Institutions drive inflows surge at Grayscale as big investors turn to digital assets

Crypto currencies

Digital assets have surged in popularity with investors seeking “safe havens” outside of traditional asset classes. Digital asset manager Grayscale Investments reports that a record USD905 million flowed into its family of 10 funds in the second quarter of 2020. 

Coming on top of the inflows of USD500 million that the firm received in the previous quarter, the first half of 2020 has contributed more than half of Grayscale’s cumulative inflows since its inception seven years ago.

Institutional investors continued to be its primary source of capital, representing 84 per cent of overall investment in its funds, which include Grayscale Bitcoin Trust, and corresponding trusts in ethereum, horizen, zcash, and litecoin. 

Grayscale also noted that USD124.1 million of inflows came from new investors, which made up 57 per cent of the investor base, rising from 49 per cent in the previous year. Most of this came from offshore investors, based outside of the US.

“This activity is even more notable for occurring during the 'coronavirus quarter’ where many other funds and investors were impacted by significant market drawdowns. Yet, when it came to digital currencies, investors were more committed than ever, almost doubling the USD500 million in inflows Grayscale received in Q1,” says Michael Sonnenshein, managing director of Grayscale Investments. “This activity suggests that large investors and institutions see crypto as playing an increasingly important role in certain investment portfolios and strategies.” 

Returning institutional investors largely increased their exposure, with 81 per cent choosing to invest in multiple Grayscale products. 

Hedge funds were the largest driver of institutional capital, representing 80 per cent of institutional inflows. These included multi-strategy, long-short equity, arbitrage, global macro, event-driven, and crypto-focused funds.

Digital assets have outperformed traditional assets, with zcash, ethereum, and stellar returning 72 per cent, 62 per cent, and 62 per cent, respectively this year. Bitcoin also gave returns of 35 per cent, compared to the S&P500 index with 19 per cent.

The combination of low-yields and high volatility as the coronavirus pandemic sent markets into a tailspin has meant that traditional diversification has not protected investors. This has caused managers to start looking at alternative assets, like crypto-currencies, for diversification and income.

“The investment thesis that we’ve been talking about since inception hasn’t changed but I think it’s resonating with investors in a new way. Whether there’s just more education and awareness on the asset class or investors looking to build more resilient portfolios in our new reality of QE-infinity, it’s clear that there is more demand to incorporate a safe haven asset like bitcoin into portfolios,” explains Sonnenshein.

“We’re seeing this at Grayscale at record pace but we’re also seeing the financial community continue to embrace the asset class. For example, Paul Tudor Jones published his thoughts on bitcoin, which is yet another reinforcement that the asset class is taken seriously by the financial community.”   

Jones, the founder and chief executive officer of Tudor Investment Corp, said in a market outlook note in May that he was buying bitcoin as a hedge against the inflation, as central banks printed money for higher fiscal spending and bond-buying schemes.

Sonnenshein maintains that digital assets are “here to stay” since they are “at the intersection of many trends shaping today’s investment landscape”.