39 - Grayscale's $10B Bridge to Crypto | Michael Sonnenshein

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'd 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 grayscale team about you know what

grayscale is and what they do but i never really felt satisfied with with other podcasts and how they approach the subject matter of grayscale and how grayscale 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 at the tip of the hat to you i think the 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 grayscale is and then also its 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 gbtc is and what ethy are i got a text from a friend of mine who's actually an investor and he's like hey i own some ethan bitcoin on coinbase but i noticed this gbtc and this e in my schwab account what the heck are they and so these are 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 how are they 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 uh into these assets should i buy them on coinbase or some spot market or should should i buy them uh inside my brokerage these these great scale assets buy them that way it sort of starts to answer that question then we got to

talking about um how the institutions are coming they're already here and what they think about things like defy and eth as an asset 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 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 uh but and that is kind of a little bit true the 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 in the bankless world where we like the banks that like crypto and that's exactly what grayscale is right and to me what grayscale is 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 narrative of ethereum and cryptocurrency really mature and they have done a fantastic marketing campaign literally for the cryptocurrency industry right promoting the the value and merits of crypto to the greater world and so as far as financial institution goes we like grayscale yeah that's 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 who who's on the boat like noah's ark and sort of the flood well grayscale is like the bridge to the ark it serves as very useful function to start getting liquidity and start getting value inside of the crypto ecosystem now if we just stay on on that bridge portion and we never actually get to the fully bankless arc i think that's a big problem and and personally that's why i have a problem with the way bitcoin is scaling it's a lot of the the

bitcoin scalability measures seem to happen within custody within crypto asset banks within you know grayscale 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 uh and i'm actually like 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 soft self-sovereign without using

a bank whatsoever and uh 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 seven and a half billion dollars 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 is 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 the power of the dollar when grayscale gets bigger i see it as you know the dollar weakening and that and grayscale is doing it from inside united states right the calls coming from inside the house we didn't talk about this subject with michael but i 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 uh 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 like when we talk when we talked 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 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 defy look no further than

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thankless nation we are super excited to bring on the podcast michael sonenshine 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 gbtc or if e in your schwab account your fidelity account these are products uh that are a way to give you price exposure to eath 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 well it's been a pleasure you've been in this space for like i think seven years or something now is that right seven years wow feels like feels like uh oh i don't know i think what it what's the old adage now a year or like a week in in the digital currency world is like a year in the

real world okay something like that yeah so uh i don't know how old you are that's like methuselah age like a thousand you spent millennials in this space already but um but 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 um it's honestly been a true pleasure um

and i'm really humbled by the opportunity i've been given to be a part of building and growing this business um 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 um it's it's really been incredible um we're actually now um as of last night uh at seven and a half billion dollars 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 um it's inflows it's very very strong steady inflows and um 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 grayscale business um and seeing us grow

when i joined with 60 million dollars of assets we now have over you know seven billion like i told you um i started we had one product now we have ten products uh i'm probably more proud of the team of people um that i put together um it's a really interesting eclectic mix of forward-thinking thoughtful caring intelligent collaborative people uh and i think everybody is really taking what they've learned working for the most part in the traditional finance

world at banks um and applying some of those best practices and leaving some of those worst practices behind um to build you know what 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 uh 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 uh all the

success if we were to uh wind back the clock like maybe a year or or two years and if somebody told you yeah that in the future you're gonna have seven and a half billion dollars assets and management uh what would your reaction have been back then um i'll believe it when i see it would it was that going to be a believable number or was that something that you actually could foresee happening at that time or has this kind of just uh blown expectations out of the water it um no it was always within it was was

in you know within reasonable grasp um it was just a question of how fast we would get there you know even today talking to you at seven and a half billion dollars uh underpinning the grayscale uh 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's probably going to be a big

part of that story but you know before we talk about institutions and inflows um i actually never heard you michael on a podcast talk about products from a retail investor perspective and um that's where that's where i think we'd like to start talking about the products themselves 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 i'm based in the us what do

grayscale's products actually look like to me so how 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 uh underpinning the grayscale family nine of those products facilitate exposure to a single digital currency and the tenth product is a diversified

basket of large cap digital currencies um and so we think of the grayscale product lineup as really almost like a tool kit um and every investor uses the tools within the gracefield toolkit in a different way some investors only use one grayscale 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 um

but it's um it's uh 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 distinctions as i talk about this i want to try and be as clear as i can be we continue to raise assets on a primary issue inside so new 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 um and so so far six out of the ten products that grayscale is responsible for managing

and sponsoring have also been quote unquote turned on having public quotations in the u.s market and so those products are for bitcoin and bitcoin cash ethereum ethereum classic litecoin as well as our diversified fund i mentioned the the grayscale digital large cap fund so if you're um 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 um

or retirement account and buy any one of those products in any size or for any period of time that you may want to um and for a lot of investors that's been a really easy accessible way for them to gain 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 um 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 um 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 gvtc or eth the public ticker symbols for our bitcoin and our ethereum products earlier as we were talking those products prices every day in the in the market are always being driven by market forces um and so we're not involved in setting the prices or maintaining the prices of those products uh 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 uh 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 gbtc which essentially gives you price exposure to underlying uh bitcoin uh the underlying bitcoin asset or eth e so e-t-h-e you can type that into schwapp and get an asset that has price exposure to um to ether the asset of course it's not the same as spot price exposure we're going to talk about all all of that

so one quick question before we get in is this available for international investors too or is this kind of u.s only oh no it's available to anybody on on both sides so on the private placement side about half of our investors are offshore um and on the public market side um certainly no no reason that investors all around the world so long as they can access the u.s securities market um they should be able to access these products as well okay and then one nice thing

we've talked about is you can access them in a traditional um brokerage system that you might have um but 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 they can get these products inside of those retirement accounts which is which is kind of nice and these are sort of the only large products that that i know of in order to do that but one question i mean 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 gbtc or an e3 and etf well so um etfs um um are different structurally so they have um you know constant creations and redemption programs um 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 etc um that's where the grayscale products are quoted as opposed to a national securities exchange like the new york

stock exchange or nasdaq so those are probably two of the the biggest differences of our products against what they would be if they were etfs although it is worth noting that both grayscale bitcoin trust and greyscale ethereum trust are the first two and the only sec reporting companies um with respect to the digital currency investment product space and what that means is that they file 10ks and 10qs and have the same

reporting 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 so that is one i i guess uh 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 ep any of these products um i want to get into like what are they actually buying so

um first where are the private keys actually held so if i'm buying um you know bitcoin or eth on coinbase then coinbase is custodying my private keys of course and then if i request uh those to be sent or redeemed to a bitcoin underneath address that i hold then coinbase will will go and do that but in this case um you know if i have one of these products in my brokerage account they can't ever be redeemed for the

underlying is that correct and then where are the private keys actually held that is correct so the two products are 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 and 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 um and greyscale custodies the underlying assets underneath all of our products in the coinbase custody trust company solution um and that is you know a cold storage solution that as you may imagine involves many 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 uh underlying digital currency and that's how investors are getting that exposure this is kind of like all the owning uh owning shares of some sort of a like 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 yeah or if you wanted to gain exposure to oil there's a product that gives you exposure to oil or to yeah and somebody's custodying that right it's

like the gold that you're buying is eventually it's you know in some big vault somewhere in london right but you're buying exposure to that gold but there's a there's an underlying i don't know lloyd's london i don't know who does that but there's an underlying vault somewhere that actually holds the physical gold right correct yeah i 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 um i can you know say with assurance that our products are fully invested in and backed by

um the the digital asset that we're 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 um when you buy you know crypto on coinbase or something at spot price you might be paying some transaction fees to to a coin base for it for example um you know 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 do got it and that fee is what like 2.5 or so or does it range it depends on the product the bitcoin product has a two percent fee the ethereum product has a two and a half percent annual fee gotcha and i imagine some portion of that goes to like pay for custody but also general administration of uh 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 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 is being deducted away from you um it actually is 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 grayscale bitcoin trust

and that has a two percent annual management fee well every day of the year the bitcoin to share ratio decays by one three hundred and sixty-fifth of two percent so we actually take the management fee out in the underlying bitcoin itself so um just wanna set the record straight on that so so people don't think it's anything other than that which is truly the way most um most uh you know 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 um our revenues are derived solely from our management fees so we are taking the price risk um 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 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 uh 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 and i think folks know what that is if they purchased you know mutual funds or stocks they've seen those sorts of fees before that's different than buying in spot of course and another thing that you mentioned earlier and i want to dig back into this to make it to make it clear michael is that there can be a premium to nav price

if somebody is purchasing a gbtc or an e in their in their brokerage account right and you mentioned that's like that's because that's a there's a secondary market right for retail investors in the brokerage essentially and that's where they're paying you guys don't control that price the market does but it's something for retail investors to keep in mind because um i i think i was i was looking this morning maybe gtb gb gbdc was about 15 over nav spot price something like that

um but uh ether has been up to 800 percent over spot price at some points this year it's down a lot from that but um that represents a premium to what they could be purchasing eth at an 800 premium for what they could be purchasing ethat at at an exchange is that correct any anything more you'd say on that it certainly is 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 uh 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 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 to say um

i you know i think one thing that certainly may be attributable to driving that that premium is the fact that um you know there is you know no redemption program and this is you know really the way in which investors get liquidity is this robust secondary market um but also because of the novelty and the i guess um yeah i guess really novelty you know there are no other you know listed securities um where investors can gain exposure to digital assets right alongside the other

things that they're invested in it does seem over time that that premium does does tend to drop right uh gptc's has dropped quite a lot in its history and even we're seeing eath drop quite a lot um is that kind of your general anticipation that it will kind of drop really hard to really hard to predict i think over time you know markets um have a way of um ensuring that uh that things get ironed out and you know information gets disseminated and and we