Why? Well Bitcoin itself was "vertically accumulated" by institutions, their money flooded into it in a very short period of time that they had to keep re-buying higher and higher. Well, another coin may witness just that. Public and private companies have accumulated close to 900,000 BTC (4.3% of the entire supply), with the majority of that happening post-March crash. Their pockets are deep and they are here to stay.

 

Institutions have just begun, Bitcoin is the gateway not the end-game. What's coming next? Let's find out

 

Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

 

What is Grayscale?

Grayscale is a cryptocurrency asset manager established in 2013 by Digital Currency Group.

They operate a number of investment vehicles that are traded OTC (over-the-counter) and they are a regulated entity which reports to the SEC. Their value proposition is to help investors gain exposure to the crypto-market without having to deal with the technicalities of it. Their investment vehicles are only offered to accredited investors.

They offer a number of trusts: single and multi asset. They offer BTC, ETH, BCH, XRP, XLM, LTC, ZEC, ZEN & ETC investment trusts as well as their “Digital Large Cap Fund” which is a mixture of large-caps.

Importance of Grayscale

There is no doubt that this recent crypto-rally has been driven by institutional capital. In fact, it is likely going to bring forward the longest bullish cycle as they have the deepest pockets when compared to previous rallies ignited by enthusiasts and retail investors.

According to Grayscale’s latest quarterly report (Q3 2020), 81% of the capital invested in their trusts came from institutional investors, dominated by hedge funds.

Given the institutional dominance in Grayscale, understanding the market growth and trends in their trusts would give us a good idea as to where they’re accumulating and what bets they are taking.

Case-Study: The Bitcoin Trust

To view if reading into Grayscale’s growth and market trends can help us predict future growth, we will view if there were any hints given by Grayscale’s data that institutional capital would flood into Bitcoin before the parabolic rise.

First let’s analyse the volume inflows.

Right after the March crash we can see an increase in trading volumes which kept growing in the early phases of upcoming rallies.

For comparison purposes, here is the trading volume on a retail-driven platform: Binance.

Volumes decreased rather than increase which is a usual volume trend for “Retail vs Institution”.

The clearest indicator was announced in May/June of this year when the Grayscale Bitcoin Trust (GBTC) was buying Bitcoins faster than they were mined, creating a major supply/demand imbalance which then boosted prices rapidly as the rest of the market began catching up.

Now let’s have a look at their AUM (assets under management) growth:

• In the first quarter of 2020, $500 Million were invested into Grayscale trusts
• In the second quarter of 2020, $900 Million were invested into Grayscale trusts
• In the third quarter of 2020, $1.05B Billion were invested into Grayscale trusts

There is a very clear jump up in investments that happened right after the March crash as the FED began printing and inflation worries ramped up.

Looking at the average weekly Bitcoin trusts investments gives us important information:

• Q1: $29.9M - Average Weekly Investment in GBTC
• Q2: $57.8M - Average Weekly Investment in GBTC
• Q3: $55.3M - Average Weekly Investment in GBTC

The same jump between Q1 and Q2 is seen however there is a slight change of trend in Q3 where the average weekly investment decreased despite the overall amount invested into Grayscale trusts having increased.

Clearly, there is a link between GBTC activity and BTC’s parabolic rise. The question we must ask ourselves now is: “Which crypto-asset is next?”

Grayscale Metrics

There are quite a few assets to invest in through Grayscale. What we must look at is:

• Significant AUM growth
• Significant volume growth
• Premiums

The first two points are self-explanatory; growth in capital invested and volumes show an increased interest. The “Premiums” are perhaps trickier to understand.

Each trust consists of shares given to investors. For example, an investor parks $100M in GBTC through Grayscale, they buy more Bitcoin on his behalf and generate more shares and give it to the investor. Each 1 GBTC share is not equal to 1 BTC, it is equal to a small portion which Grayscale determines. In the case of GBTC every 1,050 shares represent 1 Bitcoin.

Coming into the premiums, each 1,050GBTC are also not equal to the market price of 1 BTC. They either trade at a premium or a discount. Today, GBTC is trading at a +27.5% premium, meaning 1BTC purchased through Grayscale is priced at $24,400.

A premium communicates an eagerness to gain exposure to their underlying even at a high cost. The higher the premium, the more eager investors are.

An important thing to keep in mind however, is that a big premium on a small AUM is insignificant as it cannot move the market.

You’ll find all data at the end of this research report about each trust.

The Next Beneficiary

Now that we know a trend is there and what metrics to look at, which assets match light up through this methodology?

According to Grayscale, there is unprecedented demand for BCH, LTC and their DLC (large cap index) fund. Let’s look at the volumes and see if that’s what we’re looking for.

This is The Litecoin Trust’s volume, very shallow. The AUM is about ~$75M, somewhat small for institutions.

This The Bitcoin Cash Trust’s volume, aside from two daily spikes, not consistently strong like we saw on Bitcoin. The AUM is about ~52.5M. 

Neither of these is what we’re really looking for.

What about the second largest asset my market capitalisation that has an upgrade underway and Billions of dollars living on its network?

Let’s take a look at ETH 🚀 

The Ethereum Trust (ETHE) has an AUM of $1.7 Billion, a more suitable number for institutional investor interest.

Capital flows have been consistently increasing every quarter.

• Q1: $8.5M - Average Weekly Investment in ETHE
• Q2: $10.4M - Average Weekly Investment in ETHE
• Q3: $15.6M - Average Weekly Investment in ETHE

Trading volumes are also consistently strong as of mid-November 2020, which means it is only beginning.

Grayscale’s ETHE trust owns 2.5% of the entire ETH supply right now, similar to how they own 2%+ of the Bitcoin supply; a show of big interest.

Ethereum-First & Ethereum-Only Investors

These are words uttered by Michael Sonnenshein, the managing director at Grayscale Investments LLC:

“Over the course of 2020 we are seeing a new group of investors who are Ethereum first and in some cases Ethereum only. There’s a growing conviction around Ethereum as an asset class.”

We personally do believe Ethereum is under-recognised for its massive potentials and can even overtake Bitcoin. To learn more about our reasoning, click here.

 

UPDATE

When this journal was first released, ETH was trading at only $600. Fast forward to today and price has more than tripled already. Is that all? Very unlikely.

EIP1559 is coming this summer which will make ETH a deflationary asset, in addition to Layer 2 solutions making the network scalable. Ethereum is only getting better but very few see this today.

 

Disclaimer: NOT FINANCIAL NOR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

 

Data

 

[caption id="attachment_20118" align="aligncenter" width="2736"] Source: bybt.com[/caption]