When we talk about the accumulation of crypto-assets, only one corporation comes to mind this year – Grayscale Trust. In 2020 alone, Grayscale has accumulated more than 300,000 BTC, while also introducing a new digital asset trust associated with Litecoin.
In fact, according to reports, the firm has registered over $1 billion in inflows in Q3 of 2020 for its crypto-investment products. According to Grayscale, funds have continued to flood in from institutions, accounting for 81% in Q3 of 2020.
While on the surface this means that institutional interest in digital assets is consistently improving, a lot of information does not meet the eye.
In order to better understand the dynamics, let us take the example of Litecoin.
While Litecoin proponents may not like the sub-heading, we need to follow the facts. Grayscale reported that its Litecoin Trust performed the best this quarter, estimating that it noted a whopping 1800% increase in inflows on a quarter-to-quarter basis.
While on its own Litecoin is a legitimately proven crypto asset, why would an institutional investor inject capital in an asset that has risen to only $49 from $31, since the start of 2019? In percentage terms, it is a significant number, but its 2019 high was $142 and during a largely positive 2020, Litecoin has not even managed to cross the $100-threshold.
A possible explanation here is that rather than focusing on Litecoin’s growth, investors are possibly more interested in Grayscale’s fat premiums.
While a detailed breakdown is listed here, in this article, we will briefly explain where the capital of these institutional investors flows into.
When investors put in money for Bitcoin Trust or Litecoin trust, Grayscale investors create new shares in-kind at NAV, using an investor’s existing BTC or LTC holdings. So now, when investors are buying LTCN, they are able to profit by selling these shares to retail at a huge mark-up valuation because of Grayscale’s premium.
At press time, the premium on LTCN was a whopping 750% as LTC holding per share was $4.43, while the market value of the share was $33.25. A possible reason for the 1800% inflows?
When talking about enormous premiums that are totaling huge profits for these ‘institutional investors,’ we can observe that the interest in Grayscale’s crypto-products is only vested to accrue profitability, rather than to boost the fundamental growth of the asset. So, Grayscale adding funds under its AUM is a rather unclear estimation of how genuinely interested or involved institutions actually are.