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Grayscale saw its assets under management skyrocket when Wall Street used it as a proxy to invest in bitcoin.
The New York-based investment firm started with $ 2 billion in assets last year and ended with more than $ 20.2 billion. That 900% increase was driven by demand from institutional investors such as hedge funds, endowments and retirement funds, the company said in a quarterly report on Thursday.
Grayscale’s Bitcoin Trust became a popular, publicly traded way for investors to gain exposure to cryptocurrency without owning the coins themselves. The investment product increased year over year from $ 1.8 billion to $ 17.5 billion in assets.
“We saw a significant acceleration of institutional participation,” said Michael Sonnenshein, who recently took over as CEO of Grayscale Investments. “There is no longer a professional risk of investing in the digital currency asset class – there is probably more career risk if you don’t pay attention.”
Grayscale’s banner year came when high-profile money managers publicly warmed to digital currencies.
Billionaire hedge fund manager Paul Tudor Jones called bitcoin the ‘best inflation hedge’ and compared it to putting money behind tech giants like Apple and Google. Stanley Druckenmiller and Bill Miller are among the other high-profile bitcoin bulls. Their support, analysts say, has given Wall Street more confidence to invest.
Institutions accounted for 87% of Grayscale’s full-year influx, the company said. The average size of those investors’ pledges doubled within months. In the third quarter of 2020, investors invested an average of about $ 3 million and committed an average of $ 6.8 million at the end of last year.
Institutional demand has been cited as a major reason why bitcoin hit $ 40,000 last week and a triple-digit rally last year. Sonnenshein said those professional investors often don’t have the legal or “operational means” to buy and keep cryptocurrencies safe.
Digital gold
Many professional investors see it as an alternative to established safe-haven assets, such as gold, and as a hedge against “perpetual money pressure” by central banks, Sonnenshein said.
“The most common theme for investment condemnation in bitcoin comes from a rotation of gold,” he said. “Investors also share anecdotally that that’s true, and how they’re making room for bitcoin in their wallets.”
At the same time that $ 3 billion has flowed into the Grayscale Bitcoin Trust since mid-October, gold ETFs lost $ 7 billion, JPMorgan said. An investment bank strategist also told clients in a note last week that a bitcoin ETF could weigh on prices in the short term and cause outflows from Grayscale. Responding to the note from analysts, Sonnenshein, a former JPMorgan employee, said an ETF would likely be approved, but would not attract Grayscale’s interest.
“The type of inflows we report should be proof that investors are not waiting for an ETF to participate in this asset class,” said Sonnenshein.
Bitcoin prices have been volatile since falling below $ 40,000. After falling as low as $ 31,000 on Monday, the cryptocurrency traded back near $ 39,000 as of Thursday morning.
Professional investors may use the dips as an opportunity to re-enter. If the price falls, Sonnenshein said the incoming phone calls and the emails are often about investing more money.
“Investors are used to seeing cycles like that in the price,” he said. “They are taking advantage of price pullbacks opportunistically to double and increase their positions.”