$20,000 Bitcoin caps Grayscale’s incredible year

Good morning, Ledger readers. Today, Bitcoin finally crossed—nay, smashed—the psychological mark of $20,000, and is now trading around $20,600. It’s a remarkable milestone for a currency that’s been written off as worthless more times than I can count. 

The record high also comes as validation for a company called Grayscale, which has been a big driver of the current bull market. Grayscale has carved out a fabulous cottage industry by creating ETF-like products that let investors gain exposure to Bitcoin and other cryptocurrencies by means of the stock market.

Grayscale launched in 2013 and now has an eye-popping $13 billion in assets under management. The company, which is behind an ad campaign to persuade investors to ditch gold in favor of crypto, now controls around 2-3% of all Bitcoin in circulation and its owner, Barry Silbert—who was once the youngest stockbroker in the U.S.—has become a very, very rich man.

The question now is whether Grayscale can keep this up. The company has succeeded by exploiting a regulatory quirk to create a virtual monopoly in publicly-traded shares of cryptocurrency. Specifically, it has gotten around the SEC’s ban on Bitcoin ETFs by creating trusts that own cryptocurrency, and then selling shares in those trusts. 

The technical distinction is mind-numbing to everyone but securities lawyers, but has some important implications. Namely, the trust structure means that Grayscale must sell first dibs on shares in the trust only to wealthy investors, who can then unload them on the public market after a year. For its trouble, the company takes a fee of around 2%.

For retail investors, buying Bitcoin this way means paying a premium as shares in the Grayscale trust trade above the underlying price of Bitcoin. Why do this? Why not just buy Bitcoin directly from Coinbase, Kraken or another exchange? It turns out there is an appetite among some institutions that, for legal or other reasons, prefer to get their crypto in the form of shares. Likewise, trading-happy millennials have been buying the Grayscale stock (GBTC) at greater volumes than shares of Netflix or Disney.

This is a credit to Grayscale’s ingenuity in identifying a niche market and creating a product to serve it. But according to Ryan Selkis, the founder of crypto research firm Messari, Grayscale’s success also reflects terrible policy on the part of the SEC. The agency’s refusal to greenlight a Bitcoin ETF, says Selkis, has created a system that enriches the wealthy—those who can plunk down $50,000 to take part in Grayscale’s private offerings—while stiffing ordinary investors.

Given this situation, it feels like a matter of time before the SEC, which is about to get a new chair, comes to its senses, or before another firm figures out how to copy Grayscale’s lucrative model. And indeed, some newcomers, including a firm called BitWise, are trying to do just that. But for now, Selkis says Grayscale’s deep pockets and first mover advantage means no one is likely to dislodge it anytime soon.

Meanwhile, Grayscale doesn’t appear concerned about the future. I asked the company if it was worried about competitors or regulators killing its golden goose. In response, Grayscale managing director Michael Sonnenshein told me “The crypto industry is still young, and we believe the pie has a lot more room to grow,” adding that he welcomes competitors because they will help add liquidity and infrastructure.

Bottom line, Grayscale doesn’t sound too concerned about their fabulous ride coming to an end. Either that, or they’re too busy bathing in champagne over $20,000 Bitcoin to care. More news below. 

Jeff John Roberts

@jeffjohnroberts

jeff.roberts@fortune.com

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