing current Bitcoin (BTC) newly mined supply than what kind of effect could this have on other publicly traded Grayscale investment products when the narrative changes?
What will move the needle if the floodgates do ever open?
Let’s perform our back of the napkin math for Bitcoin Cash for example. A supply of roughly 27000 BCH on a monthly basis @ roughly $230 USD per BCH at current prices equals $6.21 million USD. In other words, at current BCH prices, a mere six million USD in investment demand per month would take out the equivalent of all of the newly mined Bitcoin Cash.
If we apply this to Litecoin (LTC), it would mean roughly 10 million USD of investment demand per month to take out the newly minted supply for that month. While Litecoin has a smaller market cap compared to Bitcoin Cash, the amount is higher due to its higher inflation rate. The Litecoin blockchain currently mints 12.5 LTC every 2.5 minutes.
Now, if you take into account that the total Grayscale weekly investment inflows averaged $69.7 million USD during the second quarter of 2020, consider for a moment that a mere 2% allocation of that amount into Bitcoin Cash, would take out the total weekly Bitcoin Cash (BCH) mining supply. In order to soak up the Litecoin weekly new mine supply, an allocation of 3.1% would do the trick. (Calculated on 4.5 weeks per month).
With all of that in mind, we’d also note that Grayscale’s Digital Large Cap Fund (GDLC), which only started trading publicly, November 22nd, 2019, holds a 2% of Bitcoin Cash (BCH) allocation.
Grayscale Digital Large Cap Fund composition:
- Bitcoin (BTC) – 80.7 % weighing
- Ethereum (ETH) – 12.1% weighing
- XRP – 4% weighing
- Bitcoin Cash (BCH) 2% weighing
- Litecoin (LTC) – 1.2% weighing
Complete list of Grayscale products at the time of writing
- Grayscale Bitcoin Trust (Public)
- Grayscale Bitcoin Cash Trust (Public)
- Grayscale Ethereum Trust (Public)
- Grayscale Ethereum Classic Trust (Public)
- Grayscale Litecoin Trust
- Grayscale Horizen Trust
- Grayscale Stellar Lumens Trust
- Grayscale XRP Trust
- Grayscale Zcash Trust
- Grayscale Digital Large Cap Fund (Public)
Final takeaway – The Coming Grayscale Effect
Clearly, we are not advocating to invest in any particular cryptocurrency, but we think it is valuable to understand that whenever the next bull run emerges, it is highly likely that cryptocurrencies with an easy-to-use, qualitative onramp geared towards the traditional investor community, will be benefiting immensely.
A simple change of narrative combined with a smaller sized market cap cryptocurrency could be explosive when considering the many billions, up to trillions of dollars which are being managed by investors through traditional brokerage accounts, IRA’s, 401K, and so on. All of which have little to no digital asset exposure. Simply said, if the bull market started today in earnest, where could they go? Today, it’d be Grayscale’s publicly traded digital asset products.
So, in our humble view, your time might be well spent by keeping an eye on all current and upcoming publicly-listed Grayscale products.