Why is Bitcoin trust more and more popular with traditional investors?

0

 90 total views

As a traditional investment tool, trust has become the best channel for the current Bitcoin investment market.

Original title: “IDEG 丨 Bitcoin Trust is more and more favored by traditional investors”
Written by: Kevin Yang, IDEG CEO

Bridgewater Fund is the world’s largest hedge fund. Water Bridge founder Ray Dario (Ray Dalio) in its ” paradigm shift mentioned” (Paradigm Shifts) in an article: “currently a big issue worth considering is that in the reflationary environment, in huge debt to At the time when there are major internal and external conflicts between believers in various systems, which investment will have a good return on investment. At the moment when many central banks release water and legal currencies have depreciated, we should think about the next best currency or Who is the stored value instrument?”[1] Bitcoin seems to be a powerful answer to Dario’s question.

Bitcoin is the best performing asset in 2019-2020

In the past two years, Bitcoin, as a new asset class, has attracted strong attention from many traditional institutional investors. There are three main reasons for this: 1. The scale of the Bitcoin trading market continues to expand. The current daily average trading volume is maintained at 80 billion U.S. dollars, which provides the necessary market foundation for a larger amount of funds to participate in Bitcoin investment. 2. The volatility of Bitcoin and various traditional assets lacks obvious correlation, which meets the asset allocation requirements of macro funds. 3. Bitcoin’s earnings performance in the past has been very good.

Figure 1: Revenue performance of major categories of macro assets in 2020, data source: JP Morgan, Messari [2]

According to statistics from IDEG, the Bloomberg Galaxy Digital Asset Index has risen by about 265.36% in 2020, significantly outperforming gold, and it is also much higher than the return on stocks, bonds and commodities.

Why is Bitcoin Trust more and more popular with traditional investors?Figure 2: Comparison of the performance of Bloomberg’s major financial indexes in 2020, data source: Bloomberg, IDEG

Trust has become the largest compliance channel for Bitcoin investment

Despite the outstanding performance of Bitcoin, how to invest in Bitcoin safely and compliantly faces many factors. In order to meet the compliance and security requirements of traditional institutions for bitcoin investment, trust, as a traditional investment tool, has become the best channel for the current bitcoin investment market and has gained the favor of more and more traditional investors.

Grayscale Investment LLC is the initiator of GBTC, the world’s largest Bitcoin trust fund. The trust fund is a passively managed Bitcoin index tracking fund. GBTC occasionally opens private placements to qualified investors and institutional clients, allowing them to subscribe for trust shares in the form of cash or Bitcoin. The management fee of Grayscale is 2% per year, and the minimum single subscription amount is $50,000. According to the data disclosed by Grayscale, 80% of its clients are institutional investors, 16% are family offices and high-net-worth individuals, and another 2% are pension funds. At present, the most important way for European and American investment institutions to enter the Bitcoin market is through the GBTC trust fund.

READ  Bitcoin Community Reacts to Russia‚Äôs Criminalization of Undeclared Crypto Activity

According to Grayscale’s 2020 third quarterly report, a total of more than US$2.4 billion was raised in the first three quarters. Among them, the single-quarter capital inflows from the first to third quarters reached US$504 million, US$906 million, and US$1.050 billion, respectively. The scale of fundraising in the three quarters has continuously set new historical records, which shows that people’s enthusiasm for investment in digital assets continues to rise in the context of global economic uncertainty. So far, the cumulative investment scale of various digital asset trust funds sold by Grayscale has reached 3.6 billion US dollars.

Why is Bitcoin Trust more and more popular with traditional investors?Figure 3: Cumulative capital inflows of various digital asset trust funds of Grayscale, as of September 30, 2020 [3]

After the Bitcoin block reward was halved in May this year, the inflow of GBTC funds once exceeded the value of Bitcoin mining output during the same period. Relative to the number of newly produced bitcoins, the amount of funds flowing into GBTC is so much that the relationship between supply and demand in the bitcoin market has changed. This phenomenon may be a positive signal for further appreciation of bitcoin in the future.

Why is Bitcoin Trust more and more popular with traditional investors?Figure 4: Comparison of GBTC capital inflows and Bitcoin mining output in the same period, data as of September 30, 2020[4]

According to public data calculations, as of December 31, 2020, the GBTC trust fund held a total of 607,037 bitcoins (approximately 2.89% of the total bitcoins), an increase of 57% from the end of June. According to market data on January 9, 2021, the trust fund has reached USD 24.155 billion.

Why is Bitcoin Trust more and more popular with traditional investors?Figure 5: GBTC trust fund holdings, data as of December 31, 2020 [5]

Why Bitcoin Trust is favored by traditional investors

According to Bitwise and ETF Trends surveys on the US financial advisory industry, 76% of financial advisors stated that they have received investment consultations from clients about digital assets in the past 12 months, and 72% of financial advisors believe that their clients may have been involved in digital asset trading. investment. 54% of financial advisers said that the most attractive factor for digital assets to allocate is the overall weak correlation with traditional assets [6]. Since 2019, mainstream media and Wall Street analysts have continued to discuss the “digital gold” attributes of Bitcoin. This point also resonates in the US financial advisory industry.

The survey also revealed that the main reasons preventing traditional investors from participating in digital asset investment include:

  1. 53%-Regulatory reasons
  2. 41%-Don’t know how to value digital assets
  3. 39%-Lack of convenient investment tools
  4. 34%-Worry about not being able to safely keep

Through the above survey data, we can see that traditional investors are very interested in investing in Bitcoin, but suffer from the lack of compliant and safe investment channels. As a traditional investment tool, the Bitcoin Trust Fund has solved many concerns of traditional investors:

The trust solves the problem of compliance with bank funding channels. Private channels for buying and selling Bitcoin are subject to credit risk; and private channels are small in size and cannot deposit large amounts of funds, so they are not suitable for institutional customers. By subscribing to trust shares, institutional investors can conduct public-to-public transfers through trust accounts, realizing legal and compliant purchase and holding of Bitcoin assets.

READ  Understanding Blockchains & Distributed Ledger Technology

The trust solves the security problem of customers’ custody of Bitcoin. Bitcoin is a pure digital asset type, facing multiple security risks such as network security, storage device security, and key storage. The total amount of Bitcoin is 21 million, and the current circulation on the market is about 18 million. Among them, the number of confirmed lost bitcoins is close to 1.7 million. At current prices, the value of lost bitcoins is nearly 60 billion U.S. dollars. Bitcoin trust funds generally cooperate with custodians to ensure the security of Bitcoin assets under custody.

The trust solves the compliance problem of financial auditing. Trust funds are strictly audited by a third party. Bitcoin trust assets can be credibly incorporated into the financial statements of listed companies and large investment institutions to avoid problems that cannot be consolidated due to differences in financial audit systems in various regions.

It is these advantages that make trust funds the most popular compliant investment channel in the Bitcoin market. The successful operation of GBTC over the years has fully verified the reliability of the trust channel.

The limitations of GBTC and the development of trust funds

Although GBTC is currently the most successful Bitcoin trust fund in the market, its terms have certain limitations. First of all, GBTC is a passively managed trust fund, that is, after buying Bitcoin and holding it, the income is completely linked to the rise and fall of Bitcoin itself. Secondly, the share of GBTC does not support redemption, and investors can only choose to sell in the open market after the lock-up period. The setting of this kind of clause has made the premium rate of GBTC’s share compared to the actual price of Bitcoin has been high. The premium rate reached 140% at the highest point, and it is currently maintained at about 20%. This means that investors must pay higher costs to buy GBTC shares.

Why is Bitcoin Trust more and more popular with traditional investors?Figure 6: Historical premium rate of GBTC share, data as of January 8, 2021 [7]

Due to the success of GBTC and its obvious term flaws, there have been some powerful rising stars in the field of Bitcoin trust funds. On June 12, 2020, Wilshire Phoenix Funds LLC submitted an S-1 registration statement to the US Securities Regulatory Commission, applying for approval of its Bitcoin trust product. The trust hired Fidelity Digital Assets as the custodian to custody bitcoin assets, and its management fee was 0.9%, which was much lower than the 2% of the GBTC trust. But these trusts are mainly for the US market.

In the Asia-Pacific region, this area is also getting more and more attention from investors. In November 2019, IDEG took the lead in releasing Asia’s first Bitcoin trust Asia Digital Trust in Hong Kong, which includes two sub-trusts Asia Bitcoin Trust (ABT) and Atlas Mining Trust (AMT) . The core members of IDEG have been focusing on quantitative trading in the field of digital assets since 2013, and their strategies are known for their robustness. IDEG’s quantitative trading management scale is among the best in the Asia-Pacific region. In addition, IDEG’s parent company is a leading global professional blockchain investment institution. IDEG’s parent company has been deeply involved in important tracks such as blockchain infrastructure, underlying public chains and applications, and has invested in many star projects including Canaan Zhizhi, Polkadot, etc., with excellent return on investment. The custodian of ABT and AMT Trust is Coinbase Custody, the world’s largest digital asset custodian. Coinbase Custody currently has digital assets under custody worth more than 10 billion U.S. dollars, and there has been no security incident since its establishment.

READ  Bitcoin SV, Stellar Lumens, FTX Token Price Analysis: 3 November

ABT is a trust fund focused on Bitcoin transactions. Different from GBTC’s passive management strategy, ABT adopts an active profit-enhancing strategy. The advantages of the enhanced strategy are mainly reflected in two aspects: through low-risk arbitrage strategies, earn more bitcoins, and maximize the dividends brought by bitcoin appreciation; on the other hand, effectively control the drawdown through hedging strategies Avoid extreme market risks. Therefore, the benefits of trusts using enhanced strategies will be higher than those of passively managed trusts.

AMT is currently the world’s first Bitcoin mining trust fund, which provides traditional investors with a compliant channel to participate in Bitcoin mining. Bitcoin mining is a capital-intensive industry, and retail or small institutional miners lack the necessary competitiveness in the face of big capital. Trust funds can form capital advantages and scale effects, so as to provide investors with more reliable mining income. In addition, Bitcoin mining has high industry and operational thresholds. The trust uses its brand and capital advantages to maintain a competitive advantage in mining machine procurement, power procurement, mine site design, mine operations, daily maintenance and security, and reduce operating costs.

Through the analysis of the Bitcoin trust market, we can see that the field is gradually developing from monopoly to competition and evolution. Compared with exchanges and OTC traders, GBTC quickly gained the favor of many traditional investors in a short period of time due to its compliance and security advantages, thus achieving great success. However, due to its own limitations, the efficiency of capital use is low. Investors have begun to seek better investment tools to participate in the Bitcoin market. It is in this market environment that trust fund products that are more in line with local market needs and better-designed terms have emerged, providing traditional investors with a compliant, safe and convenient investment channel.

Reference:

1. Ray Dalio,”Paradigm Shifts”,LinkedIn,
https://www.linkedin.com/pulse/paradigm-shifts-ray-dalio/

2. Mira Christanto, Twitter,
https://twitter.com/asiahodl/status/1344529644721061889

3.”Grayscale Digital Asset Investment Report Q2 2020″, page 5, Grayscale,
https://grayscale.co/wp-content/uploads/2020/10/Grayscale-Digital-Asset-Investment-Report-Q3-2020.pdf

4.”Grayscale Digital Asset Investment Report Q2 2020″, page 7, Grayscale,
https://grayscale.co/wp-content/uploads/2020/10/Grayscale-Digital-Asset-Investment-Report-Q3-2020.pdf

5. “Grayscale Investments BTC Holdings”, bybt,
https://www.bybt.com/Grayscale

6. “The Bitwise/ETF Trends 2020 Benchmark Survey of Financial Advisor Attitudes Toward Cryptoassets”, Bitwise,
https://static.bitwiseinvestments.com/Research/Bitwise-Research-ETF-Trends-2020.pdf

7.”GBTC Discount or Premium to NAV”, Ycharts,
https://ycharts.com/companies/GBTC/discount_or_premium_to_nav