What does the listing of spot ETFs bring to Grayscale, as the "grayscale effect" is reproduced?

Author: Nianqing, ChainCatcher

Recently, Grayscale launched the Grayscale MakerDAO Trust, a trust fund focused on the MakerDAO governance token MKR. Following the announcement, MKR surged over 5% within an hour, breaking through $2100, with a 14.7% increase over the past week.

Last Wednesday, Grayscale also launched the Grayscale Bittensor Trust and Grayscale Sui Trust. The TAO and SUI tokens have seen nearly a week of continuous gains amid overall turbulent market conditions. The price of SUI also surpassed $1, with a 65% increase over seven days, and it has been trending on ChainCatcher's hot search list for several consecutive days.

In July, Grayscale launched the Grayscale Decentralized AI Fund, which invests in a basket of decentralized AI tokens, including TAO, FIL, LPT, NEAR, and RNDR. Following the announcement, the AI sector experienced a broad rally, with the tokens in Grayscale's fund seeing gains of over 5% in a short period.

The long-awaited "Grayscale Effect."

Once a Bitcoin whale known as "Pixiu," Grayscale became the center of attention in the entire crypto market due to its massive accumulation of coins. Some even argue that the last bull market was a "Grayscale Bull," as its continuous accumulation directly drove up Bitcoin prices.

Grayscale's glory days lasted for two years. After experiencing a liquidity crisis caused by the chain reactions from the FTX collapse in 2022-2023 and a tug-of-war with the SEC over the conversion of GBTC into a spot ETF, Grayscale's current situation appears particularly "peaceful."

After the launch of Bitcoin and Ethereum spot ETFs this year, Grayscale has noticeably accelerated its new fund launches. According to Grayscale's official product page, aside from the new funds launched this year, nearly all other products were established before 2022. This includes trusts related to other crypto investment products such as Solana, Litecoin, Stellar, Zcash, and Chainlink. Additionally, Grayscale is actively hiring senior associates for its ETF products to support the growth and development of its ETF business.

What exactly has the listing of Bitcoin and Ethereum spot ETFs brought to Grayscale?

As a key driver behind the listing of Bitcoin spot ETFs, Grayscale and GBTC have also seen a turning point. However, as the world's largest digital asset management company, Grayscale faces challenges from other competitors after its largest assets, GBTC and ETHE, transitioned to ETFs, especially from traditional asset management giants like BlackRock and Fidelity.

Since GBTC was listed as an ETF in January, over 380,000 BTC have flowed out, leaving 232,792 BTC. In contrast, BlackRock has already accumulated 348,165 BTC, surpassing Grayscale back in May, while Fidelity holds 176,656 BTC, ranking third.

Moreover, according to The Block's statistics on "Grayscale's GBTC and ETHE Revenue (Estimated)," the income from Grayscale's two funds hit a low during the 2022 bear market, began to recover after winning the SEC lawsuit at the end of August 2023, but started to decline again after GBTC and ETHE transitioned to ETFs.

Note: This chart estimates the total revenue Grayscale has earned from GBTC and ETHE. The calculation method is the total monthly dollar holdings multiplied by Grayscale's fees. GBTC charged a 2% annual fee when it was a trust fund, which decreased to 1.5% after becoming an ETF, while ETHE's annual fee is 2.5%.

This article will systematically review Grayscale's development history and explore why Grayscale is worth our close attention.

Background and History

Grayscale was founded by Barry Silbert in 2013.

Initially, Grayscale only established a Bitcoin trust and set an irredeemable clause in 2014, achieving GBTC's listing on the OTC market in 2015. After 2017, Grayscale began to diversify its products, launching crypto trusts for Ethereum, Litecoin, ZCash, Solana, Chainlink, and others.

Barry Silbert started investing in Bitcoin personally in 2012 and invested in crypto giants like Coinbase, Bitpay, and Ripple in 2013. Additionally, Barry Silbert founded the precursor department of the Bitcoin OTC trading platform Genesis Trading. In 2015, Barry Silbert integrated these two major businesses with his personal investment operations to establish DCG (Digital Currency Group).

DCG gradually evolved into a company with asset management, mining, lending, and media (CoinDesk) subsidiaries, including the asset management company Grayscale, media, and mining company Foundry. DCG has also directly invested in over 160 projects.

The Grayscale Effect

There is a general consensus that this bull market is driven by institutions. In fact, institutional involvement began to take shape in the previous cycle. In August 2020, MicroStrategy announced its entry into the Bitcoin market, and the SEC and auditing departments approved MicroStrategy's inclusion of Bitcoin on its balance sheet, marking an important turning point in the market (exactly four years ago from now).

Under the influence of companies like Tesla and MicroStrategy, more and more publicly traded companies in North America began to follow suit. Some traditional public companies started to pivot towards Bitcoin in terms of business operations and asset reserves.

However, the regulatory processes for traditional institutions holding BTC and other crypto assets remain complex, leading to Grayscale's compliant crypto trusts becoming an important channel for restricted institutional investors to buy BTC and other assets. It can be said that Grayscale directly introduced institutional investors as a growth driver for BTC.

In the second half of 2020, Grayscale, which was generously buying BTC, began to attract attention. The newly added BTC in Grayscale's GBTC once accounted for 33% of the 100-day production, purchasing tens of thousands of BTC weekly. Due to its one-way accumulation, "When will Grayscale dump?" became a "Sword of Damocles" in the crypto community. Additionally, Grayscale became a market bellwether, with newly launched token trusts often driving up the prices of related coins. Thus, Grayscale's purchases even had a "listing effect" similar to Coinbase and Binance.

The direct driving force behind the "Grayscale Effect" lies in its premium (the market circulation value of each GBTC > the intrinsic value of Bitcoin).

Since GBTC is one of the few regulated products in the U.S., it was highly favored by institutional investors at the time. Coupled with Grayscale's secondary market lock-up policy and the inability to redeem assets in the primary market, the market had to pay a certain risk premium to investors, resulting in a generally high premium rate for Grayscale funds, with an average asset premium rate reaching 20%. Therefore, in addition to traditional institutions, Grayscale's GBTC also attracted a large number of arbitrageurs.

Arbitrage Machines

At that time, the institutions with the largest GBTC holdings included lending company BlockFi, crypto hedge fund Three Arrows Capital, and Cathie Wood's Ark Invest (AKR).

Due to the sustained high premium, GBTC became an important tool for many hedge funds to engage in arbitrage. Moreover, large investors like hedge funds had ways to buy GBTC shares at prices lower than ordinary traders. Grayscale allowed large investors to directly exchange BTC for GBTC shares.

As a result, these arbitrageurs purchased BTC, deposited it with Grayscale, and then dumped it to retail and institutional investors in the secondary market at higher prices after the GBTC lock-up period ended. Additionally, Three Arrows Capital often borrowed BTC at ultra-low rates without collateral to convert into GBTC and then pledged it to Genesis, a lending platform also owned by DCG, to gain liquidity.

During the peak of the 2020-2021 bull market, the value of GBTC shares exceeded the value of the underlying Bitcoin. However, starting at the end of February 2021, GBTC began to show a negative premium. Once the premium disappeared, the "Grayscale Effect" quickly became ineffective.

Subsequently, BlockFi and Three Arrows Capital went bankrupt, falling from grace. Grayscale's GBTC rapidly transformed from a bull market accelerator into a bear market crusher.

Related Reading: 《Success and Failure are Both Arbitrage, How Did Grayscale GBTC "Trap" Institutions like Three Arrows Capital and BlockFi?》

Affected by the chain reactions of bankruptcies, the DCG empire faced its greatest crisis: Genesis announced bankruptcy restructuring; Grayscale's largest trust, GBTC, traded at a discount of over 40%, while the SEC refused to approve its transformation into an ETF, and Grayscale continuously attempted to buy back GBTC from the market and liquidate the fund; CoinDesk was rumored to be sold for $200 million.

Core Driver of Spot ETFs

In October 2021, under pressure from numerous competitors applying for Bitcoin spot ETFs, Grayscale submitted an application to the SEC to convert its GBTC into a Bitcoin spot ETF. Subsequently, this decision was delayed multiple times by the SEC, and ultimately, on the final deadline in June 2022, the application was rejected. At that time, Grayscale's CEO Michael Sonnenshein immediately stated that they would sue the SEC. In October of the same year, Grayscale officially submitted court documents for the lawsuit.

Grayscale accused the SEC's ruling in two statements of being "arbitrary and capricious," even causing "unfair discrimination" between Bitcoin spot ETFs and futures ETFs.

At this point, Grayscale was facing its "darkest hour." If GBTC could not be converted into a Bitcoin ETF, Grayscale would attempt to buy back some investor funds through offers.

In January 2023, Grayscale submitted the next litigation brief, questioning the SEC's decision to refuse the conversion of GBTC into a Bitcoin ETF.

At the end of August 2023, Grayscale won the lawsuit. The U.S. federal appeals court approved Grayscale's review request and overturned the SEC's order, requiring the SEC to review Grayscale's ETF request.

On August 29, the trading volume of Grayscale Bitcoin Trust (GBTC) hit a new high since June 2022, with GBTC's share price rising 18% to nearly $21 that day. Grayscale's victory also brought a glimmer of hope to the entire depressed crypto market, with Bitcoin prices soaring 7% to nearly $28,000. Furthermore, Grayscale's legal victory paved the way for ETF applications from giants like BlackRock and Fidelity.

Accelerated Layout

The U.S. regulatory approval allowed Grayscale to turn crisis into opportunity, but it also introduced stronger competitors. As mentioned earlier, since January 11, the total net asset value of GBTC has fallen to $13.87 billion, and the landscape of crypto asset management has dramatically changed due to the entry of traditional asset management companies. Grayscale had to reposition itself and accelerate the launch of new products.

In the past three months, Grayscale has launched six new crypto trusts.

Aside from the new funds launched this year, nearly all other products were established before 2022. This includes trusts related to other crypto investment products such as Solana, Litecoin, Stellar, Zcash, Chainlink, and Decentralized. Additionally, Grayscale is actively hiring senior associates for ETF products to support the growth and development of its ETF business.

According to Grayscale's official website, the company has launched 21 crypto trusts and 5 ETF products, with a total holding amount of approximately $21.35 billion according to Coinglass data. The management fee for trusts is generally 2.5%, while the fee rate for ETF products ranges from 0.15% to 2.5%.

Overview of Grayscale's other assets besides BTC:

Additionally, Grayscale is also considering international markets outside the U.S. In April of this year, Grayscale disclosed plans to expand its crypto fund products to Europe. The company is holding meetings with local partners to discuss how to launch Grayscale's product suite in Europe. When determining product launches, Grayscale will consider the impact of investor behavior and local regulations.

Overall, the launch of ETFs has allowed Grayscale, which was deeply affected by the FTX incident, to turn crisis into opportunity and further drive the entire crypto market upward. At the same time, for Grayscale, there is still room for improvement in terms of fee rates, especially facing a host of strong competitors, presenting more challenges. However, the recent rise of tokens like MKR and SUI indicates that the market is still willing to pay for the "Grayscale Effect."