A recent report by Grayscale, the world's largest digital currency asset manager, revealed the firm now holds roughly 1.7% of all of Bitcoin’s supply in its Grayscale Bitcoin Trust (GBTC). Having seen the biggest quarter yet, Grayscale’s share of Bitcoin increased by 0.1% in 2020 despite current market uncertainties brought about by the COVID-19 pandemic.

Rayhaneh Sharif-Askary, Grayscale’s head of investor relations, told Cointelegraph that “the majority of capital invested into our products comes from institutional investors.” He elaborated:

“We saw 88% of the $503.7M in capital invested into our family of products come from institutional investors this past quarter. Our recent conversations with investors reinforce the idea that now, more than ever, investors are going to be looking for ways to build resilient portfolios. Moreover, the implications of the current, unprecedented monetary policy are causing previously skeptical investors to take another hard look at the asset class.”

While the Bitcoin Trust is the most popular among the company’s family of products, the increased inflow was experienced across the board, with Bitcoin (BTC) and all other altcoin-based trusts seeing around half a billion dollars in investment — double that of Q3 and Q4 2019. In Q1 2020, approximately 38% of Grayscale’s investors entered multiple Grayscale products in order to diversify their crypto holdings.

The Grayscale Bitcoin trust received around $389 million in investment throughout the quarter, which means that if GBTC was an exchange-traded fund, it would be among the 5% of year-to-date inflows. Moreover, GBTC is also one of most-traded OTC securities and has received the title of one of the most active securities in terms of trading volume in 2019, which further signals demand among institutional investors and traders.

While GBTC also targets retail investors, institutional players make up the overwhelming majority of capital inflow. Institutional investors represented 88% of the investment capital generated in the first quarter of 2020, most of which are hedge funds.

Institutional demand for GBTC

Has institutionalization arrived?

Grayscale was the first regulated crypto product to hit the market, having been launched in 2013. Since then, the company has expanded into a number of altcoin-based funds. However, the supply of options for institutional exposure has continued to grow, especially over the last couple of years.

Exchange-traded products like the physically-backed Bitcoin ETPs from Amun AG and from WisdomTree — both of which are currently trading in the Switzerland SIX stock exchange — are an example of readily available exposure for institutional players.

Most recently, 3iQ has announced the launch of its Bitcoin close-end fund on the Toronto Stock Exchange, which leverages price indexes by CryptoCompare and VanEck Europe subsidiary MVIS and custody services by Gemini. Cameron Winklevoss, Gemini’s president, recently told Cointelegraph: “This mirrors the growing appetite that institutional and retail investors alike are demonstrating for incorporating crypto assets into their larger portfolios.”

Exposure to derivative products has also become widely available for institutional investors in the last month through the Chicago Mercantile Exchange’s Bitcoin futures and options contracts as well as Bakkt’s physically-settled Bitcoin futures and LedgerX’s regulated derivatives products.

It’s important to note that the interest and volume on these paper markets is miniscule when compared to unregulated activity. According to Jonathan Hobbs — chartered financial analyst, author of The Crypto Portfolio and the chief operating officer at Ecstatus Capital — institutional demand is already here, but the challenge is finding compliant products that can satisfy their standards. Hobbs told Cointelegraph:

“As time goes by more traditional hedge funds, fund of funds and family offices are starting to see that Bitcoin and digital assets can offer them diversification. The main challenges for them lie in having digital investment products that will pass their compliance checks. Over the last few years we have seen the digital space mature considerably, with several infrastructure improvements that are making Bitcoin more accommodating to professional investors.”

Market sentiment among institutional investors

Grayscale’s results are impressive and show that institutional investors are looking to gain exposure to Bitcoin and other digital assets even during the current climate, where uncertainty and fear are becoming the norm. However, given the current state of affairs, Bitcoin is left for those with a higher risk appetite. Matt D’Souza, CEO of Blockware Solutions and digital currency hedge fund manager, told Cointelegraph, “Markets turn on a dime. If you’re not in when the opportunity presents, you’re too late.” He then added:

“While some institutional investors may be looking to bet on Bitcoin on the basis it could theoretically do well in a crisis, managers for the most part want cash which is by far the safest option. Managers that have been around for a long time understand how to last. It’s because their investors are in the stay rich business, not the get rich. This environment warrants capital preservation. As risk appetite comes back into the market I expect Bitcoin to be one of the best opportunities.”

In fact, while compliant offers for BTC are on the rise, data shows that, as of late, regulated derivatives have been losing ground both in terms of volume and open interest in contracts. This trend is observed only in regulated markets, while unregulated derivatives products had their biggest month yet in March in terms of trading volume.

This may suggest that institutional investors who are betting on Bitcoin are doing so as part of a longer-term strategy, given the increased interest in passive products like GBTC but decreased interest for CME’s futures and options.

CME Bitcoin futures Total open interest and volumes

This trend may soon pivot as large players enter the field. For example, Renaissance Technologies’ Medallion Fund — a hedge fund with $10 billion worth of assets under management — has recently received approval from the United States Securities and Exchange Commission to offer products and services involving the CME-regulated Bitcoin futures market to its clients.

Regulation is key

While institutional interest and offerings both seem to be on the rise, there is still a lot of uncertainty when it comes to Bitcoin. There are many aspects in play, from the technology to monetary policy (especially with the upcoming halving), and most importantly, regulation. Bitcoin is still threading uncharted territory when it comes to compliance, and research shows that news involving clear regulatory updates increase demand for Bitcoin.

Grayscale Bitcoin Trust has become an SEC-reporting security, which shows that regulators are willing to work with companies in the industry. According to Sharif-Askary, this type of collaboration is helping drive the industry forward. Sharif-Askary told Cointelegraph that regulators seem “eager to engage, especially from an educational perspective.” He went on to add that Grayscale Bitcoin Trust becoming regulated by the SEC is a vital step:

“This means that the Trust is held to the same reporting and disclosure standards as stocks and ETFs that trade on national exchanges such as NYSE and Nasdaq. It also reinforces that there are ways to proactively work with regulators, within the existing regulatory frameworks.”

What about a Bitcoin ETF?

While the long-awaited Bitcoin exchange-traded fund is still nowhere to be seen, it seems that institutional demand is already here. While the cryptocurrency industry still needs to make adjustments to ensure more transparency and compliance, it seems that the right steps are being taken. In the meantime, regulated alternatives to the Bitcoin ETF continue to increase.

Related: The SEC Does Not Want Crypto ETFs — What Will It Take to Get Approval?

The latest attempt at a Bitcoin-related ETF was made by Wilshire Phoenix. The proposal was rejected by the SEC, who cited lack of a surveillance-sharing agreement with a significant market for the underlying asset or a novel demonstration of the market’s inherent resistance to manipulation.

Nevertheless, companies in the space are pushing toward a more transparent market. Crypto data forensics companies are working alongside service providers and regulators to create a more transparent market, which will play a big role in the approval of an ETF. However, according to Hobbs, this may not be as significant as the community thinks:

“With crypto products such as the CME Bitcoin Futures, the Grayscale BTC Trust in the U.S. and the Wisdom Tree Bitcoin ETP, there are already options for institutions to get Bitcoin exposure without having to buy it directly. Also, not all institutional investors who want to go digital are looking for passive 'buy and hold' Bitcoin exposure, which is what you get with an ETF. Many of them are looking for regulated digital quant funds like Ecstatus Capital which can trade Bitcoin long and short.”

Whether 2020 becomes the year of the Bitcoin ETF is unclear, but one thing is certain: Compliant options exist and are becoming increasingly available. With or without an ETF, regulation is the key to advancing the industry, and if the industry continues to mature, an ETF may be just another milestone on Bitcoin’s road to mass adoption.