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Alex Kimani

Alex Kimani

Writer, Divergente Research LLC

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Divergente Research LLC and Safehaven.com. 

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Institutional Investors Hold A Lot More Crypto Than You Think

BTC

For investors who would like to track bitcoin prices but are not keen on the hassles of buying and storing actual bitcoin or investing in sketchy bitcoin stocks, buying Bitcoin Investment Trust (NASDAQOTH:GBTC) shares is the only other available option. Grayscale Investments, the fund responsible for GBTC, now says that it’s been receiving capital inflows of nearly $10 million into the fund every week—the majority of it from institutional investors.

The company made the revelation in its first-ever Digital Asset Investment Report where it said it had received $248.39 million in crypto product investment since the beginning of the year. That works out to $9.55 million per week of which $6.04 million per week is for GBTC with the rest going to altcoins such as ethereum, ethereum classic, Zcash, and bitcoin cash among others.

(Click to enlarge)

(Click to enlarge)

Source: Grayscale

More notable is the fact that the firm says that 56 percent of those new investments, or $5.3 million per week, have been coming from institutional investors—a group of investors notorious for shunning cryptos in the past.

That claim also puts into question recent comments by BlackRock’s CEO Larry Fink, who claimed that the firm did not foresee huge demand for crypto products by institutional investors. Related: Gold Selloff Continues As Dollar Climbs Higher

GBTC is not the only crypto product by Grayscale. The company offers eight different cryptocurrency investment products including Ethereum Classic Investment Trust , Zcash Investment Trust and Digital Large Cap Fund, an index product.

How GBTC Works

Since its debut in 2015, GBTC has rapidly gained in popularity thanks to its safety track record and ever-increasing crypto hacks. The shares underwent a 91:1 stock split in January, leading to the share price falling from a hefty near-$,2000 per share at the time of the split to the currently much more affordable $10.95.

Basically, GBTC acts as a bitcoin fund that owns bitcoin on behalf of investors and entrusts them to a bitcoin wallet and custodial service known as Xapo for safe-keeping. Each GBTC share is currently worth 0.00099897 bitcoin, an amount that decreases slowly as management fees are charged on the fund.

Grayscale charged a 2-percent management fee, which is quite high compared to gold ETFs that charge a more modest 0.25 percent. The fee, however, is relatively small in the grand scheme of things considering the much larger swings that bitcoin is capable of making in a single day of trading. Further, with no current competitors, Grayscale is not under much pressure to lower the fees.

There are a few nuances that investors have to bear in mind when investing in GBTC.

In theory, GBTC is supposed to closely track bitcoin prices—which it generally does but not always.

Related: BlackRock Goes Bitcoin

First off, GBTC shares usually trade at a considerable premium to actual bitcoin price. After the share split, one GBTC is now worth about 1/1000th of a bitcoin. Bitcoin is currently trading at $7,438, meaning one GBTC shares should ideally be trading at about $7.44. The current GBTC share price of $10.95, therefore, represents a huge 47 percent premium. GBTC premium to bitcoin can sometimes exceed 100 percent.

Second, GBTC does not always accurately track bitcoin prices—in fact, GBTC moves opposite bitcoin price in one out of every three days. Over longer time frames, though, the pair tends to be closely correlated. GBTC is therefore a great way of avoiding the hassles and worries of buying actual bitcoin--but only for mid and long-term investors not those looking to profit from short-term trades.

By Alex Kimani for Safehaven.com

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