Behind The Scenes: Is Grayscale’s Q1 $500 Million Spike Out Of Investor Interest Or Arbitrage?

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As the cryptocurrency market struggles to regain its footing to reach levels set earlier this year, Grayscale, a crypto investment firm largely focused on institutional investors announced a spike in its crypto assets inflows in its Q1 2020 report. The rapid growth in Grayscale’s crypto inflows to a record high of $500 million in Q1 has led to many analysts stating a possible reentry of institutional investors in the field but how right is the claim?

 “Real institutional investment not in crypto”

Jeff Dorman, CFA, believes the current calls of a swelling institutional investment market in crypto is “misleading”. Is institutional investment really entering the crypto market or is it an arbitrage seeking game by hedge funds?

Jeff, CIO at Arca, tweeted out a short thread responding to Grayscale’s Q1 report and the “excessive” claims of possible ballooning of institutional investment in crypto. He criticized the claims as “misleading” as most of the funds in these crypto investment firms are derived from hedge funds, who according to Dorman are not real institutional investors.

He wrote,

“This terminology is so misleading. Hedge funds are not institutional investors. They are professional money managers.”

In its latest report, Grayscale reported that 88% of its investors were institutions contributing to close to $800 million in assets stored in Grayscale’s Trust. The Bitcoin Trust (GBTC) currently holds about 2% of all the BTC in circulation. According to the report, hedge funds lead in the institutional investment pool at Grayscale with Multi-Strat hedge funds dominating the pool with 46% of total inflows.

Jeff however, refutes in hedge funds being termed as institutional investments given the motivation behind investing in crypto is more of profit-making than a long term view.

“Inst inv’s are pensions, family offices, sov wealth funds, endowments.”

Why are hedge funds investing in crypto?

Hedge funds are taking up positions in the crypto field in the recent past as Bitcoin and other cryptocurrencies offer a diversification asset to their portfolios. However, it seems the hedge funds do not invest in crypto due to interest but rather “quick profits” and arbitrage opportunities that spike up once and again.

Grayscale products such as GBTC and spot BTC markets offer arbitrage opportunities hence the growing interest in the field by hedge funds. If Hedge funds had a need to invest in the crypto field in the long term, then direct investing in Bitcoin spot prices or owing the actual Bitcoins would make more sense, Jeff argues.

Institutional investment in Bitcoin futures has remained rather flat since Mar. 12 market crash according to data collected on Bakkt and Chicago Mercantile Exchange (CME). On cash-settled BTC futures, CME Futures hit a high of $398 million in daily volume on Apr. 6; Bakkt further back at $8.6 million recorded on Apr. 7.