H1 2018 Highlights1

  • Total Investment into Grayscale Products: $248.39 million
  • Average Weekly Investment – All Products: $9.55 million
  • Average Weekly Investment – Bitcoin Investment Trust: $6.04 million
  • Average Weekly Investment – “Non-Bitcoin” Investment Products2: $3.52 million
  • Majority of investment (56%) is coming from institutional investors.

Introduction

 

Grayscale Investments is a global leader in digital currency investing. We have brought single-asset and diversified investment products to market over the last five years, including the publicly quoted Bitcoin Investment Trust™ (OTCQX: GBTC) and Ethereum Classic Investment Trust™ (OTCQX: ETCG), as well as our flagship diversified offering, Digital Large Cap Fund™.

Through our experience working with prominent investors around the world, we have compiled a proprietary dataset of investment activity through our regular course of business. In this report we will outline some important trends we’ve seen in the digital asset market during the first half of 2018.

 

Two Sides to Every Story

 

As the investment community knows, over the last six months, the digital asset market experienced one of the largest price drawdowns since the inception of Bitcoin in 2009. However, what is more interesting, and somewhat counterintuitive, is that the pace of investment into Grayscale products has accelerated to a level that we have not seen before. In fact, we raised nearly $250 million in new assets in the first half of this year, marking the strongest inflows of any six month period in the history of our business.

Figure 1: Grayscale Cumulative Inflows by Investment Product

December 31, 2017 through June 30, 2018

Figure 2: Grayscale Investment Product Performance

Total Return (Cumulative %)

H1 2018 Performance

Investment Activity through the Grayscale Lens

 

Despite the recent price action, by taking the cumulative investment activity highlighted in Figure 1, and analyzing the week-over-week data, we can see that the inflows into Grayscale products are occurring at a healthy and consistent rate. For example, our average weekly asset raise across all products was $9.55 million and we’ve seen fresh inflows during each week of 2018.

Figure 3: Grayscale Weekly Inflows by Investment Product

December 31, 2017 through June 30, 2018

While the majority of assets are still flowing into Bitcoin Investment Trust…

Figure 4: Bitcoin Investment Trust Cumulative Inflows

December 31, 2017 through June 30, 2018

Investors have clearly begun diversifying into other digital assets as well.

Figure 5: Grayscale Non-Bitcoin Cumulative Inflows

December 31, 2017 through June 30, 2018

Bitcoin continues to be the most popular position for Grayscale investors, with 63% of inflows into Bitcoin Investment Trust and 37% into Grayscale products tied to other digital assets.

Figure 6: Investment Product Type as % of Total Assets Raised

December 31, 2017 through June 30, 2018

Investment into both our Bitcoin and non-Bitcoin products was strong and consistent, with an average weekly inflow of $6.04 million into Bitcoin Investment Trust and $3.52 million into non-Bitcoin products.

Figure 7: Bitcoin Investment Trust Weekly Inflows

December 31, 2017 through June 30, 2018

Figure 8: Grayscale Non-Bitcoin Weekly Inflows

December 31, 2017 through June 30, 2018

Our data provides evidence that investors appreciate the notion that multiple digital assets can survive, thrive, and complement one another in the new digital economy, allowing them to play a diversifying role within investor portfolios.

Investor Profile

 

Another revealing insight is the makeup of our investor base. Through our analysis, we determined that most asset inflows are coming from institutional investors. This segment comprises roughly 56% of all investment YTD, followed by accredited individuals (20%), retirement accounts (16%), and family offices (8%).

Figure 9: Grayscale Investor Profile by Type

December 31, 2017 through June 30, 2018

The average investment was $848K for institutional investors, $553K for family offices, $335K for retirement accounts, and $289K for individuals. It is important to note that this data is skewed by the fact that the investment amounts do not necessarily fall within a normal distribution. For example, there were some large, one-time outliers and investments that were broken up into multiple allocations over a series of days.  Nonetheless, this should at least paint a general picture of the typical investment amounts we’re seeing from each client segment.

Moreover, if we break down our investor base by geography, roughly 64% of all new investments came from U.S. investors, 26% from offshore investors (e.g. Cayman-domiciled entities), and 10% from investors in other regions of the world.

Figure 10: Grayscale Investor Profile by Geography

December 31, 2017 through June 30, 2018

Conclusion

 

We’re excited to share this report for two major reasons:

  1. We believe it provides an alternate, yet accurate, firsthand perspective on digital asset market activity that is distinct from what is commonly understood.
  2. It may be useful to both value and momentum investors as they seek to identify investment opportunities where there are (i) dislocations between market prices and fundamentals and (ii) strong, steady capital inflows.

We intend to regularly update this report to identify trends in the digital asset investment landscape.

1 For the period from December 31, 2017 through June 30, 2018.
2 “Non-Bitcoin” Investment Products include Bitcoin Cash Investment Trust, Ethereum Investment Trust, Ethereum Classic Investment Trust, Litecoin Investment Trust, XRP Investment Trust, Zcash Investment Trust, and Grayscale Digital Large Cap Fund, LLC.
*Inception dates were as follows: Bitcoin Investment Trust – September 25, 2013; Ethereum Classic Investment Trust – April 24, 2017; Zcash Investment Trust – October 24, 2017; Ethereum Investment Trust – December 14, 2017; Grayscale Digital Large Cap Fund, LLC – February 1, 2018; Bitcoin Cash Investment Trust, XRP Investment Trust, Litecoin Investment Trust were each launched on March 1, 2018.

About Grayscale Investments

Established in 2013 by Digital Currency Group, Grayscale Investments, LLC is a trusted authority on digital currency investing. Grayscale provides secure access to the digital currency asset class through its single-asset and diversified investment products. Grayscale is the sponsor of, Bitcoin Investment TrustBitcoin Cash Investment Trust, Ethereum Investment Trust, Ethereum Classic Investment Trust, Litecoin Investment Trust, XRP Investment Trust, and Zcash Investment Trust as well as the manager of the Grayscale Digital Large Cap Fund LLC. Grayscale is headquartered in New York City.
For more information on Grayscale, please visit www.grayscale.co or follow us on Twitter, @GrayscaleInvest.

Important Disclosures & Other Information

Copyright © 2018 Grayscale Investments, LLC. All content is original and has been researched and produced by Grayscale Investments, LLC (“Grayscale”) unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express consent of Grayscale.
This paper is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to sell or buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this paper to make an investment decision and any information contained herein should not be used as a basis for this purpose. This paper does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors. Investors are not to construe the contents of this Memorandum as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this research and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Investors should be aware that Grayscale is the sponsor of Bitcoin Investment Trust, Bitcoin Cash Investment Trust, Ethereum Investment Trust, Ethereum Classic Investment Trust, Litecoin Investment Trust, XRP Investment Trust and Zcash Investment Trust (each, a “Trust”) and the manager of Grayscale Digital Large Cap Fund LLC (the “Fund”); each of the Fund and the Trusts, a “Vehicle”). Information provided about a Vehicle is not intended to be, nor should it be construed or used as investment, tax or legal advice, and prospective investors should consult their own advisors concerning an investment in such Vehicle. This paper does not constitute an offer to sell or the solicitation of an offer to buy interests in any of the Vehicles. Any offering or solicitation will be made only to certain qualified investors pursuant to a formal offering with additional documentation, all of which should be read in its entirety. Any offer or solicitation of an investment in a Vehicle may be made only by delivery of such Vehicle’s confidential offering documents (the “Offering Documents”) to qualified accredited investors (as defined under Rule 501(a) of Regulation D of the U.S. Securities Act of 1933, as amended (the “Securities Act”)), which contain material information not contained herein and which supersede the information provided herein in its entirety.
Grayscale’s Vehicles are private, unregistered investment vehicle and not subject to the same regulatory requirements as exchange traded funds or mutual funds, including the requirement to provide certain periodic and standardized pricing and valuation information to investors. The Vehicles are not registered with the Securities and Exchange Commission (the “SEC”), any state securities laws, or the U.S. Investment Company Act of 1940, as amended. There are substantial risks in investing in one or more Vehicles. Any interests in each Vehicle described herein have not been recommended by any U.S. federal or state, or non-U.S., securities commission or regulatory authority, including the SEC. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense.
Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Grayscale’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Grayscale assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Grayscale has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Grayscale as to its accuracy, reliability or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.
Certain Risk Factors
Each Vehicle is a private, unregistered investment vehicle and not subject to the same regulatory requirements as exchange traded funds or mutual funds, including the requirement to provide certain periodic and standardized pricing and valuation information to investors. There are substantial risks in investing in a Vehicle, including but not limited to:
PRICE VOLATILITY
Digital assets have historically experienced significant intraday and long-term price swings. In addition, none of the Vehicles currently operates a redemption program and may halt creations from time to time. There can be no assurance that the value of the common units of fractional undivided beneficial interest (“Shares”) of any Vehicle will approximate the value of the digital assets held by such Vehicle and such Shares may trade at a substantial premium over or discount to the value of the digital assets held by such Vehicle. At this time, none of the Vehicles is operating a redemption program and therefore Shares are not redeemable by any Vehicle. Subject to receipt of regulatory approval from the SEC and approval by the Sponsor or Manager, as applicable, in its sole discretion, any Vehicle may in the future operate a redemption program. Because none of the Vehicles believes that the SEC would, at this time, entertain an application for the waiver of rules needed in order to operate an ongoing redemption program, none of the Vehicles currently has any intention of seeking regulatory approval from the SEC to operate an ongoing redemption program.
MARKET ADOPTION
It is possible that digital assets generally or any digital asset in particular will never be broadly adopted by either the retail or commercial marketplace, in which case, one or more digital assets may lose most, if not all, of its value.
GOVERNMENT REGULATION
The regulatory framework of digital assets remains unclear and application of existing regulations and/or future restrictions by federal and state authorities may have a significant impact on the value of digital assets.
SECURITY
While each Vehicle has implemented security measures for the safe storage of its digital assets, there have been significant incidents of digital asset theft and digital assets remains a potential target for hackers. Digital assets that are lost or stolen cannot be replaced, as transactions are irrevocable.
TAX TREATMENT OF VIRTUAL CURRENCY
*For U.S. federal income tax purposes, Digital Large Cap Fund will be a passive foreign investment company (a “PFIC”) and, in certain circumstances, may be a controlled foreign corporation (a “CFC”). Digital Large Cap Fund will make available a PFIC Annual Information Statement that will include information required to permit each eligible shareholder to make a “qualified electing fund” election (a “QEF Election”) with respect to Digital Large Cap Fund.
Each of the other Vehicles intends to take the position that it is a grantor trust for U.S. federal income tax purposes.  Assuming that a Vehicle is properly treated as a grantor trust, Shareholders of that Vehicle generally will be treated as if they directly owned their respective pro rata shares of the underlying assets held in the Vehicle, directly received their respective pro rata shares of the Vehicle’s income and directly incurred their respective pro rata shares of the Vehicle’s expenses. Most state and local tax authorities follow U.S. income tax rules in this regard.
Prospective investors should discuss the tax consequences of an investment in a Vehicle with their tax advisors.
NO SHAREHOLDER CONTROL
Grayscale, as sponsor of each Trust and the manager of the Fund, has total authority over the Trusts and the Fund and shareholders’ rights are extremely limited.
LACK OF LIQUIDITY AND TRANSFER RESTRICTIONS
An investment in a Vehicle will be illiquid and there will be significant restrictions on transferring interests in such Vehicle. The Vehicles are not registered with the SEC, any state securities laws, or the U.S. Investment Company Act of 1940, as amended, and the Shares of each Vehicle are being offered in a private placement pursuant to Rule 506(c) under Regulation D of the Securities Act. As a result, the Shares of each Vehicle are restricted Shares and are subject to a one-year holding period in accordance with Rule 144 under the Securities Act. In addition, none of the Vehicles currently operates a redemption program. Because of the one-year holding period and the lack of an ongoing redemption program, Shares should not be purchased by any investor who is not willing and able to bear the risk of investment and lack of liquidity for at least one year. No assurances are given that after the one year holding period, there will be any market for the resale of Shares of any Vehicle, or, if there is such a market, as to the price at such Shares may be sold into such a market.
POTENTIAL RELIANCE ON THIRD-PARTY MANAGEMENT; CONFLICTS OF INTEREST
The Vehicles and their sponsors or managers and advisors may rely on the trading expertise and experience of third-party sponsors, managers or advisors, the identity of which may not be fully disclosed to investors. The Vehicles and their sponsors or managers and advisors and agents may be subject to various conflicts of interest.
FEES AND EXPENSES
Each Vehicle’s fees and expenses (which may be substantial regardless of any returns on investment) will offset each Vehicle’s trading profits.
Additional General Disclosures
Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment. Any offering or solicitation will be made only to qualified accredited investors as defined under Rule 501(a) of Regulation D pursuant to a formal offering with additional documentation, all of which should be read in their entirety and contain material information not contained herein. Any offer or solicitation of an investment in a Vehicle may be made only by delivery of its confidential offering documents to qualified accredited investors. You should rely solely on such offering documents in making any investment decision. An investment in Grayscale’s Vehicles are not suitable for all investors.
This document is intended for those with an in-depth understanding of the high risk nature of investments in digital assets and these investments may not be suitable for you. This document may not be distributed in either excerpts or in its entirety beyond its intended audience and the Vehicles and Grayscale will not be held responsible if this document is used or is distributed beyond its initial recipient or if it is used for any unintended purpose. This document shall not constitute an offer to sell or the solicitation of an offer to buy these securities, nor shall there be any sale of these securities in any state or other jurisdiction in which such offer, solicitation or sale would be unlawful, and there is not enough information contained in this message on which to make an investment decision and any information contained herein should not be used as a basis for this purpose.
The Vehicles and Grayscale do not: produce in-house research; make recommendations to purchase or sell specific securities; provide investment advisory services; or conduct a general retail business. None of the Vehicles or Grayscale, its affiliates, nor any of its directors, officers, employees or agents shall have any liability, howsoever arising, for any error or incompleteness of fact or opinion in it or lack of care in its preparation or publication, provided that this shall not exclude liability to the extent that this is impermissible under applicable securities laws.
The logos, graphics, icons, trademarks, service marks and headers for each Vehicle and Grayscale appearing herein are service marks, trademarks (whether registered or not) and/or trade dress of Digital Currency Group, Inc. (the “Marks”). All other trademarks, company names, logos, service marks and/or trade dress mentioned, displayed, cited or otherwise indicated herein (“Third Party Marks”) are the sole property of their respective owners. The Marks or the Third Party Marks may not be copied, downloaded, displayed, used as metatags, misused, or otherwise exploited in any manner without the prior express written permission of the relevant Vehicle and Grayscale or the owner of such Third Party Mark.
The above summary is not a complete list of the risks and other important disclosures involved in investing in the Vehicles and is subject to the more complete disclosures contained in each Vehicle’s Offering Documents, which must be reviewed carefully.
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