The Breakdown - A $10B Firm Makes Bitcoin Its Primary Treasury Asset

Episode Date: October 15, 2020

Today on the Brief:  Bitcoin hashrate at all-time highs Record number of large companies lose money during the pandemic JPMorgan releases research note on bitcoin Our main discussion: Stone Ridge Holdings Group discloses $114 million in bitcoin treasury assets.  NLW digs into what Stone Ridge is, why it spun off New York Digital Investments Group (NYDIG) and how the company has quietly built itself into a serious player in the institutional crypto asset space.   

We've now opened a new narrative category for journalists, for media, for people like me, but also for people like Bloomberg, which is that another company has announced or added Bitcoin to its treasury. This is a new category of demand, and that's so, so significant. Imagine as we think about where the next set of demand is going to come from Bitcoin, a year ago we weren't really talking about public company treasuries. Boom, now that's a thing, and you have $6.8 billion reflected on public company treasuries. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the Big Picture Power Shifts remaking our world.

The breakdown is sponsored by crypto.com, nexo.io, an elliptic, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, October 14th, and today we have another. bit of exciting Bitcoin Treasury news, a $10 billion asset manager has made Bitcoin its primary treasury asset. And as it turns out, there's a lot more to that story as well. First, however, let's do the brief. First up on the brief today, the Bitcoin hash rate has hit a new all-time high. It is a very Bitcoiny day here on the breakdown, so we might as well kick off the brief with it as well. The seven-day average hash rate is at one-time. 144.29 XA hashes per second, which is a new record, surpassing the 143.19 EHS on September 18th.

The hash rate has increased by almost 40% this year despite the halving, which reduces the miners' reward. This obviously suggests significant confidence about the economic viability of mining, and the broader implication is the strength of the fundamentals of the Bitcoin network. Price right now is also somewhat. reflecting that strength. Bitcoin got as high as 11,723 on Monday, but is flat today at around 11,350. Next up on the brief today, a record number of U.S. corporates have lost money during the pandemic. The number of big money-losing companies now outnumbers the peak of the financial crisis. 43 of 345 companies with a market valuation above $25 billion have posted cumulative losses over

the trailing 12 months. Maybe the most interesting and important thing about this data is how absolutely asymmetrical this is. Some categories of companies have done incredibly well, while others have just been absolutely dashed. We spend a lot of time trying to compare current crises to past crises, and so understanding how they're different is really important. The biggest losers have been things like Walt Disney with its parks, which have had to stay closed, as well as companies like Chevron, who've seen a fundamental crater in the demand for their product. And speaking of that, there's Boeing. I think when we look back on 2020, we will see this as one of the most profound behavioral shift economic crises we've ever seen. Last up on the brief today, a J.P. Morgan

research note on Bitcoin. Yesterday, J.P. Morgan released a research note, and it's said that more payment companies are likely to allow their clients to purchase Bitcoin via their apps in the wake of the success of Square's Cash app. Last quarter, Square's cash apps surpassed the Grayscale Bitcoin Trust as the biggest vehicle for Bitcoin purchases by U.S. Millennials. Cash app facilitated $8.58 million worth of Bitcoin purchases while Grayscale was in the 700s. Now, this idea that more companies are likely to allow this sort of activity via their apps is almost a for sure true statement. Rumors have been swirling about a PayPal Bitcoin Bitcoin buying experience, and really from all the rumors, it seems like it's just a matter of when

they release it, not whether it's coming. Additionally, this JP Morgan note said that Square's purchase of Bitcoin as a Treasury Reserve asset was a strong vote of confidence for it and likely the beginning of perhaps a larger trend, which segues us perfectly to our main discussion, which is a new entrant to the Bitcoin Treasury game. First, let's hit you with the TLDR. Stone Ridge Holdings Group, which owns Stone Ridge Asset Management, has 115 million in Bitcoin as its primary Treasury Reserve asset. Keep in mind, this is just the week following Squares $50 million announcement, so let's figure out where this came from and how we should view it in context. First, let's talk about Stone Ridge asset management. This is a firm with

10 billion under management, and I thought it would be useful to read their philosophy from their webpage. Centuries of financial history have shown that markets reward investors for the capital they supply and the risks they bear. Competition quickly drives prices to fair value, leaving only risk premium. Yet many managers and investors chase alpha, an often expensive and dangerous pursuit. At Stone Ridge, we believe that markets work, so we let the intentional risks we bear deliver the returns we desire. Guessing the future is no way to build long-term wealth. We believe taking intelligent, controlled, and diversified risks is a far more reliable strategy. Great financial innovations of the last few decades led to investment products that efficiently capture traditional market risk

premium. For example, stocks beat cash over time because stocks are riskier. In traditional asset classes like equities in fixed income, passive, long-only products are sufficient to capture the beta. Such products are valuable, have enormous capacity, and deserve their rightful place in every investor's portfolio. At Stone Ridge, we strive to deliver the next chapter of financial innovations. Valuable, diversifying streams of alternative returns source solely from non-traditional risk exposures. The point that I'd like you to take away from this is that this is not some crazy risk-taking, alpha-seeking bucket shop. This is a big, history firm that focuses on very specific, diligent investments, and has funds named things like all-asset variance risk premium fund and

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Bitcoin buying spree, so much so that the firm's auditors felt like they actually needed to keep track. Word also got out to clients, and given the scale and enthusiasm, those clients, or at least many of them, wanted in as well. An interesting note for me here has to do with the thesis that they ascribe to this. Robert Gutman, who's one of the co-founders, said that it was about, quote, the long-term growth of an open-source monetary system. That's a pretty sophisticated understanding of what Bitcoin offers, right from the start. Anyway, what this all led to was a whole Bitcoin initiative. As Castillo put it, instead of just establishing a few custom funds for their clients as their want to do, Stone Ridge took the extraordinary step of building execution and

custody tools from scratch and kicking off an entirely new line of revenue, executing cryptocurrency purchases, and then holding onto the assets for their customers. Taking together, this all turned into the New York Digital Investment Group, NYDig, which was the first Stone Ridge subsidiary that actually isn't wholly owned by the parent. When they created NYDig in 2017, they quietly raised 50 million, which was previously unannounced. Last Friday, they raised another 50 million in growth equity led by FinTech Collective, Bessemer Ventures, and Ribbett Capital. As part of that announcement, and this is obviously what got my attention, Stone Ridge Holdings Group revealed that NYDig is acting as custodian for 10,000 of the parent company's Bitcoin, which is a total value of

115 million in Bitcoin. Their founder, again, Robert Gutman, talked about just how big an acceleration there's been this year based on interest from the macro context. He said, we've seen a pretty dramatic acceleration in the count of institutional investors who want to participate in the market since March this year. The macro backdrop against the public health backdrop has caused a lot of people to rethink their portfolio composition. He describes their services like this. Different institutional allocators are used to buying fund management services, so that's what we sell them. Macro hedge funds are used to buying prime brokerage services, so that's what we sell them. RIAs are used to buying a set of ultra-high net worth advisory solutions, so that's what we sell them.

Basically, these guys have been building quietly for a few years and are now taking advantage of a serious shift in the macro wins that is pointing more people to Bitcoin. During their quiet period, this firm has quietly scored a New York State Bixie. license, and has also acquired a New York State limited-purpose trust charter, which allows them to buy and hold Bitcoin and other crypto for investors. We don't know anything about their customers other than the fact that they say that that $115 million for their holding company parent isn't their biggest custody. In total, they're custodying over $1 billion, and the number of clients they have has quadrupled in 2020. They've also bought companies, including an order management software company and have gone absolutely ham on hires, including two former Goldman Sachs

partners last month and the former New York State Superintendent of Financial Services who actually wrote the Bit License Law. So my take on this. When I first heard all of this, I thought, oh man, another domino in the Bitcoin Treasury game. In reality, what I think it is is more the revelation of a huge and significant inside player that has been here but been quiet for a while, that is more than an external convert like Michael Saylor from Micro Strategy. To me, this doesn't make it less exciting. In fact, it shows that there is even more institutional demand for this asset class than we previously knew. This, by the way, was reinforced by another announcement today from Grayscale that they just had their best quarter ever,

with over $1 billion raised, $2.4 billion raised for the year overall for Grayscale, which is more than twice the amount that they raised between 2013 and 2019. Their Bitcoin Trust alone saw inflows of $719.3 million, and Bitcoin assets under management have grown 147% in 2020. What's more, I also want to be clear that these $115 million as a primary treasury asset for a $10 billion asset management firm is still a significant move, that we shouldn't be ignoring. There's a new resource called Bitcointreasuries.org that is tracking Bitcoin Treasuries and publicly traded companies. It currently shows 602,055 BTC on public company's

balance sheets. That's $6.8 billion worth. Hans from Aikai summed this up perfectly saying on Twitter, in April of 2016, Bitcoin's market cap was $6.8 billion. Four and a half years later, public Companies hold 6.8 billion Bitcoin on their balance sheet, and the market cap has risen to 211 billion. In that same amount of time, total public debt has risen from 19 trillion to 26 trillion USD and counting. The net savings rate as a percent of gross national income has flipped from positive to negative. The hash rate of the Bitcoin network has gone up by 100x. Where do you think will be in another 4.5 years? The writing is on the wall. We've now opened a new narrative category for journalists, for media, for people like me, but also for people like

Bloomberg, which is that another company has announced or added Bitcoin to its treasury. This is a new category of demand, and that's so, so significant. Imagine as we think about where the next set of demand is going to come from Bitcoin, a year ago we weren't really talking about public company treasuries. Boom, now that's a thing, and you have $6.8 billion reflected on public company treasuries. That may not seem like a ton, but it's certainly not nothing, and it's certainly not nothing in the context of the overall supply of Bitcoin. We still really haven't wrapped our heads around just what a differentiating thing it is

to have a mathematically guaranteed limited supply, and when we see more companies start to strong belief their way into Bitcoin as a Treasury Reserve asset, it's very likely that you also see a whole different set of companies FOMO in as well. I know for sure that I will continue to track it, so welcome along for the ride and thanks for hanging out. Until tomorrow, guys, be safe and take care of each other. Peace.