News came out this week that Grayscale Investments has bought up one-third of all the Bitcoin mined in the last three months.
Which, unless I quantify that means absolutely nothing. So let’s put it into numbers.
In the last 100 days, Grayscale has bought 60,672 Bitcoin… worth a staggering $567 million.[i]
But, perhaps even more tellingly, Grayscale has bought up just under half (48%) of all the Ethereum mined this year – 756,539 Eth… worth $157 million.[ii]
It now owns over 1% of all Ethereum in existence.
But who exactly is Grayscale, and why should we care how much crypto it owns?
Grayscale is an institution that lets investors buy Bitcoin, Ethereum and a few other cryptos without ever actually owning them… and for a 435% price premium.
Yes, you read that right. If you buy Ethereum through Grayscale you’re be paying over five times more than if you just bought it yourself directly.
The market price per share currently sits at $106.50, and each share represents $19.88 of Ethereum.[iii]
Oh, and you’ll be paying them a 2.5% annual fee for the privilege of paying them that 435% premium.
Although I should probably say that their Bitcoin product is less of a rip off, with only a 21.4% premium and a 2% annual fee.[iv]
Basically Grayscale buys crypto then creates an investment vehicle with it, which represents the crypto it has bought and then people can invest in that vehicle.
If you own its products you can’t ever exchange them for actual crypto, they merely represent the crypto that Grayscale owns.
Why would anyone invest in that?
Grayscale says you might want to use its products rather than buying crypto yourself for:
Ease and peace of mind – basically you can have them give you a note that says you own crypto you can never redeem instead of storing your own crypto for yourself.
Fair enough, I know a lot of people face difficulties with securing and storing their own crypto. But I still don’t think that’s worth a 435% mark up.
Cost effective order fulfilment – if you’re buying a big amount of crypto, liquidity can be a problem, but not if you “buy” it through Grayscale.
Again, a fair point. But even with “slippage” you’re not going to be paying 435% extra. And if you’re really buying that much you could easily arrange your own “OTC” trade and avoid exchanges entirely (that’s how Grayscale buys its own crypto).
And IRA eligibility – you can put its products into IRAs and 401ks (tax free accounts).
Ding ding ding! This is the only reason I can see anyone wanting to buy through Grayscale and paying that 435% premium. It will let you avoid paying tax on your gains.
…although, I’m guessing the tax you may have to pay would still work out much cheaper than Grayscale’s 435% premium and 2.5% annual fee.
And probably still cheaper than its 21% Bitcoin premium and 2% annual fee.
You have to be smart to get duped by Grayscale
Basically, Grayscale products are designed for people who don’t know a lot about crypto to get into crypto – and who don’t know just how much they’re being ripped off.
It’s targeted at institutions and well-off individual investors. You have to be an “accredited investor” to even buy into its products and invest a minimum of $50,000.
The accredited investor thing is designed to stop “unsophisticated” investors losing money on investments they don’t really understand.
To qualify as an accredited investor you “must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year.”[v]
I guess the idea is, if you’ve got that much money, you understand more about… money.
However, you’d have to be a pretty “unsophisticated” investor to think you’re getting a good deal with a one of these funds.
Logically, Grayscale shouldn’t have that much business.
The only people who can invest in it are accredited investors, who should be sophisticated enough to realise they aren’t getting a good deal.
Yet, it has a lot of business.
Maybe your average accredited investor isn’t really that “sophisticated” at all.
Or to put my cynical hat on, maybe the whole accredited investor thing was never designed to help “unsophisticated” people avoid getting fleeced.
Maybe it’s merely there to keep the public out of the world of investment.
I mean, there’s no minimum-income threshold for gambling in a casino, or betting on a sports game… which is much riskier.
Or to put it another way… we live in a world of gatekeepers and central authorities.
Crypto is designed to create a world without gatekeepers… or at least a world with fewer of them.
So I find it funny that the world’s biggest crypto fund has such high barriers to entry.
But I digress.
Here’s why we should be paying attention to Grayscale’s holdings
The interesting thing about Grayscale’s massive crypto reserves isn’t its funds and the people who think they’re getting a good deal investing in them.
The interesting thing is just how big those reserves are, and the rate at which they’re increasing.
From a crypto investor’s perspective, Grayscale could be very good for crypto prices.
- locking up massive amounts of crypto – reducing its supply.
- Charging a premium to invest in its crypto products – pushing up the perceived value of said crypto.
- And getting attention from mainstream financial press – giving crypto more legitimacy and increasing its demand.
If you want crypto prices to go up, and crypto to become more legitimate, Grayscale is a great addition to the landscape.
It’s also telling that it’s accumulating so much Ethereum at such a rapid pace.
As you probably know, Ethereum 2.0 is scheduled to launch later this year, with a full rollout following fairly soontm after.
The main thing about Ethereum 2.0 is its switch from Proof of Work, which is like Bitcoin, to Proof of Stake, which is more like Tezos.
And from an investment perspective, it means you’ll be able to make an income just from holding it.
If the income you can make ends up being more than you could get in from a dividend-paying stock or a bond, it could make a compelling investment for individuals and institutions alike.
(Provided the price-increase of Ethereum remains in-line with or higher than the stockmarket over the long term).
This is what we’ve seen with Tezos, which has roughly doubled in value since the 1st of January 2020.
Investors in Tezos are making around 7% in “staking rewards” on top of that capital gain.
However, Tezos is less well known and less proven than Ethereum, which is second only to Bitcoin.
So, when the second biggest crypto suddenly starts paying out an income for merely holding it demand could surge.
And we could see a lot of mainstream interest flooding in… perhaps even more than the heady ICO days.
This may be what Grayscale is counting on. Or maybe it’s also looking to make some income off its huge holdings.
Either way, it’s interesting.
Okay, that’s all for today.
Remember, if you want to know the cheapest, easiest and safest way to buy Ethereum, Tezos and other cryptos, you can read my free guide here.
And if you liked this article, you can buy me a pot of tea here.
Thanks for reading.
PS This week’s article was a little light on the memes front. So here’s a surprisingly good rap imaginary battle between creator of Bitcoin, Satoshi Nakamoto and Hamilton of US founding fathers and central banking fame.
[i] See this Reddit post [ii] See this Reddit post [iii] https://grayscale.co/ethereum-trust/#market-performance [iv] https://grayscale.co/bitcoin-trust/ [v] https://en.wikipedia.org/wiki/Accredited_investor
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