Grayscale Investments, the world’s largest digital currency asset manager with $20.2 billion in AUM, has just released its Digital Asset Investment Report for the fourth quarter of 2020.
The quarter saw unprecedented investment inflows for the firm, with $3.3 billion total investment into Grayscale products during the period, 93 percent of which came from institutional investors, principally asset managers.
Grayscale registered $5.7 billion in investments into Grayscale Products in 2020 as a whole, more than four times the $1.2 billion cumulative inflow into its products from 2013-2019. An average of $90 million each week poured into just its Grayscale Bitcoin Trust in 2020, outpacing mined bitcoin by 194 percent.
”Bitcoin’s ability to perform during a period of significant volatility attracted the attention of more financial institutions, investors, and industry observers than ever before,” Grayscale’s analysts wrote in the report. “Influential figures in finance and technology showed public support for Bitcoin as an investment, product, and monetary good. When the history books are written, 2020 will be noted as a major inflection point for the adoption of Bitcoin, and digital currencies more broadly.”
Forward demand drivers
Looking ahead, Grayscale predicts six key factors will drive Bitcoin’s price action in 2021.
In 2020, they note, financial institutions began adding Bitcoin to their corporate balance sheets as cryptocurrencies enjoyed rising appeal as a portfolio diversifier. Major investors, advisory firms, and even banks warmed to Bitcoin, they note, and where allocating cryptocurrency was once a career risk, the risk is increasingly in not allocating. Following institutional embrace in 2020, they write, 2021 may see nation states follow suit.
Second, they note, RIA interest surged in the fourth quarter, and financial advisors continue to field an unprecedented number of inquiries on digital currencies. Given Bitcoin’s price performance in 2020, they say it’s reasonable to expect that more investors and advisors alike will be considering how to best fit this asset class within a larger portfolio. Wealth managers advise on approximately $80 trillion in assets and most have not yet recommended digital assets.
Third, they say, U.S. payment cards offering Bitcoin rewards could become a significant source of Bitcoin demand. U.S. credit cards account for $4 trillion in annual spending, and debit cards another $3 trillion. In 2020, card issuers including 2 Fold, CashApp, and BlockFi debuted cards featuring Bitcoin rewards, which could entice the major credit card companies could follow suit.
Additionally, Grayscale notes that Bitcoin has become an acknowledged clean energy incentive. The energy intensiveness of mining, as well as the geographical concentration of mining (the majority of it in China) have been cited as critical drawbacks of the asset. But that may be changing. North America, they note, is becoming a mining powerhouse, with companies like Foundry—which provides digital asset mining resources—integrating Bitcoin mining into more efficient energy infrastructure. Energy companies are seeing economic incentives to put previously wasted energy to good, profitable use. As a result, they say, Bitcoin mining is helping to subsidize underutilized energy infrastructure and may be integrated into public green energy initiatives.
Moreover, societies around the world are seeing the emergence of “Decentralized Finance” (DeFi) as an economic phenomenon, powering liquid lending, borrowing and exchange. is emerging. As the search for yield intensifies in traditional markets, Grayscale expects major financial firms to consider integrating with decentralized protocols.
Finally, they predict, 2021 may see the beginning of digital currencies integrating into national banking infrastructures. While many countries have laws around digital currencies, few have yet seriously introduced or incorporated them into the set of financial tools that governments have at their disposal. Recent guidance from the OCC suggests that U.S. banks, in particular, may look to incorporate digital currencies into their settlement infrastructure.
“2020 was the year institutional investors recognized that Bitcoin is a viable option for offsetting the abundance of paper money and the cumbersome nature of gold,” Grayscale concludes in the report. “In a world with over $17 trillion of negative yielding debt, we believe Bitcoin will continue to become a cornerstone of investors’ portfolios in 2021.”