Grayscale Investments has three publicly traded funds devoted to digital currencies, and that number will grow to four with this week’s announcement that the Financial Industry Regulatory Authority Inc. has approved the Grayscale Digital Large Cap Fund (DLC) for public quotation on the OTC markets. Grayscale says this will be the first-of-its-kind product to be publicly trade.
Based in New York City, Grayscale is a digital currency asset management firm with roughly $2.1 billion in assets under management across a suite of 10 investment products. Nine of the 10 products provide passive exposure to a single digital currency. The DLC fund contains a basket of the top five digital currencies by market cap.
Grayscale says it employs a rules-based portfolio construction methodology that targets the upper 70% of the digital currency market, and the portfolio is evaluated on a quarterly basis.
As of September 30, DLC’s holdings and their portfolio weights comprised the following: 80.3% bitcoin, 9.9% ethereum, 5.8% XRP, 2.2% bitcoin cash and 1.8% litecoin.
The value of each component is based on daily reference rates from TradeBlock, a provider of cryptocurrency trading tools. The fund’s assets are stored in offline or “cold” storage with Coinbase Custody Trust Company LLC.
DLC is an open-end fund that has been offered since February 2018 as a private placement to accredited investors, with an investment minimum of $50,000.
As of September 30, Grayscale says there were nearly 3.2 million shares outstanding of DLC. Shares created through DLC’s private placement become eligible to sell into the public market after a statutory one-year holding period under Rule 144 of the Securities Act.
The DLC fund won’t be available to retail investors on the OTC market until it is deemed eligible for trading by the Depository Trust Company, which processes transactions for the global financial services industry. Grayscale says it expects the fund to be cleared for takeoff soon. Upon approval, the DLC fund will trade on the OTCQX market under the ticker symbol GDLCF. It will carry an annual fee of 3.0%.
The OTCQX market is considered the highest tier of the OTC marketplace, and is where many American depositary receipts of foreign companies are quoted in the U.S.
And the OTCQX market is where Grayscale’s other three publicly traded products are listed. These are the Grayscale Bitcoin Trust (GBTC), Grayscale Ethereum Trust (ETHE) and Grayscale Ethereum Classic Trust (ETCG). As with the soon-to-be GDLCF fund, all three of these products graduated from private placement status to being publicly traded (though the private-placement versions still exist, as it will for the Grayscale Digital Large Cap Fund).
GBTC, ETHE and ETCG are modeled like other commodity-linked trusts that trade as exchange-traded products, and are listed on Morningstar as ETFs. But in reality these aren’t exchange-traded products because they trade on the OTCQX market, and OTC markets aren’t considered exchanges the way the NYSE and Nasdaq are.
Plus, Grayscale’s trust products don’t employ the share creation and redemption mechanism that helps keep an ETF’s market price close to its underlying value. New shares are created only through the private placement, and the lack of a redemption mechanism means there’s no reduction of shares and the number of shares increase over time.
Client demand and market forces dictate the price of the publicly traded shares, and at times they can trade at sizable premiums to the net asset value that accredited investors pay via the private placement.
At a time when the Securities and Exchange Commission has shot down any and all proposals to launch bitcoin ETFs, Grayscale has basically been the only game in town for investors seeking publicly traded cryptocurrency funds. And investors have taken a shine to the GBTC bitcoin product, which has more than $1.9 billion in assets.