Grayscale Report: Institutional investors commit 70% of new money in Q3

The ‘smart money’ is buying in the bear market, according to crypto investment specialists Grayscale, whose quarterly report shows record inflow into the company’s crypto products from institutional investors in the first three quarters of 2018.

With $81.1 million raised over the last three months, the firm has increased funds raised during the same period last year by a factor of thirteen. In total, the firm now hold $1.5 billion from customers, with almost 60 percent of that sum coming from institutions.

Managing director Michael Sonnenshein says the recent downturn has created opportunity for "smart money" seeking to buy digital currencies in anticipation of an upcoming rally:

"Investors who became interested since last year’s run up, are using this as an opportunity to get involved for the first time," Sonnenshein told Cheddar. "If they were interested when Bitcoin was $17,000, they are certainly a lot more interested in investing in Bitcoin at $6,000."

Who is buying?

In the first three quarters of 2018, $329.5 million has been committed to Grayscale’s investment products, with 59 percent of this coming from institutional investors.

In the third quarter, while the total amount of new investment was slightly decreased, the proportion of institutional money was up — with 70 percent of the $81.1 million invested coming from the sector.

Although this information isn’t enough to signal a trend, the beginning of the third quarter of 2018 also saw Bitcoin’s downtrend reach an apparent bottom, and subsequent undulations of the market have failed to conclusively break below the $6,000 range.

Whether this is because the market has reached an accumulation phase, or just because investors on the sidelines have had enough time to consider their next move, more institutions seem to be entering the market, which Sonnenshein suggests is due to growing awareness:

"The once taboo nature of investing in digital currencies has been shrugged off by most investors. When we go sit down with our hedge fund clients, endowments, whatever they may be, there is so much knowledge on the other side of the table that, to us, is really validating," he says.

Even retirement accounts have been diversifying into digital currencies — These funds constitute 18 percent of the total funds invested with Grayscale in Q3. This is closely followed by high-net worth individuals, who contributed to 11 percent of new fund inflows in the same period. Geographically, 64 percent of these investors were based in the US, and 34 percent of the new money came from offshore investors.

Grayscale Investor Profiles

What are investors buying?

The most popular of Grayscale’s offerings is the Bitcoin Investment Trust, which offers investors the opportunity to gain exposure to the price movement of Bitcoin through a traditional investment vehicle, without needing to store any Bitcoin.

In the third quarter of 2018, 73 percent of new funds went into this trust; a figure that stands at 66 percent for all three quarters. This suggests Bitcoin is the cryptocurrency of choice for accredited investors, with only 27 percent preferring to invest in higher-risk options from the altcoin market.

The second most popular fund over the past three quarters has been the Ethereum Classic Trust, which was the first altcoin-based trust, and is followed by the third most popular fund the recently launched ZEN Investment Trust.

Grayscale lead the way in a burgeoning institutional sector

As the world’s largest digital currency asset manager, Grayscale offers a host of crypto funds that have been increasing in number over the last two years,

Although Coinbase last month announced the closure of its index fund, it has since pivoted through a partnership with Wilshire Phoenix, and plans to launch a new institutional fund by the end of 2018. This will compete with the likes of Fidelity, which is launching its own institutional platform; crypto custodians BitGo, who are funded by Goldman Sachs; and the Intercontinental Exchange, which will launch its own regulated custodial solution — Bakkt — later this month.

However, despite positive returns from Grayscale’s Bitcoin Investment Trust (12.6 percent) and XRP Investment Trust (21.3 percent) in Q3, the soaring popularity of the asset class has not been reflected in the returns of most existing crypto funds this year. Leading crypto fund Pantera Capital’s main fund Is down 73 percent in 2018, Bitwise’s Digital Asset Index is down 71 percent over the past year, and the majority of Grayscale’s own funds are also underwater.

Grayscale Investment Product Performance