Mykola Tys / | LightRocket | Getty Images
Grayscale saw its managed wealth skyrocket when Wall Street used it as a proxy for investing in Bitcoin.
The New York-based investment firm started with assets of $ 2 billion last year and ended with more than $ 20.2 billion. That 900% increase was driven by demand from institutional investors such as hedge funds, foundations and pension funds, the company said in a quarterly report on Thursday.
Grayscale's Bitcoin Trust became a popular publicly traded way for investors to expose themselves to the cryptocurrency without owning the coins themselves. The investment product increased year on year from USD 1.8 billion to USD 17.5 billion.
"We have seen a significant acceleration in institutional participation," said Michael Sonnenshein, who recently took over the management of Grayscale Investments. "There is no longer a professional risk investing in the digital currency asset class. There is probably a higher career risk if you don't pay attention to it."
Grayscale's banner year came when high profile money managers publicly switched to digital currency.
Billionaire hedge fund manager Paul Tudor Jones described Bitcoin as "the best inflation hedge" and compared it to putting money behind technology giants like Apple and Google. Stanley Druckermiller and Bill Miller are among the other high profile Bitcoin bulls. According to analysts, their support has given Wall Street more confidence in investing.
The institutes accounted for 87% of Grayscale's inflows for the entire year, the company said. The average level of obligations of these investors has doubled within a few months. Investors spent an average of around $ 3 million in the third quarter of 2020 and an average of $ 6.8 million through the end of last year.
Institutional demand has been cited as the main reason Bitcoin topped $ 40,000 last week and rallied in three digits over the past year. Sonnenshein said these professional investors often do not have the legal or "operational requirements" to securely buy and hold cryptocurrencies.
Many professional investors see it as an alternative to established safe-haven assets such as gold and a protection against the "eternal money pressure" by central banks, said Sonnenshein.
"The most common theme for persuading people to invest in Bitcoin is a rotation out of gold," he said. "Investors are also sharing anecdotally that this is the place and how they are making room for Bitcoin in their portfolios."
At the same time that $ 3 billion has flowed into the Grayscale Bitcoin Trust since mid-October, gold ETFs lost $ 7 billion, according to JPMorgan. An investment bank strategist sent clients a notice last week that a Bitcoin ETF could drag prices short-term and trigger Grayscale outflows. In response to the analyst announcement, Sonnenshein, a former JPMorgan employee, said an ETF is likely to be approved but would not generate interest from Grayscale.
"The type of inflows we're reporting should be evidence that investors aren't waiting for an ETF to participate in this asset class," said Sonnenshein.
Bitcoin prices have been volatile since dropping below $ 40,000. After falling to $ 31,000 on Monday, the cryptocurrency was trading again near $ 39,000 on Thursday morning.
Professional investors may use the dips as an opportunity to get back in. When it comes to price drops, according to Sonnenshein, incoming phone calls and emails are often about spending more money on work.
"Investors are used to seeing these kinds of cycles in price," he said. "They opportunistically use price declines to double and improve their positions."