Grayscale Investments Registers Tripled Inflows in Q3 Led by Institutional Investors

Digital asset management Grayscale Investments, which offers investors access to Bitcoin and other cryptocurrencies in the form of shares, has published on Tuesday its third quarter inflows for 2019, marking a record of over $254 million in total investment into its products.

Accordingly, Grayscale provided details on the inflows in its Digital Asset Investment Report for Q3 2019 for the time period from July 1st 2019 to September 30th 2019.

The New York-based investment firm stated in the report that Q3 inflows amounted to $254.9 million, which is triple the $85 million it posted the previous quarter.  As such, inflows over the past year hit a record $412.M. In total, the firm manages over $2 billion on behalf of institutional investors, wealthy individuals, and hedge funds.

The report further shows that 84% of the new funds came from hedge funds and other institutional investors. Notably, total investments into Grayscale products from January 1st 2019 through September 30th 2019 reached $382.3 million, while the figure over the past 12 months is $412.3 million. Compared to previous quarters, the assets managed in the funds, excluding its flagship GBTC product, grew in total by $107M in the third quarter.

Currently, the digital investment giant operates a total of 10 funds tied to the cryptocurrency market, including ones tied to ZCash, Ethereum Classic (ETC), and its Grayscale Digital Large Cap Fund, which on Monday received clearance from FINRA to trade openly in the over-the-counter (OTC) market. Seemingly, this enables the first publicly quoted security based on a selection of digital currencies in the U.S.

Furthermore, the report shows that 67% of third quarter investments went into the company’s Bitcoin Trust shares, while virtually all the rest went to shares of other cryptocurrencies, Ethereum and Ethereum Classic.  As reported in July, Grayscale Bitcoin trust outperformed indices in the first half of 2019, up almost 300% on the year at the time.

Grayscale’s managing director Michael Sonnenshein attributed recent asset growth to the company’s #DropGold campaign, which launched in May and called on U.S. investors to abandon precious metals and join the Bitcoin movement. He further noted that the asset growth was being driven by traditional funds as well as investors, who decided to make digital currencies part of their portfolio mix.

“Most of our institutional investors are actually not crypto hedge funds,” he said. “It really runs the gamut — we have tons of global macros funds who maybe look at digital assets as a way to be short fiat money or thinking about all the economic and political turmoil going on globally.” 

Following the success of the previous campaign, Sonnenshein stated that a similar capaign will be launched within the near future.

United States IRS Releases Questionable Tax Guidelines for Cryptocurrencies

The United States Internal Revenue Service (IRS) has announced its first guidelines in five year for tax reporting regarding cryptocurrency airdrops and hard forks.

The guidance notice published on October 9th addresses common questions of taxpayers as well as practitioners. For instance, common issues such as the tax liabilities created by cryptocurrency forks, the acceptable methods for valuing cryptocurrency received as income, as well as how to calculate taxable gains when selling cryptocurrencies.

Upon the release of the guidance notice, IRS Commissioner Chuck Rettig has stated:

“The new guidance will help taxpayers and tax professionals better understand how longstanding tax principles apply in this rapidly changing environment. We want to help taxpayers understand the reporting requirements as well as take steps to ensure fair enforcement of the tax laws for those who don’t follow the rules.”

The IRS requires taxpayers to track their crypto transactions to prove how much they bought, so they can determine how much they owe when they sell. In addition to that, an investor must also record transfers of coins between two wallets in order to prove to the IRS that the transaction is tax-free.

Furthermore, the new IRS document gives a thorough answer to a long -standing question, that of tax liabilities created by cryptocurrency forks. Accordingly, new cryptocurrencies created from a fork of an existing blockchain should be treated as “an ordinary income equal to the fair market value of the new cryptocurrency when it is received.”

That is to say tax liabilities will apply when the new cryptocurrencies are recorded on a blockchain or if the forked cryptocurrency is received by a holder. The cost basis for calculating tax liabilities in such cases is the coin’s “fair value” in the markets at the time it was received, regardless of whether it can be spent, exchanged, or transferred.

The document further explained that if a cryptocurrency went through a hard fork and a person didn’t receive any new digital currency, whether through an air drop – a distribution of crypto to multiple taxpayers’ ledger addresses – or some other method of transfer, then that person doesn’t have a taxable income.

Meanwhile, legal experts within the cryptocurrency industry have pinpointed two questionable aspects of the guidance.

The first one is IRS’ apparent confusion about the definitions for airdrops and hard forks. In its guidance, the IRS conflates both definitions and assumes that hard forks are achieved through airdrops or distribution by exchanges. The pluralism in definitions results in several possibilities.

Jerry Brito, executive director at Coin Center has stated:

“While the new guidance offers some much-needed clarity on certain questions related to calculating basis, gains, and losses, it seems confused about the nature of hard forks and airdrops.”

The second problem would be the confusion over the method of receiving cryptocurrency and its ownership. Non-custodial wallets, where crypto owners have access to private keys, can exercise discretion over receipt of forked cryptocurrencies. However, the IRS’ guidance assumes receiving crypto through third-party exchanges.

Lokay Cohen, the vice president of crypto tax calculation platform Bittax, stated that the recent guidance follows a congressional request to the IRS which sought clarity on tax reporting for digital currencies.

Earlier this year, the IRS sent thousands of letters to cryptocurrency investors to clarify crypto tax filing requirements. An estimated 10,000 crypto investors received post from the agency, asking some to amend their tax filings, while compelling others to pay back taxes and/or interest and penalties.

UNICEF Starts Initiative to Accept Cryptocurrency Donations

UNICEF announced a Cryptocurrency Fund that will receive contributions in cryptocurrency and grant out in the same digital currency, this being a first for United Nations organizations.

Unicef’s new Cryptocurrency Fund is the most recent effort by aid organisations to try to incorporate digital currencies into their operating model. Cryptocurrencies have the potential to transform charitable giving and increase financial transparency.

This new type of decentralized value transfers offers non-profit organisations the advantage of avoiding extra transaction costs and middlemen that are usually required to move large amounts of money overseas quickly. While these features are useful in a wide array of industries, it would appear that UNICEF is willing to apply the new technology.

Christopher Fabian, principal advisor at UNICEF Innovation, stated the initiative would prepare the organization for the future while also maintaining existing donor systems.

“We see this as a piece of learning that we need to go through to prepare for the next decade,” he said.

The UNICEF Cryptocurrency Fund is a new pilot developed to allow the agency to accept cryptocurrencies, which initially includes Bitcoin (BTC) and Ethereum (ETH). For aid and charity organizations, cryptocurrencies make tracking donations easier, and have the potential to allow donors to see how their money is used.

The organization already started receiving cryptocurrency donations following the launch of the fund, with the first one coming from the Ethereum Foundation itself. The Foundation donated 1 BTC and 10,000 ETH.

“The Ethereum Foundation is excited to demonstrate the power of what Ethereum and blockchain technology can do for communities around the world. Together with UNICEF, we’re taking action with the Cryptofund to improve access to basic needs, rights, and resources,” said Aya Miyaguchi, Executive Director of the Ethereum Foundation.

Furthermore, the new initiative is already discussed with agencies from four nations, including UNICEF USA, UNICEF Australia, UNICEF New Zealand, and UNICEF France.

The importance of aid organizations like UN around the world is growing for an array of countries. As a dispenser of aid, the acceptance of cryptocurrency will certainly be helpful in becoming more transparent and attract more contributions.

Alongside UNICEF’s work with blockchain technology, the UN secretary-general, Antonio Guterres, also published a strategic plan which shows how the UN might become a leader in solving world problems through the use of new technologies. Part of the plan includes the creation of affordable access to financial infrastructure and digital networks for every adult in the world by 2030.

Bakkt Launches Bitcoin Futures Contracts with a Slow Start

Bakkt has finally launched its physically-settled Bitcoin futures contracts. The platform will from now on provide institutional investors with a new way to bet on the expected price of Bitcoin (BTC) in the near term. Currently, the amount of BTC being traded on the exchange has already reached a quarter of a million dollars.

Bakkt is digital asset platform backed by Intercontinental Exchange Inc. (ICE), the parent company of the New York Stock Exchange (NYSE), and began trading its physically-delivered Bitcoin futures products in the first hours of Monday.

Institutional traders have now a market for physically-delivered Bitcoin futures, which means that actual bitcoins are held in Bakkt’s warehouse and will be delivered at the expiry of the contract. This is important for Bitcoin traders because it helps absorb Bitcoin within the market, reducing the available supply and therefore aiding in putting upwards pressure on the price.

The much-anticipated contracts — the first of their kind – went live at 8 PM EST on September 22nd (00:00 UTC September 23rd). Soon after the launch Bakkt tweeted:

Shortly after the launch, only 18 bitcoins had been traded. However within a few hours, it had jumped up to 26 bitcoins, and continued to rise. So far, 28 bitcoins worth $280,000 have been traded on the exchange. At the time of the first made trade, Bitcoin was at $10,115, it has since dropped to $9,990.

The launch of Bakkt was first announced by ICE Inc. in August last year, with the goal to work with a number of companies including BCG, Microsoft and Starbucks, according to its filing with the U.S. Securities and Exchange Commission (SEC).

Initially, the platform was planned to launch in December last year but faced regulatory hurdles, including the federal government shutdown at the beginning of the year.

Bakkt has launched its bitcoin futures products ahead of two other CFTC-regulated exchanges: Ledgerx and TD Ameritrade-backed Erisx. Cash-settled bitcoin futures are currently available on the Chicago Mercantile Exchange (CME), which recently announced its plans to launch options on bitcoin futures contracts in the first quarter of 2020, pending regulatory review.

Meanwhile, many crypto enthusiasts have commented on the apparently slight volume levels, with one trader comparing the platform’s launch so far to patterns typically seen with earlier products:

“CME bitcoin futures traded $460 million on its first week. Current volume is around $700 million. The Van Eck fake ETF traded $0 on its first week.” 

Cryptocurrency investor Ari Paul argued that physical delivery is likely to slow adoption, at least initially, contending that:

“Probably a more gradual scale-up since it’s physical. With CME futures, anyone with the right FCM [Futures Commission Merchant] could immediately trade on launch […] I’d think the incremental demand (beyond CME) would come from people who want to buy or sell physical for delivery, at least at first. Receiving could be instant (use FCM to convert), but I’m kind of thinking depositing physical will be gradual.”

CEO of FX Hedge Fund Three Arrows Capital and Co-Founder of Sensus Markets, Su Zhu, commented that adoption on day one is usually low but it could grow into a flood.

Genesis Trading Announces Acquisition of Quantitative Investment Firm

Genesis Global Trading, an institutional over-the-counter (OTC) cryptocurrency trading firm, has made its first-ever acquisition by buying New York-based quantitative investment firm Qu Capital, according to an announcement Thursday.

According to the news, the firm has acquired Qu Capital to strengthen its trading services by introducing improved order routing and advanced execution tools. Investment startup Qu Capital was founded in 2017, and develops trading technology, including exchange connectivity, order routing, and execution tools.

The firm has struck its first acquisition deal as its crypto-related lending business saw $746 million in loans in the second quarter, increasing its total to $2.3 billion since its launch in March 2018. The firm provides high-net-worth individuals and institutional investors with over-the-counter digital currency trading and leading services.

Genesis CEO Michael Moro has addressed in a statement that the new acquisition will allow the company to raise its technological capabilities. Initially, Qu Capital had approached Genesis to use its trading and lending services. Later on, Moro decided to acquire the firm to integrate its in-house team as well as broaden its trading and lending services.

Genesis CTO, Pat DeFrancesco, said that the firm will add Qu Capital’s tools, which incorporate machine learning and other advanced technologies, into its existing technology stack and new product offerings. For instance, one of the patented products acquired is a smart order routing system which helps facilitate transactions between cryptocurrency exchanges and investors.

Further added:

“This acquisition is the latest effort to bolster our technology capabilities and intellectual firepower in order to better serve clients in an increasingly competitive marketplace.”

Whilst the firm declined to disclose any details on the deal, Moro recently suggested that Genesis could be building an integrated platform where trading and lending can be accessed through one clickable graphical user interface.

At that time, he hinted at users being able to get lending rates through an application programming interface so that customers won’t have to call or email the firm.

“We have been very impressed with the Qu Capital team and believe they will provide key technology enhancements that will benefit our trading and lending clients,” Moro said.

Meanwhile, Genesis has been taking significant steps in its development and expansion. In July, the firm strengthened its leadership team with four new hires and announced plans of expansion into Europe. The new appointments have been made to different departments such as legal, technology and business development functions, including the CTO.

The company has been growing steadily and has added a gross total of over two billion dollars in cryptocurrency loans. Following the new acquisition, it remains unclear whether Genesis will absorb in Qu Capital’s staff. The firm’s LinkedIn page lists 9 employees, including three co-founders Alex Price and Edward Yu and Lucas Schuermann, who all met at Columbia University.