Summary The Grayscale Digital Large Cap Fund offers diversified exposure to major digital assets, rebalancing automatically as new assets gain prominence. Bitcoin's scalability and efficiency issues, alongside its massive market cap, suggest potential for other digital assets like Ethereum, XRP, and Solana to outperform. However, President Trump's erratic trade policies pose a significant near-term risk to digital assets, as they depend on investor risk appetites. If you are a regular investor, you have probably heard of Bitcoin ( BTC-USD ), the largest digital asset with nearly $2 trillion in market cap. You may have even heard of Ethereum ( ETH-USD ), the second-largest digital asset with over $330 billion in market cap. But what about Ripple ( XRP-USD ) or Solana ( SOL-USD ) (Figure 1)? Figure 1 - Top-10 digital assets (CoinMarketCap) Most regular investors probably have not heard of XRP or Solana or any of the millions of other 'coins' and crypto assets that are being created every week. The fallacy of Bitcoin's scarcity value is that although the total number of Bitcoins in existence will never exceed 21 million as its circulation has been capped by design, that does not mean Bitcoin is the only digital asset in existence. Entrepreneurs and speculators can always create a new coin or token. For example, President Trump and the First Lady famously created the $TRUMP and $MELANIA meme tokens in the days before his inauguration to cash in on his popularity. In fact, Bitcoin, aside from being the original digital asset, is sorely lacking in terms of efficiency and scalability. For example, while the VISA network can process 24,000 transactions per second ("TPS"), Bitcoin can only process 7. (Figure 2). Figure 2 - Digital asset transaction speed comparison (Crypto.com) It also takes an enormous amount of energy to 'mine' Bitcoins. Essentially, computers are tasked with solving mindless math puzzles in order to verify the Bitcoin blockchain and to earn rewards. By some estimates, the mining of Bitcoin consumes 176 TWh of energy, which is comparable to the power consumption of Poland (Figure 3). Figure 3 - Bitcoin consumes a lot of energy (Digiconomist) Therefore, there is a possibility that one day, Bitcoin may be overtaken by some other digital asset with better utility and/or higher popularity. For investors worried about such a risk, the Grayscale Digital Large Cap Fund ( OTCQX:GDLC ) could be a fund to consider. The GDLC is basically an 'ETF of digital assets'. It tracks the CoinDesk Large Cap Select Index and holds positions in the 5 largest digital assets including Bitcoin, Ethereum, XRP, and Solana. If other digital assets gain traction, the GDLC will automatically rebalance away from Bitcoin and into these alternatives. However, looking forward, I am cautious on the immediate outlook for digital assets in general, as President Trump's erratic trade policies is cooling investors' risk appetites and demand for digital assets. I rate GDLC a hold. Fund Overview The Grayscale Digital Large Cap Fund is an investment vehicle that invests in a basket of large-cap digital assets, similar to how the SPDR S&P 500 ETF Trust ( SPY ) holds a basket of large-cap stocks. The GDLC fund tracks the CoinDesk Large Cap Select Index ("DLCS Index"), an index of some of the largest and most liquid digital assets including Bitcoin, Ethereum, XRP, and Solana. The GDLC's components are rebalanced from time to time, subject to the Manager's discretion to exclude individual digital assets in certain cases. The GDLC fund is traded on the OTC markets, which means it does not trade on a stock exchange like the NYSE or Nasdaq (Figure 4). Figure 4 - GDLC overview (Grayscale) The GDLC fund currently has $732 million in assets under management ("AUM") and charges a relatively hefty 2.5% management fee. Portfolio Holdings The GDLC fund currently holds 5 digital assets: Bitcoin, Ethereum, XRP, Solana, and Cardano (Figure 5). Bitcoin, being the largest and most well-known digital asset, commands the largest weight at 76.8% of the fund. Ethereum is at 13.1%, XRP is 5.4%, Solana is 3.7%, and Cardano is 1.0%. Figure 5 - GDLC fund holdings (Grayscale) The benefit of buying the GDLC fund instead of buying the individual digital assets themselves lies in the relative safety of Grayscale's custody and the ease of transaction. The GDLC fund's holdings are stored in offline or "cold" storage with Coinbase Custody Trust Company, LLC, a financial fiduciary. Furthermore, as an investment fund, the GDLC fund can be held in certain IRA, Roth IRA, and other brokerage and investor accounts. Historical Performance Has Been Strong Why might investors want to invest in digital assets besides Bitcoin? Aside from being less scalable and less efficient than some other digital currencies, Bitcoin also has another big headwind against it - its size. Simply put, due to Bitcoin's popularity and past successes, the digital asset currently sports a $2 trillion market cap, more than all of the other digital assets combined. As with all assets, the higher the market cap, the harder it may be to 'move the needle'. For example, while $1 billion in net buying may represent ~1% of Solana's market cap, it is less than 0.1% of Bitcoin's. Looking at historical performance, we can see that in the past year, XRP has outperformed Bitcoin, returning 350% compared to Bitcoin's 118%. Surprisingly, even though the GDLC holds sizeable positions in assets that have lagged Bitcoin, GDLC's market returns have outperformed Bitcoin (Figure 6). Figure 6 - GDLC vs. BTC and other digital assets, trailing 1 year (Seeking Alpha) Closing The Gap To NAV Part of the reason for GDLC's outperformance in the past year may be due to the closing of the fund's discount to net asset value ("NAV"). For example, on January 31, 2024, GDLC's market value was $14.01 / share while the fund held $23.44 / share in digital assets or a P/NAV of 0.60x. (Figure 7). Today, GDLC's discount to NAV has narrowed to 0.88 P/NAV. The closing of the discount explains the vast majority of GDLC's outperformance in the past year. Figure 7 - GDLC's discount to NAV has narrowed considerably (Grayscale) However, going forward, I do not expect a repeat of GDLC's large outperformance from the closing of its remaining discount to NAV. Since GDLC is not an exchange-traded fund ("ETF"), its shares are not readily created or redeemed, so investors do not have a way to 'arbitrage' away the fund's discount. Therefore, I expect GDLC may trade at a persistent 5-10% discount to NAV. Ethereum Could Be Due A Rebound Of all the large digital assets, Ethereum's performance in the past year has been one of the most disappointing, as the digital asset has only appreciated by 14%, far less than other digital assets like Bitcoin. Ethereum's underperformance can be traced to increasing competition from other networks like Solana, which is more geared towards meme-coins and Web3 applications, and Ethereum's relative lack of a compelling story, like Bitcoin's 'store of value' narrative. Nonetheless, the outlook for Ethereum may be improving, as President Trump's crypto project appears to have added Ethereum to its holdings and the digital asset garnered an endorsement from Eric Trump, President Trump's son. If Ethereum does rebound and outperform Bitcoin, the GDLC should outperform, given its 13% weight in Ethereum. Ripple Gathers Momentum Another way the GDLC could outperform is if its smaller holdings like XRP or Solana outperform. XRP (Ripple) is a digital asset that underpins the RippleNet payment network. RippleNet is used by major banks and financial institutions like Santander and American Express to conduct real-time cross-border payments. XRP has been gathering a lot of attention in recent quarters, especially as the digital asset has soared by nearly 350% in the past year, with most of the gains occurring after the 2024 election. If RippleNet continues to gain real-world adoption from financial institutions, XRP should continue to outperform Bitcoin and power GDLC's returns. Don't Sleep On Solana Finally, investors should not overlook the potential of Solana, the digital asset that underpins Web3 applications and non-fungible tokens ("NFTs"). NFTs can be thought of as digital trading cards (no real-world utility, but good for showing off one's wealth or popularity), and President Trump's $TRUMP coin is built on the Solana blockchain. Although Solana has underperformed Bitcoin in the past year, if the crypto rally continues and financial markets become as frothy as they were in 2021, NFTs could make a comeback as financial excess often leads to speculators bidding up the display of wealth assets such as NFTs, sports cars, and gold watches. Risks To GDLC In my opinion, the biggest risk to GDLC and digital assets in general is President Trump and his policies. While President Trump has become a vocal supporter of digital assets, including potentially establishing a national strategic 'Bitcoin Reserve', digital assets are also very sensitive to market sentiment and investor risk appetites. When President Trump first announced tariff action on Mexico, Canada, and China during the weekend of January 24th, digital assets immediately plunged, as investors sold off their 'risky' investments (Figure 8). Figure 8 - Digital assets plunged as Trump's tariffs reduced risk appetites (TradingView) Although the tariff actions on Mexico and Canada have been postponed to March 1st, digital assets have not recovered their losses, as investors remain fearful. If President Trump follows through on his tariff threats and causes a large market correction, I believe all digital assets will suffer significant declines. Conclusion The Grayscale Digital Large Cap Fund can be thought of as an 'ETF of digital assets'. It holds 5 of the largest digital assets, as measured by the CoinDesk Large Cap Select Index. For investors who are long-term bullish on digital assets but are worried about Bitcoin being replaced due to its lack of scalability and efficiency, the GDLC fund could be an interesting choice. The GDLC will automatically rebalance into other digital assets as they gain prominence. Looking forward, I am currently concerned about President Trump's erratic trade policies causing a market correction and a decline in risk appetite. Since digital assets are largely 'confidence' assets, they are often the first to get sold during corrections. I rate the GDLC a hold and will revisit the fund as the trade picture becomes clearer.
