Bankless - 39 - Grayscale: $10B Bridge to Crypto | Michael Sonnenshein

Starting point is 00:00:01 Welcome to bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. David, what did you think about today's episode? This episode with Michael, sun and shine, I thought was really fantastic. I've listened to a number of different episodes with Michael and other members of the gray scale team about, you know, what gray scale is and what they do. But I never really felt satisfied with with other podcasts and how they approach the subject matter of gray scale and how

Starting point is 00:00:51 gray scale fits into the rest of the cryptocurrency ecosystem. So Ryan, I actually thought you did a fantastic job as host on this podcast. And so tip of the tip of that hat to you, I think the flow of conversation and the topics and some of the things that we talked about really did a fantastic job kind of putting into perspective, you know, first what gray scale is. And then also it's role in relationship to Bitcoin and Ethereum. Yeah, you know, I think part of this, David, was like, I don't think people totally understand what GBT is and what ETHE are. I got a text from a friend of mine, he's actually an investor, and he's like, hey, I own some Eith and Bitcoin on Coinbase, but I noticed this GBTC and this E in my Schwab account, what the heck are they? And so these are,

Starting point is 00:01:38 of course, grayscale products that you can buy inside of a brokerage. I think we spent a lot of time in the first part of this actually talking about what those products are. Are they real crypto? Do they represent crypto? Who has the private keys, who secures them? How are they priced compared to buying it on spot? So I think this will be pretty handy for you if you're a retail investor and you're like, hey, I want some exposure into these assets. Should I buy them on Coinbase or some spot market or should I buy them inside my brokerage, these great scale assets buy them that way? It sort of starts to answer that question. Then we got to talking about how the institutions are coming. They're already here and what they think about things like defy and Eith as an asset,

Starting point is 00:02:27 which started to get really interesting in the second half too. When Michael came on to the podcast and before we started recording, I kind of gave him the pitch of what bankless is, right? And so I told him that the through line throughout bankless is, you know, how do we live a life with crypto assets and to create a world without banks, right? Which is actually kind of something, I think, from the grayscale side of things might be kind of a weird thing to hear. And that is kind of a little bit true. The bankless through line and also the grayscale product are a little bit at odds with each other, right? Because grayscale and its relationships with banks, it's a very bank friendly product, bank friendly environment. But, you know, I think in the bankless world, we, we, we,

Starting point is 00:03:07 like the banks that like crypto. And that's exactly what Grayscale is, right? And to me, what Grayscale is this gigantic coupler between the crypto world and the legacy finance world. And Grayscale's doing a really fantastic job of helping the narrative of Bitcoin, helping the narrative of Ethereum and cryptocurrency really mature. And they have done a fantastic marketing campaign literally for the cryptocurrency industry, right? Promoting the value and merits of crypto to the greater world. And so as far as financial institution goes, we like Grayscale. Yeah, that's interesting that you put it that way, because, you know, I agree with you too. Look, great. I'll be the first to say, Grayscale is not fully bankless. It is a banked crypto option. However, you know, you've used this metaphor so often of like,

Starting point is 00:03:56 who's on the boat, like Noah's Ark and sort of the flood. Well, Grayscale is like the bridge to the arc. It serves as a very useful function to start getting liquidity and start getting value inside of the crypto ecosystem. Now, if we just stay on that bridge portion and we never actually get to the fully bankless arc, I think that's a big problem. And personally, that's why I have a problem with the way Bitcoin is scaling. It's a lot of the Bitcoin scalability measures seem to happen within custody, within crypto asset banks, within, you know, gray scale type investment vehicles. But I don't think that's where the world is going to camp out and stay. So this is a great first step.

Starting point is 00:04:39 And I'm actually optimistic about what Grayscale is doing to help get people on the arc and on the path towards going bankless. You know, Bitcoin and some of these products in a retirement account, that's just the gateway drug. People aren't stopping there. They're going to dig deeper. They're going to discover how to be fully self-sovereign without using a bank whatsoever. And that is my hope and why this I think is a really useful episode for us. Grayscale's assets under management have absolutely exploded. They have $7.5 billion under management. And I think there's going to become a really interesting friction. Maybe. Maybe. I'm just speculating here. But between Grayscale and the United States, right? Because Grayscale's making it really easy to purchase Bitcoin, right? And as a financial tool that is kind of diametrically opposed to the dollar and the Federal Reserve and money printing, it's kind of, there's this. interesting relationship between Grayscale's growth and the power of the dollar. When

Starting point is 00:05:38 Grayscale gets bigger, I see it as the dollar weakening. And Grayscale is doing it from inside the United States, right? The calls coming from inside the house. We didn't talk about this subject with Michael, but I think that is going to be something to pay attention to moving forward. Yeah, I think the truth is right now that nation states are not worried about crypto eroding their reserve currency status at the moment. You know, they're worried about breaking SEC accredited investor rules and that sort of thing. They're even worried about Bank Secrecy Act sorts of things. But that could certainly change. When we talk to Michael and he said, hey, the majority of people who bought crypto within the last nine to 12 months or so, they bought it

Starting point is 00:06:23 because of COVID, because they were concerned about money printing from the Fed. That's why they bought it. As soon as nation states start to feel that pressure on their reserve currency status, you can bet they're going to start to turn their eye on crypto and all of the crypto banks that power the ecosystem. If there's one big takeaway from this podcast is that Grayscale is going to help number go up. With no further ado, let's go ahead and get into the podcast. But first, we're going to talk about some of the fantastic sponsors that make this show possible. If you are looking for the front page of Defi, look no further than zirion.io. Zirion is your home base for managing your defy portfolios.

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Starting point is 00:10:16 podcast michael son and shine he is the managing director at grayscale investments which is the largest digital currency asset management company by far. You may have seen a product called GBT or ETHE in your Schwab account, your Fidelity account. These are products that are a way to give you price exposure to ETH and Bitcoin. If you've ever wondered what those things are, what they're composed of, how institutions see assets like Ethereum and Bitcoin. We're going to talk about all of those things with Michael today. Michael, welcome to Bankless. How you doing? I'm great. Thanks so much for having me. I'm looking forward to chatting.

Starting point is 00:10:58 Well, it's been a pleasure. You've been in the space for like, I think, seven years or something now. Is that right? Seven years. It feels like a lot of know. I think what's the old adage now? A year or like a week in the digital currency world is like a year in the real world. Okay. Something like that. Yeah. So I don't know how old you are. That's like Methuselah age. You spent millennials in this space already. But you are now the managing director of Grayscale, which is closing in on something like six billion assets under management. Last quarter, you guys did about a billion in inflows. How does that feel? It's honestly been a true pleasure.

Starting point is 00:11:44 And I'm really humbled by the opportunity I've been given to be a part of building and growing this business. I couldn't have imagined that we would see this asset class develop and flourish in the way that it has over the past seven years and riding all the ups and downs and stagnant periods. It's really been incredible. We're actually now, as of last night, at $7.5 billion. Oh, my God. That's partially because Bitcoin keeps growing in price, right, as well as inflows. It's not just inflows. I'm sorry, it's not just Bitcoin price appreciation. It's inflows. It's very, very strong, steady inflows. And, you know, I'm happy to dive into that with you guys today. But I'd also probably tell you that is as proud as I am of being a part of this and really being a leader and helping to shape and mold the great scale business and seeing us grow. When I joined, it's $60 million of assets. I mean, now I've over, you know, seven billion, like I told you.

Starting point is 00:12:54 I started, we had one product. Now we have 10 products. I'm probably more proud of the team of people that I put together. It's a really interesting, eclectic mix of forward thinking, thoughtful, caring, intelligent, collaborative people. And I think everybody is really taking what they've learned working for the most part in the traditional finance world at banks. and applying some of those best practices and leaving some of those worst practices behind to build what we think is the asset manager for the next generation of investors. It's got to feel like you've been right about a few things in crypto too, right?

Starting point is 00:13:36 I guess you can say that. I attribute a lot of it to luck and, you know, happy to talk about what my journey was getting into crypto. But, you know, a lot of it is just, you know, time and place and good luck. Well, Michael, congratulations on all the success. If we were to wind back the clock, like maybe a year or two years, and if somebody told you that in the future, you're going to have $7.5 billion assets and management, what would your reaction have been back then? I'll believe it when I see it. Was that going to be a believable number? Was that something that you actually could foresee happening at that time? Or has this kind of just blown expectations out of the water? It, no, it was always within, it was within, you know, within reasonable grasp. It was just a

Starting point is 00:14:26 question of how fast we would get there. You know, even today talking to you at seven and a half billion dollars underpinning the gray scale family of products, I still have to say, it still just feels to me like we're only getting started. That's super impressive, but I think anyone in crypto knows those words very well, because we say them often. Crypto is just getting started. And therefore, Grayscale is probably going to be a big part of that story. But, you know, before we talk about institutions and inflows, actually, you never heard you, Michael, on a podcast, talk about products from a retail investor perspective. And that's where I think we'd like to start talking about the products themselves,

Starting point is 00:15:11 but like putting a retail investor hat on. So if I'm somebody with a Schwab account or a Fidelity account, some sort of a brokerage, and I'm based in the U.S., what do Grayscale's products actually look like to me? So can we start there? Maybe like, how does a retail investor buy your products in their brokerage account. What does that look like? Happy to talk through that. So, you know, for us, we now have 10 products underpinning the Grayscale family. Nine of those products facilitate exposure to a single digital currency.

Starting point is 00:15:52 And the 10th product is a diversified basket of large-cap digital currencies. And so we think of the Grayscale product lineup as really almost. almost like a toolkit. And every investor uses the tools within the Graysfield toolkit in a different way. Some investors only use one grade scale product. You know, every quarter that passes, we see more and more investors adding more great scale products to their portfolios and inherently diversifying their exposure within the crypto space. But it's a unique constituency of products. and I think we're really serving a broad base of investors. So it's important to make a couple of distinctions as I talk about this.

Starting point is 00:16:39 I want to try and be as clear as I can be. We continue to raise assets on a primary issue inside, so new assets, new shares of our products being created through ongoing private placements. So if you're an accredited investor, so these are mostly high net worth individuals and family offices, hedge funds, institutions, they come directly to Grayscale and can buy shares of any one of the products at the product's daily pricing at its daily net asset value. What we've done, though, is we've also made these products available to the public market. And so far, six out of the 10 products that Grayscale is responsible for managing and sponsoring have also been, quote,

Starting point is 00:17:28 turned on having public quotations in the U.S. market. And so those products are for Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, light coin, as well as our diversified fund, I mentioned, the Great Scale Digital Large Cap Fund. So if you're an investor, whether you're a large investor, a small investor, you have a lot to invest, a little amount to invest, you can go to your brokerage account or retirement account and buy any one of those products in any size or for any period of time that you may want to. And for a lot of investors, that's been a really easy, accessible way for them to gain

Starting point is 00:18:11 digital currency exposure in those types of accounts alongside the other assets they're invested in, whether those are stocks like Netflix and Apple and Tesla or bonds or whatever it may be. So we really do serve a whole broad swatch of the community, but it is definitely worth noting that the products on the public market have historically and currently do trade at a premium to their actual net asset value. And so it's something for investors to be aware of because that means they are buying exposure oftentimes and historically at, you know, inflated levels of varying degrees. And it's also important to note that we as a firm aren't involved in the public trading side of our products. So the price at which, you know, you mentioned GBT or ETHE, the public ticker symbols for our Bitcoin and our Ethereum products. Earlier, as we were talking, those products prices every day in the market are always being driven by market forces. And so we're not involved in setting the prices or maintaining the prices of those products.

Starting point is 00:19:19 So just something else for people to note as they're thinking about it. Super cool. We're going to get into all of that. And I want to camp on this for a bit. So let's keep with our retail investor product on, hat on, rather somebody who has a brokerage account, like any brokerage account, the way you'd look up an Apple or Netflix, you can look up something called GBT, which essentially gives you price exposure to underlying Bitcoin, the underlying Bitcoin asset, or ETH. E-E-E-T-H-E, you can type that into Schwab and get an asset that has price exposure to ether, the asset, of course. It's not the same as spot price exposure. We're going to talk about all of that. So one quick question before we get in. Is this available for international

Starting point is 00:20:07 investors too, or is this kind of US-only? Oh, no, it's available to anybody on both sides. So on the private placement side, about half of our investors are offshore. And on the public market side, certainly no reason that investors all around the world, so long as they can access the U.S. securities market, they should be able to access these products as well. Okay. And then one nice thing we talked about is you can access them in a traditional brokerage system that you might have. But of course, a lot of retail investors, they have the majority of their, their assets in retirement accounts, 401Ks, IRAs, that sort of thing. And they can get these products inside of those retirement accounts, which is kind of nice.

Starting point is 00:20:54 And these are sort of the only large products that I know of in order to do that. But one question, you know, people are used to buying things like ETFs, right? And, you know, generally investors with brokerage accounts, they understand what an ETF is. But what's the difference between a GBT or an ETH and an ETF? Well, so ETS are different structurally. So they have, you know, constant creations and redemption programs, meaning that there are participants in the market that are constantly creating and destroying shares. And those forces act to always keep the product as much as possible in line with its actual value. The other difference, because we don't operate a redemption program, is that our products trade on the OTC market, which is where a lot of foreign companies trade in the U.S., companies like Roche and Adidas and Volkswagen, et cetera, that's where the gray scale products are quoted as opposed to a national securities exchange, like the New York Stock Exchange or NASDAQ.

Starting point is 00:22:08 So those are probably two of the biggest differences of our products against what they would be if they were ETFs. Although it is worth noting that both gray scale Bitcoin trust and gray scale Ethereum trust are the first two and the only SEC reporting companies with respect to the digital currency investment product space. And what that means is that they file 10Ks and 10 Qs and have the same reporting obligations. obligations and standards as investors are used to seeing for other public instruments or public companies. So they're about as regulated and over and have as much oversight and disclosure obligations as investors should see for other things they invest in. All right. So that is one, I guess, element of transparency is basically they have the same level of transparency as, you know, a stock might have. But when they're buying a GBDC or an EFI, any of these products,

Starting point is 00:23:05 I want to get into like what are they actually buying. So first, where are the private keys actually held? So if I'm buying, you know, Bitcoin or ETH on Coinbase, then Coinbase is custodying my private keys, of course. And then if I request those to be sent or redeemed to a Bitcoin or ETH address that I hold, then Coinbase will go and do that. But in this case, you know, if I have one of the. these products in my brokerage account, they can't ever be redeemed for the underlying. Is that correct?

Starting point is 00:23:40 And then where are the private keys actually held? That is correct. So the two products you're talking about, the Bitcoin product and the Ethereum product, they're each just solely and passively invested in the digital currency for which they're named. So Grayscale Bitcoin Trust holds nothing but Bitcoin. Grayscale Ethereum trust holds nothing but Ethereum. These products don't use leverage. They don't use derivatives. They don't even have a pennies worth of cash inside of them. They're just passively invested in the underlying digital assets themselves. And grayscale custody is the underlying assets underneath all of our products in the Coinbase

Starting point is 00:24:19 custody trust company solution. And that is, you know, a cold storage solution that, as you may imagine, involves many, many, many, many different signatories, parties, time delays, all kinds of things to be able to access any of those coins. So no, investors do not own the Bitcoin or the Ethereum directly. They're owning shares of a trust, and that trust owns its underlying digital currency, and that's how investors are getting that exposure. This is kind of like owning shares of some sort of a gold trust. You know, you already gave the distinction between like an ETF and a trust and why this is different. but lots of people are familiar with gold ETFs or maybe there's even gold trust, I'm not sure.

Starting point is 00:25:06 Yeah, or if you wanted to gain exposure to oil. There's a product that gives you exposure to oil or to help your stuff. Yeah, and somebody's custodying that, right? So like the gold that you're buying is eventually it's, you know, in some big vault somewhere somewhere somewhere somewhere somewhere somewhere in somewhere somewhere in somewhere in somewhere in somewhere in somewhere in somewhere in somewhere, right? Correct. Yeah, I don't want to tell you that that's true across the board because some of the products you're referencing do use derivatives and aren't one for one. I can, you know, say with assurance that our products are fully invested in and backed by the digital asset that we're, you know, naming each product for. Okay. So now let's get back to keeping our retail hat on. Let's get back to the fees, right? So obviously, when you buy, crypto on Coinbase or something at spot price you might be paying some transaction fees to a coin coin base for example. But you're not paying annual management fees. I have to make that purchase. But these products do have an annual management fee. Is that correct? They do the same way all investment products deal. Got it. And that fee is what? Like 2.5% or so? Or does it range?

Starting point is 00:26:23 It depends on the product. The Bitcoin product has a 2% fee. The Ethereum product has a 2.5% percent annual fee. Gotcha. And I imagine some portion of that goes to like pay for custody, but also general administration of these products themselves by grayscale. Is that correct? Yeah. I mean, that's the only fees that there are. There's no upfront fees. There's no back-end fees. There's no performance fees or carry or anything like that. And actually, investors often ask about this. So it'd be great to set the record straight with, you know, your audience, which is that if you invest in these products, it's not like you're going to get some separate bill for the management fee or that somehow what you're investing, something is being deducted away from you. It actually is

Starting point is 00:27:12 all behind the scenes. And what I mean by that is that the management fee accrues daily in the digital currency itself. So if you buy, you know, great scale Bitcoin trust, and that has a 2% annual management fee, well, every day of the year, the Bitcoin to share ratio decays by one 365th of 2%. So we actually take the management fee out in the underlying Bitcoin itself. So just want to set the record straight on that so people don't think it's anything other than that, which is truly the way most commodity-based or a lot of similar investment. products structure their management fees. Michael, does that mean that Grayscale pays itself in Bitcoin and Ether as is profits? It does. Our revenues are derived solely from our management fees. So we are

Starting point is 00:28:09 taking the price risk on the underlying currencies themselves. So when Bitcoin goes up, when Ether goes up, Grayscale actually is, well, you guys just have as much exposure to the industry as as anyone else. I think that's actually a really great way to align the values of crypto with what you guys are offering. I think that's really cool. Indeed it is. Another thing that you mentioned on price. So again, keeping the retail investor hat on, right? So the one thing to keep in mind is the management fee.

Starting point is 00:28:39 And I think folks know what that is. If they purchased mutual funds or stocks, they've seen those sorts of fees before, that's different than buying a spot, of course. And the other thing that you mentioned earlier, and I want to dig back into this to make it to make it clear, Mike, is that there can be a premium to nav price if somebody is purchasing a GPDC or an EFE in their brokerage account, right? And you mentioned that's like, that's because that's, there's a secondary market, right, for retail investors in the brokerage essentially. And that's where they're paying.

Starting point is 00:29:13 You guys don't control that price. The market does. But it's something for retail investors to keep in mind because I think I was, I was looking this morning, maybe GBTC was about 15% over now, spot price, something like that. But Ether has been up to 800% over spot price at some points this year. It's down a lot from that. But that represents a premium to what they could be purchasing ETH at, an 800% premium for what they could be purchasing ETH at an exchange.

Starting point is 00:29:49 Is that correct? Anything more you'd say on that? Again, all of that's driven by market forces and not something that Grayscale is dictating or putting into the market. Yeah, totally get it. But it is definitely something for folks to keep in mind as they're evaluating their investments here because that can fluctuate up or down. And you guys really have no control over how it fluctuates. That's exactly right. Michael, does that premium simply imply that there is so much demand for crypto that people are willing to pay that premium?

Starting point is 00:30:23 on the legacy stock market in order to have exposure to these assets? I think it really is driven by market forces, so it's really hard to say. I think one thing that certainly may be attributable to driving that premium is the fact that, you know, there is no redemption program, and this is, you know, really the way in which investors get liquidity is this robust secondary market. but also because of the novelty and the, I guess, yeah, I guess really novelty, you know, there are no other, you know, listed securities where investors can gain exposure to digital assets right alongside the other things that they're invested in.

Starting point is 00:31:06 It does seem over time that that premium does tend to drop, right? GPTCs has dropped quite a lot in its history and even we're seeing eath drop quite a lot. Is that kind of your general anticipation that it will kind of drop far closer to that haven't I think over time, you know, markets have a way of ensuring that things get ironed out and, you know, information gets disseminated. And we try to do our very best certainly to make people aware of, you know, all of these kinds of risks that relate to investing in products, whether they're ours or other investment products for that matter. And over time, I think the market works all of those things as.

Starting point is 00:31:50 You guys, there is so much left in this interview. We talk about Grayscale's drop gold advertising campaign, which has really been the biggest advertising campaign to come out of the crypto space to targeting the rest of the world. We also talk about the value proposition for Grayscale for retail investors, as well as Michael's future predictions for how large the Grayscale Trust will grow in assets under management. But first, before we get to those conversations, we're going to take a moment and pause the interview to talk about some of the fantastic sponsors that make this show possible. When you own crypto, what really matters is the security and ownership over your assets. Being a part of the bankless nation means having complete sovereignty over your crypto. The easiest

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Starting point is 00:35:31 Check out the products that WIREN has to offer at y-earn.finance. That's y-e-a-r-n.finance, which I also have a nice statistics page to see what other people are doing. So what do you think the value proposition overall is for the typical retail investor? You know, it comes to mind that one is, hey, you can really easily get some price exposure to these assets inside of your existing retirement accounts. So if you have lots of money in a 401k and you want to diversify into crypto, you can you can kind of do that. So as long as your retirement account is locked in the brokerage, this could be an attractive way to essentially put those funds to work in crypto. Is that the bulk of the value proposition, at least for these retail investors?

Starting point is 00:36:16 I think that's certainly one of them. I think a lot of investors have no real understanding of the digital asset landscape because it's new, right? And that's not their fault. And so I think they have difficulty figuring out where are the best places. to buy or transfer or how to transfer or how to store or how to save keep digital assets. And to kind of go around or alleviate any of the aforementioned challenges, they have the ability to buy that same exposure, but through a titled security,

Starting point is 00:36:52 which I think is just a much more familiar experience to them, not to mention doing it in a tapped advantage manner. You're saying like, so someone like my parents, for example, they're not maybe comfortable with creating a whole new account on this thing called Coinbase, but they're very comfortable with their brokerage. And they're also scared of like private key management. This essentially gives that to them all in one package. Exactly. Can we talk a little bit about the accredited investor side? So if that's how it looks from a retail perspective, accredited investors have a different set of options

Starting point is 00:37:27 because they can buy these shares directly from you. And of course, In the U.S., there are accredited investor laws that mean an accredited investor is a person with over a million in assets or 200K per year. You guys, of course, didn't put these laws in place. They are, such as they are in the U.S. And I, for one, think that we need to rethink these laws entirely and not make them based on wealth. I don't know if you guys caught wind of this, but the SEC actually just updated the definition. So it has expanded and that does allow more people to then be considered accredited investors, things like having certain types of licenses, like securities licenses and things like that. So they are rethinking some of that and I'm sure it will continue to evolve over time.

Starting point is 00:38:16 I hope they do and I hope they rethink it. My understanding is these newest changes open it a little bit, but it's kind of a crack in the window. It's still not giving the average retail. I think that's a fair assessment. It's a step in the right. direction and I think we're right alongside you. We believe in, you know, the democratization of the capital formation process and, you know, people should have access to make certain investments. And, you know, if they're sophisticated enough, et cetera, it shouldn't solely just be based on income or

Starting point is 00:38:46 kind of network. Yeah, absolutely. Okay. But so say there are accredited investors listening to this, they have a different option, which is they can buy these shares directly from grayscale. And then how does that work? Do they have to hold them for some period of time? And then essentially, if they want, they can exit them into the public market as GBT or ETHE. And there's sort of an arbitrage opportunity there for them. So yeah, that's exactly right. So investors, if you're accredited, they can buy shares, newly created shares of the fund directly from us at NAV. And in our Bitcoin and Ethereum products, there's a statutory six-month holding period before they can sell those shares on the public market. And it's really as simple as that. Investors are doing this

Starting point is 00:39:36 in a taxable way, in a non-taxable way, putting these in retirement accounts, et cetera. But there's, quite a few options there. It's pretty cool because there, I guess for that class, there is an arbitrage opportunity there, it seems like, because ideally they could purchase at more close to nav price, basically, and then sell it a little bit higher. in the secondary market. That's, that's probably the carrot there for them. But when you guys are talking about inflows, and we, we sort of kicked this off in the intro saying that you guys did a billion in inflows in Q3. Those inflows are all coming from these accredited investors, right? So you're not tracking the amount of purchases on secondary markets in brokerages and things like that.

Starting point is 00:40:22 The inflows are actually coming directly from accredited investors. Is that correct? Correct. So when we're talking about raising assets or expanding our investor base, we're talking about new inflows from accredited investors, exactly. So who are these investors? Well, I think one of the most interesting things about it is the fact that we are dealing, well, let me first say this. I think most people think that crypto investors are just one kind of individual. or one kind of entity or someone with just, you know, a certain very specific investment mandate. We actually are really empirical evidence of the fact that that is in fact not the case. So we deal with high net worth investors, family offices, hedge funds, registered investment advisors, financial advisors, endowments, pensions. It really runs the gamut.

Starting point is 00:41:22 But I think what's even more interesting is the fact that it's, not any one kind of investor. So you have this maybe preconceived notion that it's people that are momentum traders or people that are, you know, technology investors. And actually, when you look at our investor base, it's everybody from global macro funds to risk arbitrage funds, to venture investors. I mean, it's literally deep value investors. It really runs the gamut. So I think, we like to try and make it as clear as possible that folks understand that while crypto is something that we feel now must be considered by all investors the same way you should consider everything that's out there as you think about building out a diversified portfolio, that it will not

Starting point is 00:42:14 be something that should end up being in everyone's portfolio because it's not for everyone, but at least needs to be considered. And we certainly have evidence that it's not only being considered, but it's being acted upon by investors of all different sizes and investment mandates. When people in crypto repeat, the institutions are coming. Is this what they're talking about? Are these the institutions? I think a lot of people have been saying the institutions are coming. I think gray scale is the evidence that the institutions have been coming are here and only more of them are showing up. Michael, what's been the catalyst, would you say, for such a rise in the assets under management for gray scale?

Starting point is 00:42:56 Oh, well, I think you have a confluence of a bunch of really interesting factors at the moment. I think that there is the narrative that's generally well received now, which is one of, you know, assets like Bitcoin are a digital gold or digital store of value and, you know, maybe can can help insulate investors, um, portfolios. when markets get rocky or there's instability or things of that nature. And perhaps that's such a now widely held notion because we're living in a world that is really and truly characterized by digital as opposed to physical exchanges. And so perhaps as people think about what constitutes a

Starting point is 00:43:43 store of value or an inflation hedge or any kind of instrument that may be a flight to safety, it probably should be one that's much better suited for a digital environment than a physical one. you'd certainly see that differential between something like Bitcoin and something like gold. I think a lot of investors are excited by the potential of certainly Bitcoin being a value mechanism for transfer around the world. And so I think we look at how fast information moves around the world, you know, pretty much seamlessly and for free.

Starting point is 00:44:17 But somehow value has not kept pace with those speed at which information moves. And so they're excited by Bitcoin. potential to move value around the world instantaneously and pretty much for free. I think, you know, those are kind of some of the newest and most widely held reasons that we're hearing from investors that they're excited about investing in digital assets like Bitcoin. I think we've also seen over the last year quite a propensity of investors to get excited about Ethereum and the idea defy or decentralized finance and all these new applications that are being developed on protocols like Ethereum. And so we've seen a material uptick there as well. And then I think certainly we'd

Starting point is 00:45:03 be remiss to not discuss, you know, within 2020 itself. We have seen such a crazy world over the past year. We saw this massive de-leveraging in the market in March as the COVID-19. pandemic brought the global economy to a grinding halt. And even though crypto actually sold off even harder, dropped almost 50% in a single day than other asset classes did, this was a year where, although it's happened many times before, I think there was a lot more eyes and ears keeping tabs on crypto, is that it came back harder and faster than probably it ever has before. And was once again, a real moment for crypto and Bitcoin and Ethereum to really demonstrate the resiliency to the investment community. And I think in a world now that is characterized by perpetual money printing and

Starting point is 00:46:08 fiscal stimulus intervention, a lot of investors are thinking about what assets like Bitcoin may have actual verifiable scarcity and thinking about the juxtaposition of how, having an asset like that in their portfolio compared to, you know, a fiat currency like the dollar, which somehow seems to be getting printed to no avail. And so it's kind of those kinds of conversations we're having about investors that I think is really not only moving a lot of investors off of zero, but we've also really deepened a lot of our investor relationships this year who are using any of these pullback opportunities to really average down or opportunistically add to their positions.

Starting point is 00:46:51 We've definitely been beating the drum on the bankless podcast about how 2020 has been the year where the world begins to understand how Bitcoin fits into it, what niche Bitcoin provides. And I think the evidence of the massive inflows of value into the great scale trust are just very strong evidence of that. However, over the last six, nine months, we've seen, while there's generally been overall bullishness of digital assets and Bitcoin, there have been like instances, where there are certain market news cycles or market events or news events that people really get excited about.

Starting point is 00:47:29 Like one of these would be the Paul Tudor Jones memo or micro strategy putting Bitcoin on its balance sheets followed by Square. When you guys are conversing with your customers or your investors or people that are putting value into the Grayscale Trust, are there like peaks of interest around events like this or is it more of kind of just a low and sustainable interest rather than any volatile interest at a momentary notice? You know, investors surprise us all the time. There are people who are investing now who have been kind of sitting on this idea for the last

Starting point is 00:48:12 six or nine months. And when they see the likes of PayPal and, you know, other important milestones transpiring, it gets them off of zero. It's really tough to say. What I do like to promote as much as I can, though, is having been in the space for the past seven years, I have dealt with and had the fortunate opportunity to deal with some of the world's most storied, intelligent,

Starting point is 00:48:38 you know, public investors who have seen, you know, everything in careers that are double or triple, you know, the length of my career and have navigated all kinds of things. And I continue to remind all these people that no matter how smart you are, no matter how many things you think you've seen in your career, I tell people that I've never seen somebody really successfully time their exposure to this asset class. And that you either need to decide you want this exposure or you don't. You should size your allocation appropriately.

Starting point is 00:49:12 And, you know, I think for most folks, we try to encourage them to take a more medium or long-term horizon. because we do think it's so early for the development of the asset class. Do you guys at Grayscale make any effort in trying to learn who or why or what motivates people who are interested in purchasing, you know, GBT or ETH or, you know, adding value to the trust? What goes on? What are the communication channels between you guys and your customers and also you guys and your investors? Sure. So, you know, I think we have what we hope is a really robust communication channel. We issue and publish a tremendous amount of content so that we're keeping investors informed of things that we feel are important for them to know and understand that that is, you know, about this ecosystem, which is changing every day.

Starting point is 00:50:05 I think that causes our investors to be pretty proactive with us as well. Certain areas of the market, they look to get exposure to certain products they're interested in us launching for them in the future. or certain questions they have about events taking place in the ecosystem or how we might think certain announcements or certain initiatives may impact the asset class, regulatory changes, things of that nature. I think what we find though is that ultimately it's those investors that really spend the time thinking about and researching and working on their understanding of crypto because it is so different from all the other things they've ever invested in, those are the ones that we are still having a hard time finding anybody who really does the work,

Starting point is 00:50:54 really, really does the work on understanding crypto. We still can't find someone who does that and doesn't come out on the other side of that research, totally amazed by the asset class. Doesn't mean they end up necessarily investing, although often they do. But it's usually those who kind of bulk or reject the asset class or those that just haven't spent enough time understanding it. So using these communication channels that you have with your customer and investors, and then also understanding that on the other side of the equation, we have

Starting point is 00:51:22 a lot of excitement around events like Paul Tudor Jones memo or micro strategy. How does, do you guys use these, the information that you get from your customers and investors to change up your messaging to kind of iterate and refine how you guys pitch your products? Is there anything about that process that you can shed light on? Totally. I think if we're hearing often from investors about similar issues, that, they want unpacked, then we try and host a webinar around that idea or bring in speakers for that kind of idea or publish ourselves on that kind of an idea. You know, I think we try to be

Starting point is 00:52:00 as proactive and as non-reactive as we can be so that, you know, we sitting inside this ecosystem every day can do our best to stay in front of investors and what they want. But it's a very quickly evolving landscape, as I'm sure you know. So, Michael, I was running through your last report and looking at, like, what are the most popular products? It seems, it seems, correct me if I'm wrong, it seems like Bitcoin is far and away, the most popular, 40 million in inflows, 12-month trailing. Next was the Ethereum Trust with 9 million.

Starting point is 00:52:35 Then you had the large cap fund and sort of everything else. Is that generally how it goes? It's like Bitcoin, number one. It's Eiff coming in, number two, and then it's kind of everything else? or what's sort of the popularity of products been recently? Yeah, I think what we've found historically is that Bitcoin was usually most investors first foray into the asset class. We have seen the emergence of this kind of Ethereum first or Ethereum only investor, which has been really interesting. And then we've also seen a lot of investors pouring into the gray scale digital large cap fund because it gives them the ability to make a single investment.

Starting point is 00:53:14 and in doing so gain broad-based exposure to the asset class, right? It's a basket of large-cap digital currencies. That being said, a lot of the other themes within our product lineup still resonate with investors quite a bit. The idea of financial privacy and investors investing in Zcash and Horizon, investing in like coin and Stellar and XRP, I mean, I don't feel like at this point there's anything that's really an underloved product in the Grayscale lineup. But I think from your perspective, it's easy to see why you may think that because they all have varying degrees of AUM and sizes of AUM rather. But it's also not really an equal footing. Each of these products were launched

Starting point is 00:53:57 at different times and different market conditions. So it's a little tough to say. So you mentioned D5 being one of the kind of the three pillars of narrative that you've seen increase this year. What is the thesis for? for Ether in particular? Is it sort of exposure to the upside of Defy or why are these institutional investors attracted to Ether or even in particular the Ether first investors? Why do they do that? It's tough to say. I mean, I do think a lot of it is probably attributable to Defy. I think, you know, this year has been a really strong performance year for Ethereum. It's probably doubled the return that Bitcoin has had this year. They both had very strong.

Starting point is 00:54:41 years and so a lot of that could be investors wanting to participate in that robust return stream. But it's early to say it's really only in the past quarter or two that we really started to see that emerge and you know as as you're noting we put out this report on a quarterly basis to look at our investor base and flows and try and give investors actionable intelligence and you know it's up on the graciel website and we invite people to check it out. So I think for us is going to be one of those metrics that we continue to revisit, you know, quarter after quarter. What's kind of the take on defy among these institutional investors?

Starting point is 00:55:18 What do they think about it? I think some of them are meeting it with a lot of optimism and excitement and others with skepticism. I think that for a lot of them, if they spend some time in and around defy, they're starting to realize that, you know, we're not just talking about the digital currencies themselves, but actually, actually, you know, they're able to start sinking their teeth into actual applications of these technologies, which I think helps them to understand them more than just as, you know, digital versions of money. As far as allocation goes, you know, we're always thinking through sort of allocation of like fiat versus crypto, you know, different people in bankless take different

Starting point is 00:56:00 approaches to that. What does a particular, a typical portfolio allocation look like for this group in terms of percentage of assets outside of crypto and percentage in crypto? Great question. I think it really depends. I think it depends on risk tolerance, time horizon, but I'd say broadly, the lower end of the spectrum is probably someone investing, call it, 20 to 40 basis points. So we're still talking about way under 1% of their portfolio. I'd say our more aggressive portfolios are probably teetering on, you know, call it four or five, maybe even 6% of someone's portfolio. Within that more aggressive group, that 5, 6% plus group, within crypto, what does their portfolio

Starting point is 00:56:46 look like? Usually, and every day that passes, more and more diversified. I think a lot of those portfolios are anchored by Bitcoin, but I think now what we're seeing is such a propensity of investors to not only appreciate the diversification benefits of having crypto exposure in their investment portfolios, but even further benefits by having diversified exposure within their crypto portfolio or crypto holdings. One thing that I really appreciate about what you guys are doing is you're basically starting to sort of mainstream this asset class. And you recently put out an investor study.

Starting point is 00:57:24 This one was Bitcoin focused. But there were some interesting takeaways from that. One that I took away was that more than half of U.S. investors. right now. And I think this was a, correct me if I'm wrong, but a general survey of investors that you did, more than half of U.S. investors are interested in investing in Bitcoin right now. And that's up something like 20% from the previous year. Is that a surprising finding? Not for us. I mean, a lot of the, so we published the study every year and we just published it in the last week or so. And, you know, I think it's a lot of the things we're talking about. It's the resiliency of this asset class.

Starting point is 00:58:06 It's the asset class's ability to create diversified return streams for investors. It's the staying power of the asset class. You know, a lot of people have called Bitcoin dead or the digital currency asset class, you know, dead multiple times. And it kind of just keeps getting challenged and coming back stronger. So we're not surprised. And if anything, we're just encouraged by the propensity and interest of investors wanting to have digital asset exposure.

Starting point is 00:58:33 You know, the other crazy takeaway, I think, from that investor study, and I encourage folks to read it, we will include a link to our show notes, is that 63% of those that invested in crypto and Bitcoin recently did so because of COVID as a result of COVID. So the money printing meme, it seems, is actually showing. showing in the data of investors taking action and going and buying some crypto due to COVID. Is that surprising to you? Or is it kind of like shrug your shoulders? Yep. We thought that was the case and it's happening. The latter of the two. People are, you know, paying attention to the world around them, navigating an investment environment that's very different.

Starting point is 00:59:21 And, you know, crypto, thankfully, is now part of that. Another, I think, interesting topic of conversation within crypto is just the sheer size of grayscale, perhaps relative to the supply of these crypto assets. I mean, you guys are getting pretty darn big. How much Bitcoin supply does Grayscale hold today? I'm not sure if you disclose that generally, but. Oh, we certainly do. Yeah, we own more than two and a half percent of the floating supply Bitcoin today inside the Grayscale Bitcoin Trust product. So it's not us, it's our investors, right?

Starting point is 00:59:58 We're just the sponsor of the investment product. Two and a half percent. How much for Ether? Do you know that atop of mind? Off top of my head, I want to say it's also about 2%. But that statistic I don't have as readily available. So Grayscale is just like gobbling up these crypto assets, it seems like. And another interesting stat that you put out is as a proportion of the amount of mined Bitcoin or mined ether, the amount that gets essentially gobbled up by grayscale investors is super high.

Starting point is 01:00:35 I think I read in 2020 in your report that of the new issuance of Bitcoin, grayscale inflows were basically 77% of that new issuance. So it's like it's like gray scale is gobbling it up almost as fast as it's getting minted and awarded to miners. that is that is that is that is true um that is that is definitely true and yes actually we the grayscale ethereum trust does own over two percent of the outstanding ethereum float that's an insane number do you know of any other institution that owns more bitcoin than than not owns but holds more bitcoin than gray scale um i i do not that's well tip of the half for that so congratulations on being being number one I know in Ethereum, we like to look at our, you know, ETH locked in defy metrics for, you know, how much, you know,

Starting point is 01:01:26 a defy protocol has locked up in its faults. And I think on the Bitcoin side of things, the Bitcoin held by Grayscale is the Bitcoiner equivalent for that. So congratulations on being number one holder of Bitcoin. Thank you. I do have a flip side to that because I think as bullish as that is, I think for asset appreciation and let's call it the institutionalization of these asset classes, Ethereum in Bitcoin, there's also an element that, hey, like,

Starting point is 01:01:55 are these crypto assets getting trapped in old finance, getting trapped in legacy banking? Is that really what we want? I've commented before that sometimes if you think about buying crypto in an ETF, you're still on their traditional banking system rails. You're almost stuck inside of a brokerage jail. So if you have ETH in an ETF, you can't stake it. You don't hold your own private keys. You can't really use it in defy yourself and you can't send it to an eth address. What's your reaction to that criticism that, hey, like, Grayscale could, and these, in general, custody through some sort of crypto banking system could become too big. And then crypto essentially loses the plot a little bit. It becomes much more like the legacy financial system and we lose the ability to transfer it and do this finance and a pure. to peer way. Do you think that argument has some merit? It's certainly not our intention. I think rather

Starting point is 01:02:55 the role we play in who we are as an actor, I think we are certainly out there as really big advocates of this asset class. I think we are hopefully viewed as a positive actor, right? That I think in the absence of our offerings, you would not be having as many people or as many institutions or investors getting into crypto, right? A lot of these investors are coming to Grayscale because they can't buy and hold crypto directly. And so the Grayscale solution really is that entree for them into the asset class that if it wasn't there would not be drawing them into kind of either what digital currency exposure can do to their portfolios or help them kind of unpacked. the ways in which we think that digital currencies as a technology are going to kind of transform

Starting point is 01:03:48 a lot of the systems and things around us. But at the same time, you know, those who may have a have a gripe with our, you know, taking Bitcoin out of circulation and putting it in a financial product or taking Ethereum out of circulation, putting in a financial product, to that, I would say it's really kind of evidence of where we are in the life cycle of this asset class. If it was that much easier, and it is becoming orders of magnitude easier for folks to access this directly, then, you know, what we're seeing and why gray scale is in the position it is is because by and large, digital currencies exist outside of the traditional financial system, and for a lot of people aren't as accessible as they'd like them to be. It's not as easy as buying a

Starting point is 01:04:35 stock or a bond or an ETF if you want to buy and hold Bitcoin. And if you lose, a private key with Bitcoin. You don't have a reset button or 1-800 number to call or, you know, things like that. So, you know, I think it's certainly a role that we're excited to be playing. We want to provide educational content. We want to be providing actionable intelligence to investors. But I think the role that we've, you know, come to assume within this community is one of wanting to grow the asset class together with other industry, participants, and we're just excited of kind of where we are. And again, we just feel like we're just getting started. Could you do things like a staked ETH product inside of a trust, or maybe at

Starting point is 01:05:22 some point when SEC lets us an ETF, or any other sort of yield-bearing crypto asset products? It's all possible. I'd say at any one time, we probably maintain, call it, 20 to 30 different product ideas of things that we'd like to bring to the market. It's really just that balance between, you know, where we're finding opportunities, what's permissible, what fits into the legal and operational frameworks that we want to make sure that we're adhering to, to bring our investors the best products we can and make them actionable and trustworthy for them. And at the same time, hearing from investors where they're interested in putting exposure on and what's important to them and building out their portfolios.

Starting point is 01:06:04 Speaking of going mainstream with investors, you guys have put together a series of pretty brilliant ad campaigns recently. Can you tell us a bit about that and the reaction from them? Yeah. So, you know, I think, you know, advertising is one of those areas that we have a lot of fun with as a team and it's a really collaborative effort. Most of 2019 was characterized by our hashtag drop gold campaign in which we had a national advertising campaign, you know, that aired on television and across, you know, social media platforms and display ads and banner ads and, you know, pretty much everywhere you could possibly think of where we are, you know, part of a now very solidified portion and a big portion of the investment community that believes

Starting point is 01:06:58 that digital currencies like Bitcoin are, in fact, the next inflation hedge or the next store of value or have in fact emerged now as a digital gold or a digital inflation, you know, hedge. And so this whole idea of younger generations waking up from, I guess, these old or antiquated or preconceived notions that somehow, you know, gold is going to be the asset that does that in their portfolios going forward. And we tend to say, well, this is a wake-up call. There are other things that have now emerged that you can use in your portfolio as a tool besides goals. gold to achieve those outcomes. And we believe that with about $68 trillion, and again, $68 trillion, moving from older generations down to younger generations over the next 25 years, we believe that

Starting point is 01:07:52 today, the way a lot of those assets are postured in things like gold will, as they move in or pass down to younger generations, get reallocated. And it's not to say, and again, I want to be clear, we're not saying $68 trillion is moving into Bitcoin or digital currency, but we'd be hard-pressed to believe that that younger generation of investors is going to be investing in assets like gold, of which they have no tangible experience, doesn't really resonate with them. And it's a generation that grew up on Instagram, Venmo, and airline points and credit card points, right? This is the generation that is going to grow up on Bitcoin in digital currencies. And so we are paying attention to and are trying to create a wake-up call that investors should be looking to where the, you know, skating to where the puck is going, right, if that's how investment preferences are going to change over time.

Starting point is 01:08:44 And so, you know, that is an idea that we're really, you know, still very enthused about. And I'd say over the lot, a course of a lot of 2020, we've had a history of money campaign, which we're also really excited about, which I think for a lot of investment. investors has helped them to realize that we believe that digital currency very well may be the next stop on the train, if you will, in the evolution of money. And so we have a national television commercial now that goes all the way back to rocks and salt and animal skins and, you know, every single form that money has taken over the course of time and eventually gets you to paper money, which is, you know, for the most part, a foregone conclusion at this point. And now kind of helping people to understand that, you know, perhaps digital currencies are the next step in the evolution of money in, you know, giving again that kind of that call to action to wake up

Starting point is 01:09:44 and understand what this is and make sure you're paying attention to this. Michael, I want to thank you for your time and coming on the bankless podcast. And there's nothing that gives me more excited and more bullish about this industry than a national ad campaign that talks about the merits of Bitcoin and crypto. So tip of the hat for leading that charge. I want to finish up with this one last question. What's Grayscale's next move? Where are you guys going to expand? I think probably on the product front, and I'll have to come back and talk to you guys more about it. But we have 10 products today and we're seeing some really interesting opportunities and we are hearing from investors about certain opportunities they want to be able to get exposure to. And, you know, I think we're always

Starting point is 01:10:32 hard at work at HQ, thinking about additional products to launch and expanding our product family. And I'm excited that we'll be doing some of that in the months to come. Michael, want to thank you again for joining us and coming in front of the Bankless Nation talking about these things. It's been a pleasure. Thank you. Thanks for having you guys. This is great. Awesome. Bankless Nation, some action items today. We will include these in your show notes. You should read the report that Grayscale put out, the Bitcoin investor study to see some of those specific metrics we were talking about. Also, number two, if you have a Fidelity account, a Schwab account, go take a look at GBDC and ETHE in the portfolio and compare them to NavPri.

Starting point is 01:11:17 We'll include some links where you can do that. Finally, five-star reviews. David, how are we doing on five-star reviews with bankless? We can always do better with five-star reviews, can't we, Ryan? Five-star reviews gets bankless podcast to the front of the iTunes investing in finance charge, which we are already in the top 100, but we want to be in the top 10 by the time that Bitcoin and Ethereum go completely mainstream. And so we need your five-star reviews to help get that done.

Starting point is 01:11:44 Absolutely, guys. Of course, risks and disclaimers, none of the time. this today was financial advice, ETH is risky, Bitcoin is risky, crypto is risky, and certainly when you buy them in gray scale products, they can be volatile and risky as well. As always, you could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the bankless journey. Thanks a lot.

Bankless - 39 - Grayscale: $10B Bridge to Crypto | Michael Sonnenshein

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