Grayscale sees inflows up by 200% in Q3, but where are its competitors?

 "Why aren’t there any competitors to Grayscale’s trust product?"

It's a question that was top of mind for Multicoin Capital general manager Kyle Samani, who tweeted it last week following Grayscale announcing that it attracted $254.9 million worth of inflows in Q3.

It's a good question. The purported world’s largest cryptocurrency asset manager just wrapped up yet another record-breaking quarter; its total Q3 inflows are up by over 200%; marking the largest quarterly demand the firm has ever seen.

So far, Grayscale trust funds' unique structure and long-standing reputation have largely helped the firm fend off any serious competition. Still, there are rivals offering similar alternatives, and some remaining hope that a bitcoin ETF may avail to undermine Grayscale's dominance. 

Unique structure, few competitors 

Grayscale is not the only asset manager in the cryptocurrency space. Bitwise and VanEck both offer trust products that give investors exposure to cryptocurrencies via traditional investment vehicles, although all three have different structures. 

The shares of some Grayscale trust products, such as the most popular bitcoin trust (GBTC), are first available to accredited investors through “private placement" and can then be resold on the secondary market to all other investors after a one-year lock-in period. 

VanEck's and Bitwise's products, one the other hand, cannot be offered on the secondary market. VanEck’s proposed bitcoin trust is only tradable between investors that have over $100 million assets under management — an even smaller addressable market than Bitwise's.

As a market observer noted to The Block, Grayscale's availability on the public market holds strong appeal to both institutional and retail investors and some of Grayscale's offerings are traded at very high premiums on the secondary market. 

"Retail investors choose Grayscale because of accessibility and don't understand the risk involved in large premiums. Accredited investors choose Grayscale because they can harvest premiums," said the market observer, hinting that institutional investors can resell their Grayscale shares at much higher prices than the value of the underlying assets.

Meanwhile, Bitwise’s crypto funds are essentially targeting the same group of investors as Grayscale without the selling point of public market access, while VanEck is counting on its wide client network to spread the word of its bitcoin trust. However, given that only around 15 disclosed ultra-rich funds invest in GBTC, according to their 13 filings, to make VanEck's product a hit may mean the firm has to convert funds outside of crypto. 

Sure, VanEck, Bitwise, and other asset managers can create something similar to GBTC to snatch the same market. However, going through the paperwork with the Securities and Exchange Commission (SEC) and creating a liquid market may be a huge time and capital commitment.

"To structure a trust, raise assets in a trust, and wait a year before any secondary market activity... is expensive to do, and it takes a long time," said the market observer. 

In addition, it is worth noting that GBTC's one-year lock-in period and lack of redemption mechanism are both rare in traditional finance, not to mention in crypto. In general, a fund can usually be continuously created and redeemed, while some can be also publicly traded. 

"GBTC is a Frankenstein product," the market observer added. 

Bitcoin ETF may do the trick

As such, Bitwise and VanEck may have to count on bitcoin exchange-traded funds (ETFs) to access the public market. However, that plan has so far been blocked by the SEC. 

Neither VanEck nor Bitwise were successful in winning an ETF approval from the SEC after a handful of attempts. Given the regulator's cautious attitude towards cryptocurrencies, the wait time for a bitcoin ETF may be indefinite. However, if a bitcoin ETF indeed hits the market, it may pose substantial competition to GBTC, according to some market observers. 

ETFs have several advantages that GBTC's structure does not prescribe. Investors that access GBTC through private placement have to wait a year to sell their shares, while the lack of redemption mechanism pushes up GBTC's premiums on the secondary market. ETFs, on the other hand, do not have any lock-in period and can be redeemed. 

Across the Atlantic Ocean, firms like Coinshares and Amun are already offering exchange-traded products (ETPs) on several European stock exchanges. European governments’ comparatively relaxed attitude towards cryptocurrencies allows these firms to package cryptocurrencies in traditional fund structure and make them publicly available with close to zero premium. 

“Our securities are publicly available for sale in certain European countries and listed on a national securities exchange (NASDAQ Nordic), so there is no need to find exemptions from the European securities or a workaround of those rules. Grayscale is quite an anomaly in the US ETP market in terms of the product type, the regulatory rules under which it operates and the success it has seen,” said Coinshares head of product Townsend Lansing.