TL;DR
- Grayscale Investments, which offers alternative ways to invest in cryptocurrencies through trusts, has recorded $961 million in deposits in Q2 of 2020
- Grayscale Bitcoin Trust holds a reported 2% of all BTC in circulation
- Grayscale last week listed shares of its litecoin and bitcoin cash funds on OTC Markets.
- A premium has developed between the price of LTCN and BCHG – as of the morning of August 25, LTCN trades for $40.00 on OTC Markets, implying a premium of 620%
- The SEC has consistently rejected exchange based ETF’s
- Spot trading on OKCoin provides traders with the most reliable bet for buying, trading and selling cryptocurrency in a regulatory compliant manner
Grayscale Investments, a crypto asset manager with over $5 billion under management, has made waves in recent months as it has reported strong capital inflows. In Q2 2020, the company recorded a record $961 million deposited into its financial products.
The company is leveraging its success heading into Q3 2020. Last Monday, on Aug. 17, the firm revealed it would be listing shares of two of its funds on public markets;Grayscale Litecoin Trust (LTCN) and the Grayscale Bitcoin Cash Trust (BCHG), which trade on OTC Markets.
The products have already seen an influx of demand from retail investors. The launch of these products, though, have also indicated there is a clear need for alternative ways through which retail investors can gain exposure to cryptocurrencies. This is due to a premium that has developed between the Trusts’ shares and the digital assets underlying each Trust.
Grayscale’s Bitcoin Cash and Litecoin Trusts now trade on public markets
While Grayscale is best known for the Grayscale Bitcoin Trust, which holds a reported 2% of all BTC in circulation, the firm also operates an array of other funds. These include the Grayscale Litecoin Trust and Grayscale Bitcoin Cash Trust, which allows investors to obtain exposure to LTC and BCH by owning shares.
After the company garnered the support of Financial Industry Regulatory Authority (FINRA) and DTC, Grayscale last week listed shares of its litecoin and bitcoin cash funds on OTC Markets. OTC Markets is a secondary market for shares accessible through most mainstream brokerages. This meant that instantly, dozens of millions of investors could gain exposure to litecoin and bitcoin cash through their brokerages by purchasing LTCN and BCHG.
The challenge now is that a strong premium has formed between the value of the shares on the secondary market and the value of the cryptocurrency underlying each Trust share.
Before we get into that, here’s a quick overview of how Grayscale’s Trusts work.
How Grayscale’s Trusts work
An oft-cited reason for not getting into cryptocurrency investing is the hassle of setting up an account with an exchange, then storing the digital assets. Grayscale, responding to the existence of these barriers to entry, has launched a variety of Trusts.
Each Trust is composed of a different cryptocurrency or cryptocurrencies. In Grayscale’s words, the purpose of these funds is to “reflect the value of the assets held by such Trust, determined by reference to the appropriate TradeBlock index at 4:00 p.m. New York time, less such Trust’s expenses and other liabilities.” The company charges a 2.5% per annum management fee on each Trust.
Grayscale currently has Trusts for a variety of markets. In addition to the Trusts for LTC and BCH, the company offers products that provide exposure to bitcoin (BTC), ethereum (ETH), ethereum classic (ETC), horizen (ZEN), Stellar Lumens (XLM), XRP, and zcash (ZEC). Grayscale also operates the Grayscale Digital Large Cap Fund, which aggregates the aforementioned coins into one vehicle.
Shares are generated in periodic private placement rounds that Grayscale can only offer to accredited investors. An accredited investor, at least in the eyes of U.S. regulators, is an individual or entity that has a net worth (net worth minus home) of at least $1,000,000, or an income of over $200,000 per year ($300,000 per year for couples). Institutions are also accredited investors, but not all accredited investors are institutions.
Grayscale Litecoin and Bitcoin Cash Trusts command heavy premiums on OTC Markets
Now, back to the premiums.
As shares can only be generated by accredited investors, the only way a retail investor can acquire exposure to any of Grayscale’s supported assets is through OTC Markets. In the case of the Litecoin Trust, a retail investor can purchase LTCN; in the case of the Bitcoin Cash Trust, a retail investor can purchase BCHG.
Because Grayscale does not allow one to redeem shares for the underlying cryptocurrency, a premium has developed between the price of LTCN and BCHG and the price of the cryptocurrency underlying each Trust.
At current, Grayscale reports that each share of LTCN represents 0.094 litecoin, presently valued at $5.55 according to OKCoin data. As of the morning of August 25, LTCN trades for $40.00 on OTC Markets, implying a premium of 620%.
Grayscale also reports that each share of BCHG represents 0.0094 bitcoin cash, presently valued at $2.61 according to OKCoin data. At a price of $10.50 as of August 25, shares for the Trust are trading at a 302% premium to the underlying cryptocurrency.
These premiums are not an isolated case: the Grayscale Bitcoin Trust is famous for trading at a slight premium to the spot market, while the Grayscale Ethereum Trust made headlines earlier this year when it traded at a more than 500% premium. In 2019, this same product also garnered a 1,300% premium amid a crypto market frenzy.
Millions continue to flood into the secondary markets for Grayscale’s Trusts, but the premiums are actually dangerous for investors without knowledge of the nuances of these vehicles.
The need for other avenues of Investment
The high premiums commanded by Grayscale’s Trusts on the secondary markets signals strong retail interest in the cryptocurrency market. What this trend also signals, though, is the need for alternative vehicles of investment where exposure to digital assets to reduce the friction for new investors into crypto can be acquired at a relatively low cost and without premiums.
A regulated exchange-traded fund that holds cryptocurrency — be that Bitcoin, Ethereum or otherwise — is a solution that firms in the industry have been eyeing for a while. Take the example of VanEck, a Wall Street ETF stalwart, whose Bitcoin ETF applications were denied on at least three separate occasions by the U.S. Securities and Exchange Commission (SEC).
In denying Bitcoin and cryptocurrency funds, the SEC cites concerns around the security of funds, a lack of regulatory oversight, and the inherent international nature of the cryptocurrency market.
As regulators such as the SEC remain hesitant on approving cryptocurrency funds, spot exchanges such as OKCoin remain the most reliable bet for investors to acquire digital assets without premiums. A new user can Register, have an account legally approved, deposit and start trading in less than 10 minutes.
