The Eternal Bitcoin Bull, GrayScale has a plan
In the last three months of 2020, Bitcoin has done it again, only ones in the crypto market not cheering were the “non-believers”. Bitcoin as a whole showed a linear upward trend, breaking through the previous high in one fell swoop and doubling again to hit a record high of $41,950. According to Coingecko, Bitcoin’s gained a staggering 168.33% in Q4, which is almost 50% monthly gain, the highest quarterly gain that could only rivaled by that of 2017.
So whats the driving force behind this monumental gain? Why this time? Here are several most popular speculations circling around.
- Bitcoin’s thrid halving, previos block reward was 12.5 bitcoins. After the halving is completed, the reward for each block mined became 6.25 BTC.
- Global central banks’ QE in light of the pandemic not only caused huge money outflow, some inevitably found itself in Bitcoin as either an “asset” or a “heaven” for hedge.
- Much different from 2017, more institutional investors are open with their welcomeness in Bitcoin and crypto.
One of them, has been praised as the star behind this Bitcoin rally — GrayScale.
A not so new cryptocurrency trust fund
Grayscale was founded on September 25, 2013. It is a cryptocurrency fund company and one of the earliest entrants in the crypto field. After more than 7 years of development, the BTC assets it manages ( GBTC) is worth more than 19.1 billion U.S. dollars, and ETH assets under management (ETHE) exceed 2.9 billion U.S. dollars.
Thats not all, they also holds crypto assets such as BCH, ETC, ZEN, Zcash, and LTC.
There is a difference between buying crypto backed assets from Grayscale and buying crypto directly from the exchange.
If the user buys bitcoin directly from a crypto exchange such as Coinbase, it is equivalent to the user directly managing the bitcoin (if the user transfers to a personal wallet, then the ownership is not to be questioned). When an user buys its Bitcoin product GBTC from Grayscale, it is an investment trust relationship. What users buy is not Bitcoin itself, but Grayscale holds a share of Bitcoin. The current price per share is $35.8, which represents Grayscale’s share of BTC, not BTC itself.
In addition, we will also discover that in the past, users purchased Bitcoin or Ethereum assets at a high premium. Why didn’t users directly purchase Bitcoin or Ethereum assets? Two questions are involved here: Where do Grayscale’s crypto asset investment products come from? What are the benefits of buying grayscale crypto asset products?
Where did the Grayscale crypto asset products come from
Grayscale in this case is a manager of crypto assets, helping investors to manage their assets. It first raises capital from qualified investors, and the raised funds are used to purchase crypto assets. These qualified investors are generally larger investors or institutions, who use their own funds or borrow funds from off-market to invest in grayscale. The funds invested can be legal currency or cryptocurrency (such as direct investment in Bitcoin or Ethereum).
Since qualified investors can directly invest in cryptocurrencies in Grayscale, the direct purchasing power of Grayscale’s BTC and ETH is not as high as people usually think.
Grayscale uses these funds and purchase crypto assets, and then divides them into shares, thus generating Grayscale crypto investment products, such as GBTC and ETHE.
The operation of Grayscale is mainly based on the “Rule 144 exemption” . With this exemption rule, Grayscale allows the crypto asset investors (strictly qualified investor identity verification) that initially created shares during the lock-up period (6 or 12 Months) can be sold to the public. The lock-up period of GBTC and ETHE is revised to 6 months.
The transaction price of these crypto asset shares is often different from the value of its underlying assets, and there may be a premium or a discount. From the chart below, historically, GBTC and ETHE assets have a higher premium. This is also an important reason for the Grayscale of investment by some institutions. According to recent disclosures, Three Arrows Capital holds more than $1.2 billion in Bitcoin trust positions in Grayscale, holding 36,969 BTC, which currently accounts for about 6.1% of GBTC.
Where does the Grayscale product premium come from
Grayscale has been operating for more than 7 years, but so far, many people still don’t understand its operating mechanism, which leads to a high premium. Grayscale provides ordinary investors with exposure to cryptocurrencies.
Many ordinary users in the United States buy Grayscale crypto asset products because they can be purchased through traditional brokerage and pension accounts, which brings a series of conveniences. For example, benefits in taxation, asset custody, transferability, etc.
For traditional investors, these conveniences meet their needs. For example, gray shares can be held in tax preferential accounts such as IRA; crypto investors are ordinary investors, and self-management of Bitcoin and Ethereum assets has a high threshold. You need to download crypto wallets and manage keys. Not a small problem.
By investing in grayscale crypto asset products, investors do not need to set up wallets or crypto exchange accounts, and can buy and keep them through traditional financial channels. From the user experience, investing in grayscale crypto asset products is similar to buying traditional stocks. .
This is obviously more in line with the operating experience of most ordinary investors. In addition, these assets belong to the investor’s name, and it is also convenient to transfer to relevant beneficiaries as inheritance, without worrying about the loss of crypto assets.
Finally, the gray share of these crypto assets is also transferable, and traders or investors can also make profits through trading after purchasing.
It can be seen from the above that Grayscale has found its own way of survival between crypto assets and centralized custody, helping traditional investors achieve their goals in compliance with regulations, and this service is an crypto asset investment service. The premium purchased by users is equivalent to paying for their services.
Of course, if the world is completely flat, the value of Grayscale will be much smaller. But for compliance and other benefits, the value of Grayscale will continue and increase. In essence, part of the gray service belongs to regulatory arbitrage, and part of it belongs to asset custody service.
Whats next for Grayscale in 2021?
After bitcoin hitting 42k in the beginning of the year, it slummed 10k and tested 30k resistance 5 times till the time of this writing, despite Grayscale shows no signs of slowing down in purchasing bitcoin from the market like a blackhole. So whats behind their mastermind?
According to the filing website of the Delaware Corporation of the United States, Grayscale has filed 6 new trust products. They are LINK, XTZ, MANA, FIL, LPT, BAT. Currently, these products have not been listed on their official website and are open to the public. Among them, except for the date shown by FIL Trust as 2020.10.15, the rest are 2020.12.18.
Earlier, some media issued a statement that Grayscale is suspected of establishing trust funds such as Chainlink, and Grayscale Investment’s new CEO Michael Sonnenshein also stated that Grayscale is expected to launch six new products in 2021.
Such action has stirred the community and especially the ones that missed out the previous (or one might argue on-going) rally, are laying their eyes on crypto assets that might have the potential to pull another one, Chainlink is obviously one of those popular choices.
Chainlink co-founder Sergey Nazarov stated at the 2020 Web 3 conference that before the initial development of smart contracts, there were basically only two things that could be done at the time: Bitcoin transfer and multi-signature; and in 2014 Before and after, the agreement smart contract appeared, but this kind of agreement is very heavy and contains many different parts. Each part is a separate smart contract. You need to add different smart contracts to the blockchain itself. Different smart contracts need to be added to the protocol of the blockchain itself, and this process takes months or even years.
However, the emergence of Ethereum’s scripted smart contract has brought about a major change. It replaced the original clumsy protocol smart contract. It only takes a few days or weeks to complete the smart contract script, and the smart contract is also online. And this scripted smart contract gave birth to a generalized, brand-new smart contract type, and realized the modular development of smart contracts, which is a major innovation.
Smart contracts have entered the stage of off-chain connectivity, and more and more cases such as finance, international trade, and insurance are being covered. -- Sergey Nazarov, Chainlink Co-founder.
But these products all require data input, such as market price data, etc. These data can be transmitted to the blockchain in some form, so the current trend is to connect scripted smart contracts to the off-chain world, and the oracle is to achieve the key to this trend, this trend has also driven DeFi smart contracts to achieve great growth.
The consensus is that 2021 will be just the beginning of NFTs and Defi, the fuel of non-stopping QE will generate more energy in the crypto industry, while Grayscale will fan the flame of Bitcoin, and possibly Chainlink.
