Grayscale’s $1.4-billion inflow in the first half of 2020, along with two other key factors, shows institutional demand is surging rapidly.
Since early 2020, the institutional demand for Bitcoin (BTC) has been steadily increasing. In the second quarter of this year, data show that the appetite for BTC spiked significantly. According to crypto asset fund Grayscale, its products recorded an inflow of $1.4 billion in capital. The investment firm is best known for the Grayscale Bitcoin Trust, which allows institutions in the United States to gain exposure to Bitcoin through a publicly-traded over-the-counter stock.
If the demand for Bitcoin climbed steadily in the first three months of 2020, it surged rapidly from March to June. One possible explanation for the sudden increase in attraction toward Bitcoin is its crash in early March when Bitcoin’s price briefly dropped below $3,600 on BitMEX. More than $1 billion worth of futures contracts were liquidated, but in the 72 hours that followed, the volumes in retail markets surged substantially, especially on platforms like Coinbase.
Similar to their retail counterparts, institutional investors likely bought large amounts of BTC after the major correction. The assets under management of the Grayscale Bitcoin Trust rose from $1.577 billion to $3 billion, from March 17 to May 13.
Overall, three key data points show that the institutional demand for Bitcoin has been rising, particularly in Q2 2020.
Grayscale records $1.4 billion in inflows in the first half of 2020
In a single quarter, Grayscale’s products recorded an inflow of nearly $1 billion. The $905.8 million quarterly inflow raised total inflows in the first half of 2020 to $1.4 billion. Grayscale’s half-year report reads: “Total investment into Grayscale’s family of products hit $905.8 million in 2Q20. To put that into context, that’s nearly 1.5x the capital raised during all of 2019, and following a record quarter in 1Q20.”
The Grayscale Bitcoin Trust is considered an accurate metric to measure institutional demand for Bitcoin since the U.S. and Europe have not yet approved an exchange-traded fund around Bitcoin or cryptocurrencies. The absence of exchange-traded funds in the U.S. and Europe narrows down the options for accredited and institutional investors. Institutions can choose among the Grayscale Bitcoin Trust, custodial services and direct OTC trades. But, custodial services are not widely-utilized, and direct OTC dealings can cause security vulnerabilities.
Primarily due to a lack of options, institutions typically use the trust to gain exposure to Bitcoin despite its high market premium. Grayscale emphasized that 84% of investments came from institutional investors in the first half of 2020. The record-high quarterly inflow into Grayscale’s products and the fact that the overwhelming majority came from institutions suggest institutional demand surged in the second quarter.
But in recent weeks, the rate of Grayscale’s accumulation of Bitcoin has slowed down. The filings of the investment firm with the U.S. Securities and Exchange Commission showed the company has not bought a single Bitcoin in three weeks. Speaking to Cointelegraph, a Grayscale spokesperson clarified that the trust was placed in an administrative quiet period, which is also called a “waiting period” by the SEC. The halt in purchases is temporary, and it does not necessarily mean that institutions have stopped buying BTC.
Banks are starting to operate custodial services
Since January 2020, major banks across Asia, Europe and the U.S. have started to prepare crypto custodial services, indicating that they see a certain level of demand for Bitcoin from clients. In January, Switzerland’s third-biggest bank, Julius Baer, partnered with Seba to launch digital assets services.
Two months later, South Korea’s largest bank, Kookmin, filed a trademark application for a crypto custodian solution. Speaking to a local publication called Digital Today, a Kookmin Bank spokesperson said the trademark is related to its partnership with Atomrigs Lab in 2019, which was brought about to develop a custodian platform called KBDAC. Local analysts said that the bank is likely far into product development at this point.
This week, Standard Chartered reportedly confirmed to be developing a crypto custody solution.
Standard Chartered’s venture and innovations arm called SV Ventures is attempting to aid the start of the institutional adoption of cryptocurrencies. The firm’s entrance into the cryptocurrency market suggests that it has been seeing growing demand for Bitcoin and cryptocurrencies, in general, in the global market.
Financial institutions are supporting crypto infrastructure
Major financial institutions portrayed a pessimistic stance toward cryptocurrencies in the past several years. Executives of Visa, Mastercard and other financial service providers have previously criticized Bitcoin and crypto assets.
In October 2017, as Cointelegraph reported, Mastercard CEO Ajay Banga said cryptocurrencies that are not government-mandated are “junk.” Yet on July 20, Mastercard announced the launch of a crypto card partner program. It would allow cryptocurrency companies to distribute Mastercard payment cards through a Mastercard principal membership. The program shows a 180-degree shift from the Mastercard CEO’s stance toward non-government cryptocurrencies in 2017. Raj Dhamodharan, the executive vice president at Mastercard’s digital asset department, said:
“The cryptocurrency market continues to mature, and Mastercard is driving it forward, creating safe and secure experiences for consumers and businesses in today’s digital economy. Our work with Wirex and the wider crypto ecosystem is accelerating innovation and empowering consumers with more choice in the way they pay.”
Visa, which has also canceled crypto debit cards in the past, established a partnership with Bitcoin Lightning Network startup Zap. Mastercard and Visa’s initiatives to build an infrastructure around cryptocurrencies as a potential long-term strategy have demonstrated the growing perception of cryptocurrencies as legitimate tools of payment and store of value.
Strategist Lyn Alden echoed a similar sentiment in her recently-published investment thesis on Bitcoin. Alden noted that she has become optimistic about Bitcoin’s growth trajectory. Apart from the halving, scarcity and the network effect of Bitcoin, she said the presence of major businesses in the crypto industry is a positive factor for growth:
“Some major businesses are already on board, apart from the ones that grew from crypto-origins like Coinbase. Square’s (SQ) Cash App enables the purchase of Bitcoin, for example. Robinhood, which has enjoyed an influx of millions of new users this year, has built-in cryptocurrency trading, making an easy transition for Robinhood users.”
In the long-term, the consistent increase in inflows from institutional investors into Bitcoin, supplemented by a strengthening crypto infrastructure, could largely benefit Bitcoin. The introduction of alternative investment vehicles to the Grayscale Bitcoin Trust, like an ETF or an exchange-traded note, could further bolster institutional demand for Bitcoin.
