What is Grayscale? A deep dive into Grayscale Investment Products

What is Grayscale?

Grayscale Investments, or Grayscale, in short, is the largest U.S. crypto asset manager that has over $40B AUM. Its goal is to facilitate crypto investments to everybody in the U.S., legally regulated by the SEC (the Securities and Exchange Commission).

As mentioned, the company will provide financial vehicles as the gateway for investors to start joining the crypto market with the best convenience. In short, we will list some attributes that will facilitate us when we’re using Grayscale products.

• Grayscale products are available and accessible on the platform or directly via IRA accounts.
• Grayscale will keep crypto assets secure and stored with regular reports to investors.
• Grayscale advisors will lend the investors a hand to serve the query and the need.

Grayscale product history

• 2013: Grayscale Bitcoin Trust.
• 2017: Grayscale Ethereum Classic Trust, Zcash Trust, and Ethereum Trust.
• 2018: Grayscale Digital Large Cap Fund, Bitcoin Cash Trust, FIlecoin Trust, Horizon Trust, and Stellar Lumens Trust.
• 2021: 7 products, including BAT, LINK, MANA, LPT, SOL, and FIL Trust, eps. DeFi Fund.

Grayscale started the crypto journey early in 2013, as we can call it, the crypto veteran. It was approved by the SEC to launch Grayscale Bitcoin Trust, which is particularly impressive as the SEC is known for conducting many investigations related to crypto. In late 2021, the SEC turned the green light for Grayscale to convert GBTC to an ETF.

In the 2021 bull run, Grayscale has added more crypto projects to make products (6 crypto projects and 1 DeFi Fund). This means the product demand of the investors was increasing at that time. The diversification strategy of Grayscale depends on the current market conditions and regulatory compliance.

Grayscale Team

Barry Silbert is the founder and CEO of Digital Currency Group (DCG), which is the parent company of Grayscale, Coindesk, TradeBlock, etc. This means he founded Grayscale in 2013 after his first Bitcoin purchase in 2012.

Prior to the newfound industry, Barry was the founder of SecondMarket, which was later acquired by NASDAQ in 2015. Therefore, Grayscale is led by an experienced founder who is now managing many top-notch companies related to digital assets.

Grayscale Products

At the writing time, Grayscale Investments is managing crypto assets in 15 products (13 Trusts and 2 Funds). At a fast pace of adopting new products that serve the investors, Grayscale is acting as a pioneer filling the gap between the crypto world and the investors, esp. who need a reliable service provider.

In the U.S., Grayscale has a step-by-step plan for its products, ultimately for the sake of investors. Grayscale Bitcoin Trust (GBTC) is the first and top-tier product to be shipped to an ETF since it met many requirements to have a strong asset-backed foundation and the SEC approval.

Bitcoin is the first and not the last crypto to be converted to ETFs. We follow the crypto ETF news for a while and we find that Bitcoin has been going on a long journey to get accepted as an ETF (future earlier and spot much later).

Grayscale also regularly sends reports to the SEC for auditing financial statements to ensure that everything complies with the regulations in the U.S.

All the assets in the family are in the top 100 projects in terms of market cap. As a result, Grayscale prioritizes crypto assets with high-level security and reliability to high-volatility ones.

Grayscale Bitcoin Trust and other Trusts

Its strategic product, Grayscale Bitcoin Trust, was first launched in September 2013 with the abbreviation of “GBTC”. U.S. citizens can invest in Bitcoin directly on the stock market via purchasing GBTC. This means retail investors buy shares of Bitcoin trusts (specifically with the GBTC ticker). The share price will be close to the price of Bitcoin on the crypto exchange. Currently, around $24.5B AUM is in Grayscale Bitcoin Trust.

Through this financial vehicle, the investors own a portion of the Bitcoin pools in shares. Literally, they hold shares, not the actual Bitcoin. Besides Bitcoin Trust, there are other Grayscale Trusts that are available for U.S. investors. The working principle of those Trusts is similar to the Bitcoin Trust.

Grayscale Decentraland Trust is a noteworthy mention since it is an NFT/Gaming project focusing on building Metaverse. A blockchain game share trading on stock exchanges is a major milestone for crypto adoption, esp. blockchain games.

Grayscale Digital Large Cap Fund

In 2018, Grayscale announced the first diversified product, Grayscale Digital Currency Large Caps, as the crypto market was booming with hundreds of new blockchains and infrastructure projects. It has a $380M AUM, updated: Mar 12th, 2022.

The digital asset manager company detected the market sentiment and created a basket of top market-cap cryptos.

Grayscale DeFi Fund

Decentralized Finance had an epic 2021 Summer as the ATH TVL was surpassing the $300B mark. Despite the Bitcoin selloff in early 2022, the TVL decreased by 22.4%, which is a small correction compared to the previous $188B hikes. Therefore, DeFi is still growing at an accelerated pace.

Therefore, Grayscale couldn’t stay still but release the new diversified investment product, Grayscale Decentralized Finance (DeFi) Fund in July 2021. Grayscale selectively picked out DeFi protocols across crypto to give investors more investment options. At the time of writing, the DeFi fund is having a $5.8M AUM, which is a rather small number compared to other trusts and funds.

In January 2022, Grayscale rebalanced the DeFi fund by removing Bancor (BNT) and Universal Market Access (UMA) and adding Flexa’s crypto payments, AMP tokens. The changes incurred as the DeFi race was going fast and easily got outpaced.

DeFi protocols that are included in Grayscale DeFi Fund:

• Uniswap (UNI) and SushiSwap (SUSHI) are the go-to AMM DEX on Ethereum.
• Aave (AAVE) is the top lending protocol in crypto.
• Curve (CRV) is the stablecoin trading platform, reputable for the Curve war model.
• MakerDAO (MKR) with the decentralized stablecoin DAI was leading the decentralized stablecoin market, now outpaced by Terra with UST.
• AMP (AMP) is an asset-collateralized payment on Ethereum.
• Yearn Finance (YFI) and Compound Finance (COMP) give users the best yields across the crypto land.
• Synthetix (SNX) is a derivatives market.

Grayscale Selection Thesis

9 DeFi protocols are in the fund now. We think the selections of Grayscale DeFi Fund are following some critical criteria as follows:

• Top top-tier protocols: To be at the top, DeFi protocols have to be competent in every aspect: Ideas, Products, Team,... As a result, being at the top will say a lot about the project.
• Liquidity: The share of trusts and funds is listed on stock exchanges in the U.S., which needs the asset to have high liquidity to handle the potential trading volume.
• Reliable project: Grayscale prefers those projects that are transparent and regulatory compliance since the asset manager is based in the U.S.

All mentioned characteristics serve the investment thesis of Grayscale which focuses on long-lasting and viable investments. This can grant users a higher safety level in the crypto market during high-volatility movements as well as potential risks of hacks, exploits, and rug-pulls.

On which ecosystem does Grayscale DeFi Fund focus?

As we break the DeFi fund down in the last section, Grayscale loves adding the top-tier DeFi protocols to give exposure to investors. In Particular, it adopted most Ethereum-based projects to its two diversified funds.

The DeFi Fund has 9 projects that were built on top of Ethereum. They are all leading protocols in DeFi as the Ethereum ecosystem has flourished fast since 2017. However, the development pace of Ethereum has been slowing down lately. It needs scaling solutions to deter the current congestion challenges.

Should we follow Grayscale?

Grayscale Performance

As shown above, the performance of the large-cap fund and the DeFi fund is humble, 265% and -47% since inception, respectively. To clarify, Grayscale provides investment vehicles for investors to users in the U.S., not other countries. It is not responsible for investing users’ funds, and it provides advisory services.

Grayscale in 2022

Before 2022, Grayscale focused on top-notch crypto assets in the period 2017 - 2021, including infrastructure, blockchain platforms, and DeFi protocols. Those projects made it through the crypto winter from 2018 to 2020. However, the market is now turning into a new leaf with many innovations and changes under the current circumstances; numerous projects with better solutions come as alternatives.

By adding more latest crypto assets that climb the market cap leaderboard, Grayscale serves investors’ needs in order to maintain the current throne as the lead manager in the U.S crypto market. It successfully simplified the crypto purchasing process via shares on stock exchanges.

Our prediction in 2022 for Grayscale is a faster crypto adoption in the U.S. market. More investment products will be converted to ETFs, and we will see Bitcoin Spot ETF in next coming years. Furthermore, assets that are under consideration will get accepted to the Grayscale family.

• Infrastructure: Arweave, Gelato, Holo, Ren, Secret Network, Monero, and The Graph.
• Blockchain platforms: Algorand, BitTorrent, Cosmos, Bora, Elrond, Decred, Enjin, EOS, Fantom, Flow, Helium, Internet Computer, IOTA, Kava, Loopring, Near, Oasis Network, Polkadot, Polygon, Reserve Rights, Stacks, Terra, Tezos, and VeChain.
• DeFi: 0x, 1Inch, Bancor, Convex, Numeraire, Spell, and Universal Market Access.
• NFT/Gaming: Axie Infinity, Gala, The Sandbox, and Yield Guild Games.

Grayscale is noticing more NFT/Gaming projects (4) and DeFi protocols (7) with the latest models. We think in this year, or later, it will adopt more and more protocols into its available funds. The NFT/Gaming sector is gaining traction and being funded by institutional cash flow. As a result, Grayscale might release an NFT/Gaming fund and its index for investors.

Conclusion

We’ve been through the detailed information about Grayscale and its investment products, esp. the large-cap fund and the DeFi fund. We hope you’ve gained the overview, and our well-thought insights will be helpful to you. There will be more articles for other noteworthy portfolios. Stay tuned!

Learn more: What is Supernet? How Polygon Supernets differ from Avalanche Subnets