The following is the full text of the conversation:

The following is the full text of the conversation:

OKEx Intelligence Agency: Grayscale Investment is a well-known institution on Wall Street, but people actually don’t know much about his background, and it’s not detailed enough. Could you briefly introduce the origin and background of this institution?

A Feng:I will introduce Grayscale Investment in two aspects. The first aspect is the development process of Grayscale, and the second aspect is the financial empire of its parent company DCG.

Let's look at the first aspect: the development process.

Grayscale Investment was established in 2013. The first trust issued after its establishment was GBTC. However, when it was first established, the development situation was worrying, but the later development momentum was very rapid. Here I divide its development into three stages: the accumulation period (2013-2016, the asset scale increased by 700 million US dollars); the rapid development period (2017-2019, the asset scale increased by 2.6 billion US dollars); the explosive period (In 2020, as of August, the asset size increased by US$3.4 billion).

Look at the second aspect: the financial empire of the digital currency group DCG (Digital Cuerrency Group).

Well-known blockchain companies such as encrypted media Coindesk, investment company Grayscale, and market maker Genesis are all subsidiaries of DCG Group, while Coinbase, Blockstream, BitGo, etc. are also part of DCG's investment landscape. Therefore, DCG can be called a financial empire.

As for DCG CEO Barry Hilbert, he is an extremely influential early practitioner in the cryptocurrency industry. If you have a brief history of cryptocurrency, you will know that on the eve of the Bitcoin hard fork , in 2017 he contributed to one of several key Bitcoin scaling meetings: the New York Consensus.

In addition, his digital currency group has invested in thousands of large and small cryptocurrency projects in hundreds of countries around the world, and Grayscale Investment Company is one of his financial empires.

OKEx Intelligence Bureau: There are 10 types of grayscale encrypted trusts. For example, they have been traded in the secondary market, including GBTC, ETHE, LTCN, BCHG, ETCG, and GDLC. What do these symbols mean?

Afeng: First, let’s talk about the specific meaning of these symbols. Each symbol represents a cryptocurrency trust product. For example, GBTC is a Bitcoin trust, ETHE is an Ethereum trust, and LTCN is a Litecoin trust.

Every trust of Grayscale is backed by real cryptocurrency:

1GBTC=0.00095712 BTC, which means that 1 BTC can be exchanged for 1044 GBTC,

1ETHE=0.09351806 BTC, that is to say, 1 ETH can be exchanged for 10.69 ETHE;

Here I will focus on introducing GDLC, the full name of which is Grayscale Digital Large Cap Fund. It is a digital large cap fund of Grayscale Corporation. An important tool for investors with a more balanced portfolio with higher risk-adjusted returns. "

Each GDLC consists of BTC, ETH, BCH, XRP, and LTC in a certain proportion. According to the official website, the amount of five cryptocurrencies in a GDLC is:

Bitcoin 0.00047754 BTC

Ethereum 0.00276074 ETH

Bitcoin Cash 0.00048051 BCH

XRP 1.10624317 XRP

Litecoin 0.00156041 LTC

Check out the website:https://grayscale.co/digital-large-cap/

All these cryptocurrencies are kept in Coinbase Custody's cold wallets, which are kept with professional security measures.

Secondly, symbols such as GBTC, ETHE, LTCN, BCHG, ETCG, and GDLC are essentially the same as securities under the legal framework of the United States, except that the underlying objects behind them are cryptocurrencies. Therefore, we will use securities to describe them later, so don't be confused about the differences in these names.

OKEx Intelligence Agency: Why did Grayscale issue these encrypted trusts? And we also observed that this trust has received a lot of attention, so why not buy coins directly on the exchange?

A Feng:Regarding this issue, the official website of Grayscale has given a professional explanation, I will quote part of it, and also add some personal understanding.

The advantage of investing in grayscale encrypted trusts is that there is no need to personally purchase, transfer and store encrypted assets themselves, and there is no need to additionally manage personal accounts, wallets and private keys. The fundamental purpose of Grayscale’s development of these products is to make investors feel at ease. Grayscale’s trust situation is also an investment type that financial advisors and investors are familiar with.

1) Buy with peace of mind, buy with peace of mind, buy with peace of mind

Under normal circumstances, individuals and institutions must go through unfamiliar channels (exchanges, intermediaries) to buy and sell encrypted assets, but these channels are often unregulated and not safe. At this time, investors must first transfer funds to a safe area (jurisdiction) that they do not like very much.

In addition, for investors, independent storage of encrypted assets is likely to face loss and theft of private keys. Once such an event occurs, it will lose part of the assets at the slightest, and go bankrupt at the worst.

Therefore, in contrast, Grayscale Trust can avoid all the above problems. Grayscale Investments and other service providers have conducted a large number of security audits on the bottom layer of each product and provided strong security protection measures, including offline storage or "cold" storage, multi-signature, username and password, and two-step verification, etc. wait. The underlying agreements of these investment products are designed by the industry's top professionals in the financial, legal and computer fields, and the system operation is supervised by a dedicated person in charge.

Moreover, the financial statements of all products are audited by Friedman LLP, which is audited once a year.

2) The transaction price strictly follows the market trend, and large orders are no exception

On traditional trading platforms, large transaction orders often have a huge impact on market price trends. However, when investing in Grayscale’s encrypted trusts, when qualified investors execute large orders through exchanges and OTC, the transaction prices of different encrypted trusts are strictly based on the four large-scale encrypted currencies of Coinbase, Kraken, LMAX Digital, and Bitstamp. Prices from exchanges are blended, but their price weights will vary.For example, when investors invest in the GBTC corresponding to Grayscale Bitcoin Trust (BTC), Grayscale will follow Coinbase, Kraken, LMAX Digital, and Bitstamp (the weight ratios are 56.12%, 12.15%, 15.99%, and 15.75%). Real-time prices on cryptocurrency exchanges for exchange. For another example, ETHE Trust, Grayscale will be combined according to Coinbase, Kraken, LMAX Digital, and Bitstamp, and the price proportions are 68.15%, 12.63%, 11.25%, and 7.98% respectively.

This is done to avoid the problem of investor losses due to a large impact on the entire market price.

3) Property rights, transferable and IRA investment qualifications

Known as securities or securities, these encrypted trust products are no different from other types of ordinary securities and bonds that are common in the market and familiar to financial and tax advisors. These securities can be easily transferred to beneficiaries under real estate laws. Shares in these crypto trust products can also be held in certain IRAs, 401(k)s and other brokerage and investment accounts. For more investment information, please consult your investment and tax advisors (Consult your investment and tax advisors for additional information).

OKEx Intelligence Bureau: We know that since 2020, the market value of crypto assets held by Grayscale has exceeded US$6 billion, but at the beginning of the year it was less than US$4 billion. Why is the scale of assets managed by Grayscale Investment growing so fast?

A Feng:Yes, Grayscale’s holding of cryptocurrencies such as Bitcoin is very fast. It currently manages more than 400,000 Bitcoins, accounting for 2.2% of the total number of Bitcoins in circulation, and its total assets under management exceed US$6 billion.

In addition, the growth rate is also very fast, which is mainly determined by four reasons:

1) The number of bitcoins held in positions increased rapidly;

For example, in Q2 2020, the amount of bitcoin funds flowing into Grayscale accounted for almost 70% of the bitcoin mining volume during the same period, and after the third bitcoin halving in May 2020, this proportion increased to 118%. This means that after the halving of Bitcoin, Grayscale bought 120% of the total Bitcoin mining.

2) The number of cryptocurrencies other than Bitcoin has also increased rapidly;

Cryptocurrency inflows other than GBTC in the past 12 months reached $384.1 million, more than any time period, with Ethereum inflows accounting for 15% of the total growth, which also peaked. This is also one of the reasons why Ethereum has performed relatively strongly since the second quarter of this year. From the mid-year investment report released by Grayscale in July this year, it can be seen that its holdings of bitcoin cash, litecoin, large-cap funds and other products are very strong, which can almost be described as exponential.

3) The entry speed of Wall Street institutions is also accelerating;

In Q2 2020, capital from institutional investors accounted for 84% of total capital inflows. This trend has exceeded the 81% over the past 12 months. If you look at the earlier data, this data is less than 75%. In fact, among Grayscale’s investors, there are not only institutional investors, but also pension funds, family trusts, and some individual investors. However, among all the funding sources of Grayscale, the proportion of institutions is increasing.

4) Asset prices are rising;

For example, since July 2020, the US$5 billion has increased to more than US$6 billion, an increase of 1 billion a month, which is also mainly due to the rise in the price of Bitcoin.

OKEx Intelligence Bureau: What are the conditions for participating in the issuance of Grayscale Encryption Trust? How should ordinary investors get involved?

A Feng:According to the definition of qualified investors on Grayscale’s official website, there are some requirements as follows: individuals with an annual income of 200,000 US dollars, couples with an annual income of 300,000 US dollars, or personal assets of 1 million US dollars, excluding real estate and real estate loans. Ordinary investors can also participate if they meet the above conditions, but they need to comply with the regulations and requirements of the US Securities Law.

There are two main ways for qualified investors to participate in encrypted trusts: physical contribution and cash contribution.

Look at cash contributions first.

Cash contribution means that investors deliver their own cash (US dollars) to Genesis Global Trading, an affiliated company of Grayscale. After Genesis gets the investor's cash, it converts the cash into BTC or other cryptocurrencies required by customers according to the market price. These cryptocurrencies are then delivered to Grayscale to create GBTC, ETHE or other trust shares. This is a cash contribution process that must have Genesis as an intermediary.

Let's look at real investment again.

In-kind contribution means that qualified investors directly deliver physical cryptocurrency to Grayscale, and then directly exchange for GBTC, ETHE or other cryptocurrency trust shares.

OKEx Intelligence Bureau: In other words, the vast majority of investors investing in Grayscale’s encrypted trust are institutional investors. So which well-known institutions have invested in Grayscale’s encrypted trust business? What are the characteristics of these institutions?

A Feng:Yes, at present, more than 85% of the funds of Grayscale come from institutional investors represented by hedge funds.

Let's take Ark Investment Company as an example. He manages $5.3 billion in assets and is also a shareholder of Tesla. He holds a large number of Tesla securities, and Ark Capital holds a Bitcoin trust worth nearly $400 million.

Take again the Rothschild Investment Corporation, founded in 1908 by Monroe Rothschild and his brother-in-law Samuel Karger, for a long time has long been a leading financial institution in Chicago, IL. They hold about $3.2 million in bitcoin trusts.

They only hold more trust products, because they may also hold Ethereum trusts, digital large-cap funds, and so on.

Let me add that there are currently more than 600 hedge funds in the world involved in cryptocurrency business, of which nearly 200 are very active in trading, and the vast majority (97%) of these 200 active hedge funds are trading in Bitcoin .

However, not all of these funds are making money. For example, Prime Factor Capital, the UK’s first compliant cryptocurrency hedge fund, decided to close in July this year. Of course, there are also other crypto hedge funds that closed. There are always winners and losers in the market game.

OKEx Intelligence Bureau: We have seen that institutional investors have shown a very strong interest in these encrypted trusts, so what price do they need to pay for this? Or what management fees do they need to pay?

A Feng:Of course, I think investors need to pay three additional fees, including premiums, broker fees, and Grayscale’s annual management fees.

First, there's the premium.

According to recent data on Grayscale’s official website, at present, a GBTC is sold for $13.4, with a premium of 10%.

Let's take investor Tony as an example. Assuming that investor Tony buys 1033 GBTC (worth 1 BTC), he first pays a premium of $1380.

Second, look at the exploitation from brokers.

Assuming that Tony wants to contribute in cash, for example, when converting GBTC through cash contribution, he needs to go through the broker Genesis Global Trading, and the broker will also charge a fee of 3.5%-8.5%. During this process, the broker will ask Tony to pay at least $500.

Finally, Grayscale's annual management fee.

Even if calculated according to GBTC, which has the lowest annual management fee, its annual management fee is 2%, and that of ETHE is 2.5%. That means, Tony also needs to pay an annual management fee of about $270.

To sum up, when the investor Tony buys 1033 GBTC (worth 1 BTC), the additional cost to be paid is as high as $2156.

And pay the same funds, buy 1 bitcoin directly on the exchange, and the maximum expenditure will not exceed 10 US dollars. It can be said that buying GBTC shares through Grayscale will cost 215 times as much handling fee as that of centralized exchanges.

OKEx Intelligence Agency: We know that Grayscale Crypto Trust has a significant premium compared with the real cryptocurrency price. The most extreme ETHE premium can be as high as 1000%, but we have observed GBTC, ETHE, etc., but the trading volume is still Very big, why is that?

A Feng:The premium is indeed very large. For the latest premium situation of encrypted trusts, we list four examples: GBTC: 21%; ETHE: 79%; the premiums of BCHG and LTCN that have just launched are 348% and 742% respectively;

Here we will observe a very interesting phenomenon, that is, the ETHE premium change process has dropped from a maximum of 1000% in June this year to 300% in July this year. The current premium is only 79%, and the premium has dropped by 90%.

However, BCHG and LTCN, which went online on the secondary market for over-the-counter transactions on August 18, also had a maximum premium of more than 10,000%, with a premium of at least 10 times.

So why is there such a high premium? The root cause is too little circulation.

The lock-up mechanism of Grayscale’s trust products has resulted in too few securities circulating in the market. The lock-up mechanism is mainly caused by Rule 114 of the Securities Act of 1933 in the United States. Under this regulation, newly issued encrypted trust securities must be locked for 12 months, but GBTC can be locked for 6 months in the secondary market. over-the-counter transactions.

Why is the lock-up of Bitcoin Trust only 6 months? In fact, it was 12 months before. On January 21, 2020, GBTC registered as a reporting company with the US Securities and Exchange Commission (SEC). The lock-up period of GBTC securities was shortened from 1 year to 6 months, and the official implementation time is April 2020. On the 21st, the ETHE lockup period is still 1 year (however, ETHE is also submitting an application to the SEC for registration). It is precisely because of this that the GBTC premium is far lower than ETHE.

As mentioned earlier, the premium of ETHE suddenly dropped to 72%, which is also because the previously locked part (the red framed part in the figure) has been gradually released and flowed into the market.

As for why the trading volume is so high, and why they are willing to bear such high handling fees and premium fees to buy such trust products, it is mainly caused by the retirement plan, and they can only invest with the money in the retirement account.

A lot of income of American investors is stored in 401(k) and IRA retirement plans. If investors want to use the money in it to invest in cryptocurrencies, the only compliant channel is to buy GBTC and ETHE. The premium on encrypted securities is very high, and you have to buy it. There are also some people who may not know much about the mechanism. Seeing that the ETHE premium is so high and the increase is so large, it is also possible to chase the rise. American investors also have FOMO emotions.

Therefore, the high premium of encrypted trust securities is a result of US laws.

OKEx Intelligence Agency: We know that these encrypted securities such as GBTC are backed by real cryptocurrencies, but at the same time these cryptocurrencies are also irredeemable. Doesn’t that mean that the Bitcoin and Ethereum I invested will never be returned? ?

A Feng:First of all, the non-callability is also determined by US law; secondly, although it is not callable, the trading of these securities is open, and the transaction depth is also very good, and Grayscale, as a compliance institution, has already made a lot of money Yes, it can be said to be lying down.

First, let's talk about the reasons for irredeemable.

The BTC, ETH, BCH, and LTC represented by GBTC, ETHE, BCHG, and LTCN are not redeemable. But this is not the case in history. GBTC had a redemption plan. Before October 28, 2014, Grayscale Trust investors could redeem through Genesis. The redemption program was later found to have violated Rules 101 and 102 under Regulation M, and the redemption program was terminated.

But in fact, there is no need to worry about this irredeemable problem.

First, according to public data, GBTC was one of the most actively traded securities on the OTC market in June.

We know that there are more than 10,000 securities offered in the U.S. OTC market, of which 1,430 are traded on the two top platforms of OTCQX and OTCQB. As of the end of June 2019, GBTC is one of only eight securities with a transaction size of more than $1 billion on the two platforms. So you can know the depth of GBTC - able to undertake most of the selling pressure.

In addition, Grayscale’s Ethereum Classic Trust Fund also appears in the list of the top ten most actively traded securities on the OTCQX platform. This is the transaction depth, which means that you don't want these securities anymore, and you can cash them out at any time.

Another reason is that we know that every security is backed by real cryptocurrency. Although it cannot be redeemed now, the cryptocurrency behind these shares is real. If you don’t want it, someone else will buy it. , which is OK. Because everyone knows that all cryptocurrencies received by Grayscale will be stored in the cold wallet of Coinbase Custody, and there will be dedicated operation and maintenance personnel for maintenance and security management.

OKEx Intelligence Bureau: What impact will the existence of Grayscale have on the entire cryptocurrency market? Will he meet competitors? If competitors appear, what impact will it have on Grayscale?

A Feng:I think the impact must be positive.

First of all, after the reduction of Bitcoin production, the total amount of Bitcoin purchased by Grayscale accounted for 118% of the total mining volume, which is definitely good for the spot market.

Secondly, Wall Street is also increasing its positions in Ethereum through Grayscale, which is also a great benefit to the encryption market.

Finally, the cryptocurrencies purchased by Grayscale have no redemption authority, so no matter how much cryptocurrencies investors invest in, they will eventually be locked and will not enter circulation for at least a few years.

In terms of competitors, there are already competitors, for example, Wilshire Phoenix.

On June 13, Wilshire Phoenix filed an S-1 registration statement for a publicly traded bitcoin fund with the U.S. Securities and Exchange Commission (SEC). And named Bitcoin Commodity Trust (Bitcoin Commodity Trust), referred to as BCT, directly against the GBTC (Grayscale Bitcoin Trust) issued by Grayscale.

And in the future, BCT will also be publicly sold on the OTCQX market of OTC Markets Group.

In short, this is an encrypted trust fund that is very similar to the grayscale encrypted trust fund, with lower handling fees and more convenient trading. The annual management fee of Bitcoin Commodity Trust is only 0.9%, which is directly 35% off compared to Grayscale’s 2% annual management fee!

Moreover, we note that on June 14, Wilshire Phoenix approved its Fidelity Digital Assets to be the custodian of its new Bitcoin Trust.

The function of Fidelity Digital Assets here is approximately equal to that of Grayscale, and the function of Wilshire Phoenix is ​​approximately equal to that of DCG (Digital Currency Group), the parent unit of Grayscale Investment.

Therefore, we say that Grayscale's competitors are on the road, and the handling fee is still lower.

In addition, in terms of encryption investment, we see that, like DCG Digital Currency Group, Wilshire Phoenix also has greater ambitions.

On January 15, 2019, Wilshire Phoenix filed an S1 filing with the U.S. Securities and Exchange Commission (SEC) for a Bitcoin-related exchange-traded fund (ETF).

The ETF, called the U.S. Bitcoin and Treasury Investment Trust, will hold bitcoin, short-term U.S. Treasury bills and U.S. dollars. According to the document, “The purpose of the fund is to provide investors with a more efficient, convenient and stable way to invest in Bitcoin than buying Bitcoin directly."。

Although Wilshire Phoenix's ETF was rejected at the beginning of this year, it actually showed Wilshire Phoenix's ambitions in the field of cryptocurrency-not limited to the Bitcoin Trust Fund.

Therefore, it is almost certain that with the entry of Wilshire Phoenix, as custody fees decrease, and as the number of tradable GBTC and ETHE increases in the market, Grayscale’s tuition fees will also decrease.

The following is the fan interaction session:

amt: Are there similar institutions like Grayscale in China?

A Feng:There is no such institution in China, and there is only one such institution in the world as Grayscale, which can issue such encrypted trusts.

Ade: In this case, is it true that the shares held by Grayscale will only increase, because they cannot be sold, but the price of each share will fluctuate with the price of BTC?

A Feng:There are two aspects to answering this question. First, your understanding is generally correct. However, Grayscale does not hold shares. These shares are held by hedge funds and institutional investors represented by Wall Street. What Grayscale does is to exchange the obtained cryptocurrencies for shares and manage these assets. Because there is an irredeemable mechanism and cannot be reversed, these escrowed cryptocurrencies cannot be exchanged, which is equivalent to being locked, and the number of cryptocurrencies circulating in the market will become less and less