Gate.io Cryptopedia: Grayscale Investments

What is Grayscale Investments?

Grayscale Investments (hereafter called “Grayscale”) is an investment fund that its price of bitcoin holdings will determine the market capitalization. It is currently the world’s largest cryptocurrency asset management investment company.

Grayscale originally was a bitcoin investment fund under SecondMarket, a private equity trading platform. After it spun off to form Grayscale Investment Trust, it was merged into DCG (Digital Currency Group) in 2015. Grayscale became an investment fund that the market capitalization was based on the price of its bitcoin holdings. Meanwhile, it’s also the only company that American IRAs (Individual Retirement Account) and 401K can buy bitcoin.

How does Grayscale Investments make a profit?

Grayscale relies on managing investors’ money to earn management fees through legal fund operations.

The annual management fee for a normal trust fund is about 0.3–1.5%, while the annual management fee for the Bitcoin Trust Fund (GBTC) issued by Grayscale is 2%. With GBTC alone, Grayscale can earn about 7,000 BTC in management fees one year.

At first, Grayscale will conduct a private placement of GBTC in the primary market, allowing qualified investors and institutions to purchase GBTC with cash or BTC (minimum $50,000), which is regarded as buying Grayscale’s share of BTC. The investors or institutions can cash out by selling GBTC in the secondary market in the lock-up period. As long as investors continue to buy GBTC during this entire process, Grayscale can constantly earn management fees.

What other cryptocurrency trust products are available from Grayscale Investments?

Except for GBTC, Grayscale has also launched trust funds for BCH, ETH, ETC, Horizen, LTC, XLM, XRP, and ZEC, as well as composite cryptocurrency trust funds including mainstream currencies. Among them, the highest management fee rate of 3% per year is charged for composite cryptocurrency trust funds that include mainstream currencies.

The picture below shows the Net Assets Under Management, Holdings per Share, and Market Price per Share for Grayscale Investment Products (12/08/20).

Grayscale Investments’ Impact on Market

In the second half of 2020, the price of bitcoin witnessed a sharp rise, which was called an “institutional bull market” by many media. The “institutional bull market” here refers to the fact that the price of bitcoin has risen greatly due to the influence of substantial increase in holdings of investment institutions such as Grayscale.

Currently, the purchase of bitcoins by Grayscale has outpaced the number of bitcoins mined in the same period, and the price of bitcoins has risen at the same time. There is speculation that the price has been influenced through strong advertising efforts of Grayscale, which has supposedly caused the number of investors to grow. Some investors worry that Grayscale’s entry will bring disaster to bitcoin for the reason that substantial purchases and random smashes or extremely high premiums will lead to the future collapse of the bitcoin price

However, some analysts believe that Grayscale’s entry will not cause prices to plummet, because investment institutions usually purchase some asset out of the need for asset portfolio allocation, with the purpose of spreading risks and rationally allocating assets. Moreover, before choosing to allocate assets, the institution will discuss with and the allocation process will be uted after the final decision given by the committee.

In addition, Grayscale’s Bitcoin trust products have a long lock-up period. Now Grayscale’s bitcoin trust products consist of securities, and securities need a lock-up period of 6 months to 1 year after issuance in accordance with the regulations of the United States Securities and Exchanges Commission (also known as: SEC). At present, investors can buy and sell trust funds held in the secondary market after the unlocking, so they cannot “smash” the cryptocurrency market in the short term.

How to Track BTC Positions of Gray Investments

BTC positions in grayscale can be viewed in the “Markets” and “Index” of the Gate.io App. By keeping an eye on the BTC positions, you can become aware of the investment situation of the institution and related investors so as to get some reference information for judging the market outlook.

Important Notice: This article does not intend to provide any investment suggestions. Please fully understand the risk of investing in virtual currencies

More information can be found on Gate.io’s Cryptopedia by clicking here: https://www.gate.io/en/bitwiki

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