Demand Surges for Biggest Crypto Fund Amid Arbitrage Play

Grayscale Investments LLC generated a lot of buzz when its cryptocurrency trusts attracted more than $900 million — mostly from institutional investors — in the second quarter, nearly double its previous quarterly high and bringing total assets under management to over $4 billion.

While the surge in demand can be seen as a sign that large asset managers are finally embracing digital assets, many investors were likely taking advantage of one of the more popular arbitrage opportunities in crypto.

“The Grayscale arb is a pretty common trade,” said Kyle Samani, co-founder of Austin, Texas-based hedge fund Multicoin Capital Management LLC.

Grayscale’s main Bitcoin and Ethereum trusts both traditionally trade at a premium to the value of the underlying assets, so a lot of hedge funds buy or borrow the coins on their own and contribute the assets in kind to the trusts, thereby creating more units of the trusts, Samani said. “If those shares trade at a premium to the underlying assets, the trade provides riskless profits.”

The structure of the investment trusts, which allow for periodic private placement of shares with accredited buyers and include lock-up provisions of as long as 12 months, make that possible.

“It has been very popular as there has been a lingering premium for both GBTC and ETHE,” said Nic Carter, co-founder of researcher Coin Metrics.

Small investors who can purchase shares in the exchange-traded trusts, but don’t participate in the private placements, may have the most at risk when the locked-up shares purchased by accredited investors are allowed to be sold months later. That means that small investors could lose money even if Bitcoin and Ether perform well, rival crypto trust company 21Shares wrote in a report last week.

Grayscale said it doesn’t control prices on the secondary market. The investor inflows demonstrate the demand for buying and holding crypto access products, according to a Grayscale spokesperson.

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