Editor's Note: This article comes fromMatrix Encyclopedia, reprinted by Odaily with authorization.

As an investor, the first thing I do when I wake up every day is to see what coins and how much Grayscale has accumulated. Grayscale's dynamics have become a must-see indicator for many people to invest in. Some people even say that if you don't know what currency to buy, just follow Grayscale to buy it. I watch Grayscale every day to buy, buy, buy, do you really understand the organization of Grayscale?

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grayscale background

Although Grayscale became popular in the currency circle this year, it has existed for 7 years.

In 2013, the US digital currency investment group DCG (Digital Currency Group) established Grayscale Investment Trust, which aims to provide services for institutional investors and high-net-worth qualified investors through compliant fund operations.

Many people should have heard of DCG. It is one of the most active and influential crypto capitals in the world. Its investment territory spans all subdivisions of the blockchain industry, including exchanges, underlying protocols, wallets, etc. The well-known cryptocurrency media website CoinDesk and the trading platform Genesis belong to its subsidiaries.

DCG founder Barry Silbert is also one of the legends in the cryptocurrency circle. Barry Silbert made a lot of money through Bitcoin very early on, and he invested in Coinbase, Bitpay and Ripple in 2013. In 2011, he and Zuckerberg were selected as one of the top 40 business stars under the age of 40 by Fortune magazine.

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Grayscale products

The reason why Grayscale suddenly became popular is mainly because of its massive accumulation of Bitcoin and some mainstream currencies. Many people believe that this wave of Bitcoin’s new highs is also driven by the blessing of Grayscale. And the reason why it operates in this way is inseparable from its products.

At present, there are 9 types of single asset investment products, including BTC, ETH, LTC, XRP, ETC, BCH, ZEN, XLM, and ZEC nine digital currency trust funds. The following are the holdings of Grayscale Fund as of writing.

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Grayscale mode of operation

Grayscale Trust Fund is also divided into primary market and secondary market.

The primary market is carried out in the form of private placement and subscription, mainly for institutional investors. The purchase method is divided into: physical purchase and capital purchase.

The physical purchase is to purchase with mainstream digital currencies such as Bitcoin and Ethereum, which are common in the currency circle. Users transfer digital currency to Grayscale in exchange for the corresponding amount of Grayscale Trust Fund. Taking the physical purchase of BTC as an example, investors hand over BTC to Grayscale, and Grayscale deposits BTC in Coinbase for custody, and distributes Bitcoin trust GBTC of equal value to investors.

The purchase of funds is the purchase of OTC legal currency. Users can use fiat currency to purchase cryptocurrency trust through its authorized OTC dealer Genesis. After Genesis receives the fiat currency, it converts it into the designated digital currency according to the currency price at that time and delivers it to Grayscale. After Grayscale receives the encrypted currency, it issues shares of the encrypted currency trust fund of the same value.

Grayscale Trust has two mechanisms: it does not support redemption, and it needs to be locked for up to 6 or 12 months. It is precisely because of this that investors can only sell their trust shares through the secondary market if they want to cash out.

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How Grayscale Makes a Profit

Regardless of whether Grayscale only buys or not sells, this still does not affect its profitability. Like other trust companies, Grayscale makes its main profit by charging management fees. The annual fee for each trust product is different, ranging from 2% to 3%.

For example, the annual fee of Grayscale Bitcoin Trust GBTC is 2%, and the annual management fee of Ethereum Trust ETHE is 3%. At present, the total amount of positions held by Grayscale is nearly 10 billion US dollars. Calculated according to the lowest bitcoin trust, the annual profit of Grayscale is as high as 200 million US dollars.

In addition, the two investment terms formulated by Grayscale can also make it a huge profit.

One is that Grayscale Trust does not support redemption, that is, once an investor subscribes for a trust share, it cannot be converted into digital currency. Taking Bitcoin as an example, investors can only exchange BTC for GBTC, not GBTC for BTC. Investors who want to sell GBTC can only go through the secondary market. Grayscale's non-redeemable mechanism will make its management positions larger and larger.

The second is that the management fee is deducted from the cryptocurrency held in the position, that is, the currency standard charges the management fee. Since Grayscale’s Bitcoin trust does not clearly stipulate the duration of the trust, this means that the coins held by the trust will be slowly transferred to Grayscale.

Grayscale can not only make profit itself, but also drive the profit of its sister platform Genesis. This is because Grayscale Fund’s cash purchases in the primary market are all authorized to Genesis, and the premium of Grayscale Trust has also driven its lending business and derivatives business.

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Secondary market premium

Just mentioned that the premium of Grayscale Trust has driven the development of Genesis, so what is the premium of Grayscale Trust?

Taking BTC as an example, BTC has a price, and Grayscale Bitcoin Trust GBTC also has a price. Since the current price of GBTC is higher than the price of BTC, that is, if you spend the same money, buying Grayscale Trust shares will correspond to a smaller number of Bitcoins than buying Bitcoin directly from the exchange. This is the Grayscale Trust premium. This premium exceeded 100% at its peak and has remained at around 20% for the past year.

The reason for this premium is that the U.S. stock OTC market and the Bitcoin spot market are two isolated markets, and the non-redeemable and lock-up period settings of Grayscale Trust make the market circulation limited. Since Grayscale Trust is currently one of the channels that can legally and compliantly invest in cryptocurrencies in the United States, there is a huge demand in the market, and the supply exceeds demand, resulting in a long-term positive premium for trust shares in the secondary market, and the lower the circulation rate, the higher the premium. high. For example, the secondary market premium of Litecoin Trust (LTCN) was once as high as 57 times, but the actual circulation was less than 100,000 copies, and the circulation rate was only 1%.

The long-term positive premium of Grayscale Trust creates arbitrage space between the primary and secondary markets. Institutions can borrow BTC to participate in the private placement of GBTC in the primary market, obtain GBTC shares, wait 6 months and sell them in the secondary market, and then buy BTC to repay the loan. The GBTC premium minus the loan interest is the profit part.

Seeing the premium of Grayscale Trust, some people began to have doubts, "Why is the premium of Grayscale Trust so high, and why are there still people buying it?"

First of all, rest assured. Grayscale Trust has a certain reputation on Wall Street, and investors can buy with peace of mind. There are a lot of questions to consider when buying bitcoins: How do you store it? Do you need to pay someone to hold your bitcoins? What if you lost your keys or your bitcoin wallet was hacked? This is a problem for traditional investors, and Grayscale Bitcoin Trust can make users not have to think about these problems.

Finally, and most importantly, Grayscale Trust is legal. Grayscale's model benefits from the fact that Bitcoin ETFs are not yet legal in the United States. The U.S. Securities and Exchange Commission (SEC) has rejected several bitcoin ETF applications on the grounds that the price of bitcoin can be manipulated. With the Grayscale Bitcoin Trust, you’re buying shares in the trust; with an ETF, you’re investing in a fund that directly tracks the price of Bitcoin. While U.S. investors are waiting for a Bitcoin ETF (which the SEC may never approve), the Bitcoin Trust is the next best thing.

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Will Grayscale crash the market?

This is also a concern of many investors, after all, Grayscale holds a large number of coins. In fact, when you read the above, you already have the answer to this question.

Grayscale Trust's mission is to achieve its investment objective, which is to track returns on digital currency prices. The most direct way is to hold the digital currency, which is why it has been accumulating. Moreover, Grayscale itself relies on management fees to make profits. Naturally, it hopes that the price of the digital currency it manages will continue to rise, so as to attract more investors to buy its products and contribute management fees, so it has no reason to smash the market.

As for those institutional investors who buy Grayscale Trust, they hold Grayscale Trust stocks, not cryptocurrencies, and due to the existence of Grayscale’s irredeemable mechanism, the digital currency market is independent from the US stock market, and they are also It is not possible to short digital currencies.

So there is nothing to worry about now.

On Monday, it's time for Grayscale to go to work.