Grayscale and the institutional inflow paradox

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

- George Soros

The market talks continuously about the arrival of institutional money and the increase in participation from some of the worlds largest money-managers. With the launch of Bakkt, Prudential and a raft of other institutional infrastructure for the purchase of top cryptocurrencies, one would make the assumption that capital inflows amongst top-tier traditional managers is on the rise.


In this issue of Dark Pools, we get down and dirty by analyzing the capital inflows of one of the largest BTC investment vehicles globally - Grayscale.

. . .

Grayscale says institutional investment in its GBTC Bitcoin Trust has increased - but the data suggests something different...

Our initial assumption based on 'headlines' of various publications was that growth in capital deployment from institutions to cryptocurrencies was surging.

This is correct, to an extent.. but there is more to it than meets the eye.

First some background.

In late 2013, Grayscale created a vehicle for investors to take exposure in Bitcoin securely through a trust. The trust would purchase Bitcoin as a close-ended fund to match the contributions made.

As of June 2019, assets under management (AUM) for GBTC reached US$2.70b, fueled by the increase in price of BTC and ‘new contributions’, as Grayscale would claim.

Grayscale’s 100% growth in new contributions for Q2 2019 dominated by ‘institutions’.

In the last quarter, Grayscale doubled contributions to their trust, pulling in an extra $84.8 million in investment in comparison to $42 million in Q1 2019. The vast majority of this capital was directed to investment in BTC-exposed vehicles.

A massive $71 million of the total $84 million inflows was driven by institutions, a data-point that gets your average crypto speculator jumping with joy.

So based on this data, you are likely thinking that the worlds best and brightest are spending their fiat on crypto and the long-awaited institutions have finally seen ‘the light’ correct?

Not exactly.

71% of new contributions were ‘in-kind’ (meaning not made in Fiat).

In the asset-manager world, an ‘in-kind’ contribution is a method of exchange where instead of giving the fund/trust Fiat currency, they give them another asset that can be exchanged for shares or units. In this case, we are more than likely talking about cryptocurrencies.

This means that $60 million of the $84 million that was contributed to Grayscale in the last quarter was actually contributed in assets such as Bitcoin or shares - not Fiat."

So when Grayscale are saying that institutions are coming into their investment products, it isn’t institutions that are converting Fiat to Crypto. It is institutions that are converting another form of value [Crypto] to Shares.

This took us by surprise, and to be honest, I’m not quite sure if it is a bullish or bearish narrative. Yes, it is good that institutions may already own cryptocurrencies, however, most media coverage is leading us to believe that these new inflows of capital are coming from Fiat, not existing crypto holdings.

So this begs the burning question we need answered:

Why would institutions convert their crypto into a crypto trust?

There’s a few obvious answers here and then there are some that just puzzle us.


  • Streamlined tax reporting and integration with internal systems

  • Custody-enabled

  • Insurance

  • Limited liability for handling of the assets

  • Possible tax incentives

And then we have the ‘not so obvious’…

GBTC is illiquid, close-ended, and trades at a 30-40% premium to the underlying Bitcoin price.

Most savvy investors and professional money-managers will generally look to buy into an asset that trades at a discount and has the potential to ‘close-the-gap’ and converge with normal market pricing.

What we are seeing in this instance is investors swapping their physical cryptocurrency for a unit that trades at a steep premium and charges a raft of fees for doing so.

. . .

Perhaps there are other explanations for the contribution of Crypto vs Fiat including reinvestment from a previous fund, pricing arbitrage or inflating a funds mark to market for valuation purposes? Perhaps the ‘in-kind’ contributions are not crypto but actually private shares, listed equities or some other form of non-fiat asset?

We don’t know for sure.. All we can say is that being a fund-manager and research-house ourselves, the data from Grayscale leaves us with more questions than answers.

View the Grayscale Financial Report here.

Until next time,

Matthew Dibb | CIO

About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

For subscription information about our investment funds, visit or follow us on twitter.

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