The Grayscale Bitcoin Trust: The Implications of Institutional Investment in Bitcoin
Over the past few years, many institutions and organizations have labeled bitcoin a Ponzi scheme. Not only did that affect the price, but crypto enthusiasts were also blacklisted as cyberpunks. However, the narrative changed in 2020. Major traditional institutions are now massively investing in bitcoin. They are investing and establishing Crypto Trust Funds like the Grayscale Bitcoin Trust (GBT) or the recent Grayscale Ethereum Trust (ETHE).
In the past few months, institutional interest in Bitcoin has consistently made headlines. One key factor is that traditional institutions are bagging as many Bitcoins and other cryptocurrencies as they can. Even those like the DBS, who in the past called Bitcoin a Ponzi scheme, are now beginning to embrace its qualities.
Collectively, both retail and institutional investors have a role to play in crypto adoption. According to a recent JP Morgan report,
“In our opinion, the ascend of Grayscale Bitcoin Trust suggests that bitcoin demand is not only driven by the younger cohorts of retail investors, i.e., millennials, but also institutional investors such as family offices and asset managers,”
In the same report, they acknowledged that;
“Corporate endorsements of bitcoin and in particular the endorsement by Paypal a couple of weeks ago appear to have propagated further demand for bitcoin.”
The trend has continued, and notable traditional financial companies like MicroStrategy, Square, DBS, and many others are investing in cryptocurrencies, particularly Bitcoin. This article will explore the Grayscale Bitcoin Trust and the implications of traditional financial companies’ investments in Bitcoin. Let’s begin by defining and understanding the Grayscale Bitcoin Trust and the concept of an institutional investment.
What is The Grayscale Bitcoin Trust?
The Grayscale Bitcoin Trust is a product of Barry Silbert’s New York-based Grayscale Investments, LLC. Originally known as the Bitcoin Investment Trust, it was established to ease the process of investing in Bitcoin. It allowed its registered investors to gain exposure to Bitcoin by purchasing the trust’s shares rather than going through the relatively more rigorous process of owning a wallet and understanding the technicalities. The Trust is recognized as the first digital currency investment vehicle. It became an SEC reporting company on January 21, 2020.
On September 25, 2013, the Grayscale Bitcoin Trust began with only private offerings to accredited investors but was later approved by FINRA, allowing its shares to be traded publicly. In other words, investors can buy or sell public shares of the Trust under the symbol GBTC.
The Grayscale Bitcoin Trust is not an Exchange Traded Fund (ETF); however, it is based on other popular commodity investment products. The SPDR Gold Trust is a good example of a physically-backed ETF. As of November 2020, the Grayscale Bitcoin Trust has over $10 billion cryptocurrency assets under management (AUM). The Company actually offers ten different cryptocurrency products, and all of them are single-asset trusts except for the Digital Large Cap Fund.
The Grayscale Bitcoin Trust has been aggressively accumulating Bitcoin in 2020. Within the past six months, it has increased by almost 50% in size. Although the fund offers numerous benefits, there are also some disadvantages worth mentioning.
Because the Grayscale Trust is currently the only fund of its kind in existence, investors have to pay high premiums. Andrew Left of Citron Research once described Grayscale as the most dangerous way to own Bitcoin due to the high premiums and annual fees. On more than two separate occasions, Grayscale shares have closed at prices that were at least double the value of its Bitcoin reserves at the time.
Another factor to consider is the Trust’s centralized investment model. For instance, according to Forbes, about 27 big companies have significant shares in the Trust. Their report shows that nine companies owned by just three big players possess over $3.5B worth of shares. This is clearly a disadvantage to smaller players.
The Implication Of Traditional Financial Companies Investing In Bitcoin
Several financial companies, such as PayPal, Grayscale, Visa, etc., have publicly indicated an interest or have already invested in cryptocurrencies, especially Bitcoin. However, the million-dollar question is what implications does this have for the cryptocurrency industry?
Growing institutional adoption of Bitcoin, especially by big traditional financial companies, is a significant step towards mass adoption. Interests from such prominent sources increase overall trust in these assets. When people witness renowned financial companies announcing their Bitcoin investment, the coin is perceived as a much more lucrative asset. Paypal, for example, now allows users to send and receive Bitcoin. According to Spendmenot, Paypal has approximately 286 million active users. If such a large user base joins crypto, mass adoption is near.
The rise in the price of Bitcoin
Since its creation in 2008, Bitcoin’s price has rapidly grown at a pace that exceeds all other asset classes. It reached an all-time high of $23,000+ in 2020 – thanks in part to institutional investments. It is no coincidence that 2020 happens to be the year that more traditional financial companies invested in Bitcoin or other cryptocurrencies like Ethereum.
When these financial companies express interest, overall confidence rises.
Increase in the deployment of blockchain technology
Blockchains or distributed ledgers are the underlying technologies that power cryptocurrencies. Bitcoin and Etherum are built on such blockchains, but now, institutions and countries are exploring these options as well. Today, institutional coins like the J. P. Morgan Chase coin are beginning to emerge. The JP Morgan coin is a digital token designed for immediate institutional payments using blockchain technology. Central banks are also deploying CBDCs (Central Bank Digital Currencies) to counter decentralized cryptocurrency projects. Some countries like China and Venezuela are already in the final stages of launching their CBDCs. Simultaneously, the likes of Sweden, UAE, and Saudi Arabia are also studying the technology for financial settlements.
The increase in the deployment of blockchain technology will also increase the demand for blockchain experts. Besides paving the way for financial inclusion, it brings new jobs and opportunities.
The decrease in the use of fiat
The rising adoption of Bitcoin by traditional financial companies will likely decrease the use of fiat currencies. On top of its ease of use, cryptocurrency transactions are also cheaper than fiat transactions. Cost considerations will likely lead more people to crypto as a standard medium of exchange.
Currently, some big names such as WordPress, Wikipedia, and other platforms are already accepting crypto. As more institutions begin to participate, the everyday use of these assets will become much more viable.
The Future of Traditional Finance
With the advent of Bitcoin and other cryptocurrencies, the financial industry is evolving rapidly. According to Statista, the total value of cross-border transactions will increase from $21.78 trillion in 2016 to $30.2 trillion by 2022.
Despite significant progress, the financial and payment industry is still plagued by high transaction fees and slow throughput. Given traditional financial companies’ recent interest in Bitcoin, a potential disruption in the sector could be approaching soon. Once it does, we expect some dramatic changes and innovations as outlined below:
Simplified and programmable payment systems
Traditional financial companies like PayPal and Visa both support and have invested in Bitcoin. With Blockchain technology, crypto transactions are executed almost instantly. Since these cannot be reversed, users employing digital assets for payments will not have to worry about chargebacks.
Today, users can already enjoy almost instantaneous transactions and save up to 70% on payment processing costs, including credit card, ATM, inactivity, and overdraft fees.
Transition to a cashless society
Traditionally, cash has always been the dominant payment method. Today, we are increasingly transitioning into a cashless society. The rising popularity of Bitcoin and its quick adoption by financial and payment companies will undoubtedly accelerate the process. E-wallet usage is expected to account for about 28% of total Point of Sale (PoS) transactions by the year 2022. The same report claims that cash will only make up 17% of global payments within the same period.
Good hedge against the general market.
Over the years, gold has been used as a hedge against turmoil in the global market due to its limited correlation with stocks and bonds. Bitcoin could serve as a worthy alternative to gold as a safe-haven asset. Individual investors and other non-financial companies are likely to adopt Bitcoin as their reserve asset. We have already witnessed many major stock market crashes that had little to no impact on crypto assets.
As confirmation of this trend, the analysis depicted in the figure below shows that more investors are moving away from gold into bitcoin.
Institutional investments in cryptocurrencies like Bitcoin are already happening, with traditional financial companies leading the charge. Though the crypto industry may still be relatively young, such forceful investments suggest the incredible impending growth that is to come.
Nevertheless, If you wish to invest your own money in the crypto market, always practice some due diligence. Carry out extensive research and make sure you understand all the fundamentals before committing any funds. Don’t make the mistake of investing blindly simply based on a big company’s decision. Everyone is susceptible to errors and losses.