The world's largest digital currency asset manager took in $1 billion in new investment in the third quarter. Here's why investors are feeling so bullish about bitcoin and ethereum.

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Michael Sonnenshein.JPG Michael Sonnenshein is the managing director of Grayscale Investments.

  • Grayscale Investments, the largest digital currency asset manager, experienced its largest-ever quarterly inflows, taking in more than $1 billion in new investment, according to a new report from the firm.
  • “It’s generally accepted now that this asset class is not going to go away,” Michael Sonnenshein, managing director of Grayscale Investments, told Business Insider.
  • The price of bitcoin dropped by almost 50% over the span of less than two weeks in mid-March, but the currency largely recovered by early May. 
  • Visit Business Insider’s homepage for more stories.

Portions of the global economy melted down in 2020, but an emerging asset class seems to have reinforced its staying power amid the chaos.

Grayscale Investments, the world’s largest digital-currency asset manager, notched its largest-ever quarterly inflows, taking in more than $1 billion in new investment, according to a report published by the firm on Wednesday.

Serving institutional investors, family offices, and some private investors, Grayscale offers 10 cryptocurrency products and has $5.9 billion in assets under management. 

This marks the third-straight quarter that the asset manager has broken its own record for inflows. 

All of this growth comes as the global economy took a nose dive in 2020. And while the price of bitcoin faced its fair share of volatility as well, dropping by almost 50% over the span of less than two weeks in mid-March, the currency had largely recovered by early May. 

“I think for a lot of investors, it perhaps for them was one of the first times that they had looked at, or were invested in the asset class, where it fell precipitously in a short period of time,” Michael Sonnenshein, managing director at Grayscale Investments, told Business Insider. “But it was also, for a lot of investors, more importantly, a watershed moment in that it delivered for them the true staying power and the resiliency of the [cryptocurrency] asset class.”

Bitcoin remained the most popular cryptocurrency, but ethereum gained momentum in 2020

While bitcoin remained the leading cryptocurrency throughout the third quarter, Ethereum, the second most-popular cryptocurrency, saw record growth this quarter, according to the report.

Ethereum was up in value 57% year-over-year in the third quarter of 2020, the report said, with Grayscale Ethereum Trust — the largest trust trading in Ethereum — seeing 17% of its Ethereum investment coming from new institutional investors who had not previously invested in this product.

“We believe in a future where multiple digital assets coexist,” Sonnenshein said. “We often compare them to the likes of the precious metals family, where you look at something like gold, silver, platinum. They all exist amongst the precious metals family with different use cases and applications and prices.”

Grayscale Q3 AUM

Rival cryptocurrencies are similar, he said. “We believe that there is a future state where bitcoin, Ethereum, and other digital currencies coexist as part of the digital currency cohort,” and are “used for different things,” he said.

In spite of Ethereum’s rise, bitcoin remains the leading cryptocurrency for 2020, the report noted. Grayscale Bitcoin Trust, which is Grayscale’s largest product, saw $719.3 million in new inflows in the third quarter, accounting for the lion’s share of the asset manager’s new investable capital.

What’s more, for the first time in the history of Grayscale’s quarterly research reports, the firm found that a majority of its investors were investing into at least two of its cryptocurrency investment products. 

More than half of investors (57%) had invested in at least two cryptocurrency products as of the third quarter this year, versus 44% one year ago. When Grayscale started in 2013, only 37% were invested in multiple crypto products.

Fiscal stimulus measures could be driving investors’ temptations for cryptocurrencies, experts say

One major explanation behind cryptocurrency’s rise, Sonneinshein said, is that a finite amount of cryptocurrency provides a buttress against devaluation in a way that government-backed cash reserves can’t defend against.

“I think from our investor conversations, a lot of that is drawn from bitcoin being an asset that has verifiable scarcity, which is an attribute that is really resonating with the investment community, especially against the backdrop of unlimited financial economic stimulus,” Sonnenshein said.

This year saw massive fiscal stimulus measures which bloated the Fed’s balance sheet to more than $7 trillion as of late September, according to Statista.

Phil Bonello, director of research at Grayscale Investments, agreed that fiscal stimulus measures might be driving investors to these cryptocurrency products.

“Anecdotally, it’s clear that investors are concerned about the ongoing stimulus,” Bonello told Business Insider. “It’s not clear if there’s an end in sight. And so I think that that generally has drummed up interest for a digitally scarce asset like bitcoin and the emerging assets around bitcoin.”

To be sure, cryptocurrency still has a long ways to go to compete with fiat currency. Bitcoin’s entire market cap, roughly $212 billion according to CoinDesk, is smaller than most mid-sized asset manager’s individual AUM. 

However, the industry continues to make steps to further embed itself in the fabric of traditional finance. Grayscale Investments operates the only two cryptocurrency investment products that report to the US Securities and Exchange Commission — Grayscale Bitcoin Trust and Grayscale Ethereum Trust.

“The fact that [Grayscale Investments] is an SEC-reporting vehicle makes it have the same level of reporting obligation and disclosure as you would see for any other instrument that investors are using,” Sonnenshein said.

He added that the success that cryptocurrencies have experienced in 2020 should repel any aspersions that critics might have on the asset class.

 “And while definitively it’s not for every single investor or every single portfolio, it is something that is being accepted as needing to be examined in the context of building a portfolio.”

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