Unchained - $5 Billion in AUM: Why Growth at Grayscale Exploded in the Last Quarter - Ep.137

Michael Sonnenshein, managing director of Grayscale Investments, talks about the strong growth in investment in its products, with inflows in Q2 totaling more than $900 million, bringing assets under management to over $5 billion. He discusses how Grayscale: saw more than $900 million in investment in Q2, up from $500 million in Q1 why the macro environment is causing investors to focus on crypto why investors are expressing growing interest in the Grayscale Ethereum Trust how 80% of Grayscale i

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WEBVTT Kind: captions Language: en hi everyone
welcome to unconfirmed the podcast that we're feeling is how the marquee names
and crypto are reacting to the week's top headlines
and gets the inside scoop on what they see on the horizon i'm your host
laura shin a journalist with over two decades of experience
i started covering crypto five years ago
and as a senior editor at forbes was the
first mainstream media reporter to cover cryptocurrency full-time
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today's guest is michael sonenshine managing director of grayscale investments
welcome michael hi laura great to be here in its recently quarterly report
grayskill announced record inflows tell us about that so on
a quarterly basis our team puts out a report that looks back at
investment activity across the greyscale family of products
um over that most recent quarter and we try and break down for the
investment community which products have inflows which products are more
popular than others what the breakdown is of different types
of investors any other trends that we're seeing
amongst our investor base and the regularity of these reports have really
allowed them to become almost the de facto sentiment indicator for investment in
the space and in q2 of this year we raised over 900 million dollars
in just that second quarter and that was on the back of
raising over half a billion dollars in q1 this year
so we're really seeing inflows into the grayscale products at a record pace
and that's you know almost double what do you think accounts for the massive
increase in interest i think that the macro environment is
causing a lot of investors to focus on crypto in a way that they perhaps
hadn't before i think one of the most topical things that investors are
talking to us about is unlimited quantitative easing and as they look at
how much the fed and other governmental bodies
are printing they're really starting to drill into the verifiable scarcity
of assets like bitcoin and when you think about that very important
attribute that bitcoin has and then you combine it with bitcoin's
uncorrelated nature and it's not just bitcoin right it's other digital
currencies as well investors are really starting to appreciate
that there is a new and uncorrelated return stream that they can maybe get
from having exposure to digital currencies and now is really the time
we're seeing a lot of investors dig in on the space
and so when you talked about the quantitative easing that does of course
immediately bring to mind bitcoin because of the cap on its supply
and when you started your answer you were talking primarily in bitcoin
or about bitcoin but i wondered how the interest
in the other currencies with spread out is it 80
in bitcoin or you know what are you seeing in terms of the interest across
the various crypto assets so you know grayscale now
has 10 different investment products and the greyscale bitcoin trust is our
flagship product it's been around the longest it's our
largest fund no question about it um we've seen a market uptick in interest
across the other products so in particular i'd highlight in q2 we saw a
lot of interest in the grayscale ethereum trust
and really seeing more investment really coming in across the board
and i believe now of our returning institutional investors
we now see over 80 percent of them having now invested in more than one
grayscale product meaning they now each have exposure to
more than one digital currency and it's interesting to think about that
audience because for many of them bitcoin is their first foray it's the
place that they're most comfortable with they've done the most research on
typically it's what gets them comfortable and gets them to dip their
toe in the space and we're now really seeing a growing
trend of investors not just wanting bitcoin exposure
but they actually see diversification benefits of having more than one
cryptocurrency exposure in their portfolio and when you said that ethereum
was another one of the assets that was gaining a lot of interest
what's driving that because ethereum does not have a cap on its supply
so i was curious to know why they were focusing on that out of all the other
non-bitcoin assets well i think for a lot of investors ethereum
like bitcoin has a lot of staying power um it too like bitcoin has overcome
a lot of adversity and i think investors are really starting to drill into some
of the use cases around ethereum um powering d5 and a lot of
other new applications for which ethereum is really targeted towards
where i think for more investors thinking about bitcoin
they're really thinking about it more along the lines of a digital gold or a
digital store of value and who is coming to you now are you
seeing interest from new groups and what types of investors are coming
to grayscale well so grayscale raises assets um primarily
from institutional investors um so we deal primarily with accredited investors
so it does include a lot of high net worth individuals and
family offices financial advisors but really the vast majority of the actual
dollars that we're getting are coming from hedge funds
um and then other types of institutions endowments and pensions
and i think one of the most interesting things that we actually broke this out
in some of our reports this year is that the allocations aren't coming from any
one kind of investor i think you know for a lot of folks
bitcoin and digital currency investing it's it's for momentum traders or it's
for funds that really only are experienced in investing in technology
or um in venture capital things that are really on the riskiest end of the
spectrum and for us when we look at the actual mandates of our investors
it's everyone from global macro funds to value funds to risk arbitrage funds i
mean every single kind of investor mandate is represented
in the grayscale investor base which i think the takeaway is
digital currency investing is certainly not for everyone
it's risky it's early days you know a lot of investors need to have
a patient and kind of medium-term horizon for their investment but it does
then mean that it's something that everyone should at least be considering
and we're already seeing empirical data that it's making its way into the
portfolios of investors of all different kinds of mandates
there was also huge validation from paul tudor jones around this time
amongst that institutional set he announced that he had gotten exposure to
bitcoin in his portfolio and i was wondering are you seeing any
impact from that on investors well i think investors are
certainly always going to be looking at the price of digital currencies um as
a as a metric to look at when considering when to or when not to put exposure on
and that's not something we'll ever be able to draw investors away from right
they're always thinking about when to put on risk and when to take it off
i certainly think that the environment around the asset class has created
a lot of there's been a lot of recent tailwinds around that so
you can definitely point to paul tudor jones you can definitely point to
renaissance technologies a lot of these more storied investors
who are coming out publicly in support of the asset class
is a huge point of validation for investors
and when you combine that with the types of on-ramps
in the infrastructure being developed around the asset class
when you think about the development of the derivatives market
how much you know there is in the way of lending and borrowing and really
seeing all of the on-ramps provide investors with that
know your customer aml really all those protections they're used to seeing
it really forces more people to you know no longer really have any
roadblocks that would prevent them from participating in the asset class
which i think for a lot of folks long has been the reason they've been on the
sidelines they wanted more regularity more regulatory clarity or
they wanted to see more infrastructure built up and at this point
those excuses don't really hold up and so what percentage of your investor base
was new this quarter so we expanded the investor base by about
24 25 uh this past quarter and so what i think that means is number one
we're certainly seeing a lot of returning investors
as i shared a lot of them are now utilizing more than one grayscale product
um but we're also moving into new audiences and new areas
and i think that a lot of investors continue to be attracted to greyscale
for its you know long-standing track record and
the breadth and depth of its offerings and how would you say the growth in the
space compares this year from last year and when i say that i don't mean just
because of the macro forces due to the pandemic but
i wondered if there was anything more inherent to
the development of the crypto space as well that has changed that narrative for
people well i think certainly one thing is that it's just
generally been you know orders of magnitude easier
for folks to get the right resources they need around crypto
you know whether you're reading coindesk.com or listening to this podcast as
frequently as it comes out reading books reading articles reading
papers that the grayscale team is authoring i think today there is a more ro
probably the most robust library of resources available to
investors and i think that that's been a huge benefit
because for our team we actually conduct a survey
um almost every year in the middle of doing one now
where we actually go out and try and determine using a third party provider
what are some of those holdbacks what are some of those sentiment indicators
um in the investment community and we're not just talking about
sophisticated hedge funds we're talking about just average investors as well
and the last time we did this in 2019 for most
investors the biggest thing holding them back was a lack of education
so our team has really started to engage the financial advisor community
we just launched an entire digital currency toolkit for financial advisors
they need to be armed with the information to have those conversations
with their clients and be armed and ready and not kind of caught flat-footed
so i really think you know not just grayscale but the industry as a whole is
doing a really good job of getting those resources out there in
a moment we'll discuss some news regarding the grayscale ethereum trust
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slash token that's nexo dot io slash token back to my conversation with michael
sonnenshine grayskill filed a form 10 with the sec for the grayscale
ethereum trust what is a form 10 and what is the significance of that filing
so i think a lot of your listeners and viewers may never have heard of a form
10 before so let me unpack that typically when a company goes
public company xyz ipos on the new york stock exchange or the
nasdaq they're already subject to being an scc reporting company
that means they file their financial statements as 10ks and 10qs and
make periodic updates through 8ks um so you don't hear about form 10 often
in our case grayscale actually voluntarily filed form 10
which actually allows if it becomes effective for the greyscale ethereum trust
to become an sec reporting company so grayscale ethereum trust is already
alive and well and is an active product that now has over 500 million dollars of
assets in it it's the world's largest ethereum
vehicle um world's largest ethereum investment vehicle
and by filing form 10 we are voluntarily asking the sec to have this vehicle
become a reporting company so its financials become 10ks and 10
queues and we file 8ks and really the motivation there is to
really provide investors with that additional disclosure
and that additional reporting obligation that again
we're voluntarily doing this is what investors want this is what investors
deserve and this is what investors candidly already have when they're looking at
lots of other investment instruments across other asset classes
and we really think this is a really really big milestone for the product
and why did you decide to do that for this investment vehicle at this point in
time well this is on the heels of our successfully
having the grayscale bitcoin trust become an sec reporting company
in january of this year and so this is the vehicle that next seemed to be
the most likely candidate um to become effective as an sec reporting company
and i think with the added attention this product has gotten
with the added investment it's received um we've seen already such a positive
reception and around greyscale bitcoin trust
you know we want to expand this into not only grayscale ethereum trust
but over time we hope we can bring this same level of reporting
um to other products within the grayscale family so
time will tell and does the interest in ethereum have to do with the upcoming
transition to a proof-of-stake network which will perhaps
also have an impact on the value of ether as a digital asset
i don't think necessarily i think you know my takeaway
around the potential transition from eth to eve 2.0 and
some of you listening and watching may have no idea what laura and i are
talking about but it's a pretty material change to the ethereum protocol
if it goes through and i think what i'm most interested in sharing with
you is that we have been amazingly amazingly impressed by
our investors who are coming to the table and
asking questions about this that they're smart enough
on this asset class and smart enough on ethereum
to be doing their homework and again those resources are now available
that we're now having those kinds of conversations with investors about eth
and eth 2.0 so certainly something that's coming up
in conversation but not necessarily something that
i would say is driving investment uh your parent company digital currency
group and grayscale i believe were initially proponents of ethereum classic
and it seems however by filing the form 10 for the ethereum trust that the
priority has switched why is that i wouldn't say our priority has switched
um you know i think that at the grayscale level we try to identify protocols
that investors are a telling us that they want to be able to gain exposure to
um and trying to identify opportunities where
we may see certain value and want to bring that to investors as well
and obviously that includes both ethereum and ethereum classic
because we offer products around both digital assets
i would say we again would want to file um you know more products to become sec
reporting over time um and there's no real prioritization so much as
um you know the products that we're able to work on with the sec
and so as you mentioned you do have a suite of
products for other digital assets what metrics would you want to see for any of
those whether it's bitcoin cash or horizon or a litecoin uh
to determine whether or not you would also file form tens for those
well so i think some of the most meaningful updates around some of the
other grayscale products are uh one the grayscale bitcoin cash trust
as well as the grayscale litecoin trust um both of those
products have now satisfied the obligations to
become publicly traded and so both of those products
were recently assigned ticker symbols and are now just awaiting their dtc
eligibility before they'll begin trading um and i'm also happy to share
that grayscale is not going to stop at the 10 products we have today
um we're working on and always maintaining a list of
other products that we'd like to bring to market and i think for us
again it's towing that line between where we see opportunities
and where investors are telling us they want to deploy capital
but there are some pretty fundamental things that we're always looking at
that can help us screen in or screen out products
or rather digital currencies as to whether or not we could
create products for them and so we're thinking of things like
is there a transparent market that we can access around the digital asset is it
possible for us to create a reliable reference rate for the product
is there a sound custodial solution for the product
those types of real implications are very very meaningful um to us continuing to
you know utilize the best service providers we can and
really structure these products in a way that that works for investors
and when you said earlier that the bitcoin cash and litecoin
investment vehicles will be publicly tradable is that on the over-the-counter
market like gptc it is yeah it'll be on the over-the-counter market
so now um with the additions of the bitcoin cash and litecoin products
now six out of the 10 grayscale products will be on the public market which is
really really exciting and something i know the team is
very very proud of and so we've really only talked about your single
digital asset products but what about your diversified kind of
index type products what is the interest in that and where do you think um
when investors expressed interest in that where does that come from like why
are they interested in that as opposed to a single asset
so we have one diversified offering and it's called the greyscale digital large
cap fund this fund was created a few years ago and it was really meant to
meet the demand of investors telling us we'd like to invest in digital currency
maybe we missed bitcoin and we should invest in ethereum or
you know i don't know how to pick winners and avoid losers
and if there was a product that i could make a singular investment in and it
would give me broad-based exposure well then that would be something really
attractive and so grayscale digital large cap was created to satisfy that
and it has as its holdings the assets which constitute
the upper 70 of the crypto market and it holds them on a market cap weighted
basis so today that's five assets that includes bitcoin
bitcoin cash ethereum litecoin and xrp and the constituents inside the product
get re-evaluated every quarter so we'll be able to screen in or screen
out certain assets from being included in that basket
the digital large cap fund began its public quotation
late last year under symbol gdlc uh grayscale digital large cap and the
pickup has been tremendous um there are a lot of investors now
who yes still may be interested in bitcoin or maybe inserting ethereum
you know some of those better known digital currency networks
but we're now facing more end investors that we would consume more as allocators
um those types of investors that want to make a more broad-based
um investment in the space versus picking individual currencies around
which to have exposure and so we're really excited about the
digital large cap fund and um really happy with the the investor
reception around it you've been with grayscale from the
beginning when interest in cryptocurrency was much smaller i think
you joined in january 2014 and now here you are grayscale has
more than 5 billion in assets under management
how does it feel to have come this far well i will say that it is a team effort
uh when i joined uh we just had about 60 million dollars of the
assets under management um in just the the grayscale bitcoin trust
and so to be a part of building out the team
and building the business um as a group we've really come together as a
group of smart forward-thinking hard-working individuals
and you know now speaking to you tonight we you know we have five and a half
billion dollars of assets across the family of ten products and so
um i think i could have never imagined the growth um
would be at the pace that it's been or that digital currency
um would move as fast as it has but you've been in the space a long time too
and i'm sure you'll agree that you know a week in the digital currency world is
like you know three months in the real world so
i'm a little tired but um i can happily say that the team at greyscale is just
getting started great well congratulations on your record
quarter and thank you so much for coming on unconfirmed
thanks for having me don't forget next up is the weekly news recap [Music]
hi everyone thanks for tuning in to this week's news recap first headline
twitter hack mastermind was 17 year old graham ivan clark a 17 year old tampa
resident was arrested last friday for allegedly being the brains behind last
month's twitter hack in which the accounts of barack obama jeff bezos
joe biden and other prominent people were taken over
as the new york times put it quote his arrest raised questions about how
someone so young could penetrate the defenses
of what was supposedly one of silicon valley's most sophisticated technology
companies clark had a troubled family life and spent much of his time online
where he developed a reputation for quote scamming people
out of money photos and information according to people who for instance
played video games such as minecraft with him and got swindled for 50 or 100
dollars he later got involved in cryptocurrencies and joined an online
forum called og users where he described himself as
quote a full-time crypto trader dropout but he was later banned by the community
after failing to pay bitcoin to a user from og users he entered a hacker
community that focused on sim swapping people's phone numbers so
as to get access to steal their cryptocurrency
that group targeted a seattle tech investor and drained his accounts of 164
bitcoins then worth 856 000 and now worth 1.9 million dollars the extortion note
was signed by scrim which is allegedly one of clark's online aliases
in april the secret service seized 100 bitcoins from clark
and the seattle tech investor received a letter from the secret service
saying that the agency had recovered 100 of his bitcoins
additionally the blog reports that clark currently has 300 btc
worth 3.5 million dollars a friend of clarks said that the run-in with the
secret service frightened him but within two weeks according to the
government affidavit he convinced a twitter employee that he
worked in the social media company's i.t department
and from there the hack began next headline square's cash app bitcoin sales more
than doubled to 875 million dollars in the second quarter of 2020 the square
cash app saw a revenue of what 875 million dollars
which because it's based on the purchase price also reflects the run-up in btc
however even the cash app's gross profit has also more than doubled
from seven million dollars in q1 to 17 million dollars in q2
revenue is up 600 percent year over year and the bitcoin
gross profit is up 711 year-over-year and according to this chart by the block
as a proportion of the company's total gross profit that shot up from 1.24 in q1
to 2.84 in q2 on a related note after the bitcoin and aether prices
both rose dramatically in the last few weeks they also both saw a brief crash
within six minutes on sunday with bitcoin dropping by 12 percent and ether by 20
as more than one one million one billion dollars in futures was liquidated
however the prices have mostly recovered since
and meanwhile according to coinmetrics bitcoin addresses with at least 10 or
more of cryptocurrency have hit a new all-time high of 16.6 million
up 14.5 percent from the previous previous peak
of 14.5 million from january 2018. next headline ethereum 2.0 test net goes live
the final test net ahead of the launch of ethereum 2.0 went live on tuesday
with 20 000 validators staking 650 000 eth
the testnet also features five clients teku prism
nimbus lodestar and lighthouse if you're
looking for a good overview of the state of ethereum today
delphi digital released the first of its monthly reports on ethereum
going over pretty much every major issue
on the network including everything from
whether ethereum's proof of stake system can compete with yield and defy to the
details of ethereum improvement proposal 1559
the report shows how defy is leading ethereum's momentum
gives an analysis of demand for gray skills ethereum investment trust
and breaks down the various attractions of defy in areas such as decentralized
exchanges yield farming as a token distribution
mechanism and what the growth of bitcoin on ethereum means for the security of
the bitcoin blockchain one of the more interesting charts shows that 58 of ether
has not moved in over a year another shows that d5 protocols that
introduce liquidity mining saw fast growth amongst users although uniswap which
currently does not have a token still has the most users overall next headline
ethereum spot and future volumes are growing faster than bitcoins
the block reports that bitcoin's market cap is roughly five times out of
ethereum however trading volumes for ether in the spot and futures market
is rising faster since september 2019 on the spot markets the eth btc price
ratio has more than doubled and the trading volume of ether is about half
of that of btc whereas in september it was at 19 the ratio of e futures
trading volume to btc futures trading volume has increased
from eight percent in september to 29 today next headline
two 51 percent attacks on ethereum classic
the first nets the attacker 5.6 million dollars
after several days what was initially thought to be an innocent mistake on
ethereum classic turned out to be a 51 attack by a malicious miner
in the end the attacker double spent 807 260 etc which is worth 5.6 million
dollars while spending just 17.5 btc worth slightly less than 200 000 to
execute it the way this person carried it out was
by sending etc from an exchange to his or her own wallets
then back to the exchange on the etc blockchain
but then the attacker used what amounted to more than 51 percent of the etc hash
power to mine thousands of blocks in which he or she
he or she sent etc from those wallets to other wallets that he or she controlled
instead of back to the exchange the attacker then broadcasts those blocks
which reorganize the chain replacing the blocks containing the traction
the transactions to the exchange with the transactions to the other wallets it
seems that okay x may have been the exchange that was targeted
and if that isn't crazy enough on thursday ethereum classic experienced
a second 51 attack with a reorganization of more than
4 000 blocks coindesk reported that the majority of ethereum classic miners
are continuing to mine the shorter version of the chain though the
reorganized blockchain is currently longer next headline
four house members ask irs to not tax proof of stake block rewards
four members of the congressional blockchain caucus wrote a letter to the
internal revenue service requesting that stakers not get
taxed for receiving block rewards but only on their gains when they sell
representatives david schweiker of arizona bill foster of illinois
tom emera of minnesota and darren sota of florida
wrote it is possible that the taxation of staking rewards as income
may overstate taxpayers actual gains from participating
in this new technology it could also result in a reporting and compliance
nightmare for taxpayers and the service alike one of the concerns
is that staking protocols could release new tokens every few minutes
which would create hundreds of taxable events every year
another is that gains do not always reflect income
because an individual stakers tokens may increase by six percent
but that may be because the supply of tokens on the network has increased five
percent coin center advocates that block rewards not be taxed as income
but quote like crops minerals livestock artwork and assembly widgets
they should be taxed when they are sold not when they are created
the advocacy group says validating on a proof of stake blockchain
isn't like being paid revenue but instead like creating a valuable item
through labor the way one might quote grow valuable crops on one's
own land or extract minerals from one's own minds
next headline this is a roundup of defy hacks
scams and blunders some users of defy options issuance platform open
lost 371 000 usdc due to an exploit on its eth put
contracts the attacker was able to steal the collateral of some puts
by double exercising o tokens similarly the creator of asuka token
which is a fork of yfi allegedly exits scammed
korean crypto news outlets reported that zhong chan jiang
shut down the tokens website and social media accounts
the asuka token plummeted from sixteen hundred dollars to nineteen dollars
next why vaults a new product put out by wyon
was a bit luckier when trailer bits caught a bug before any exploit occurred
that could have allowed an attacker to drain most if not all
of the pool's why usdc assets meanwhile the block reports that the sec
is looking to buy a blockchain forensics tool to help it monitor smart contracts
to detect the purpose of a smart contract the token sales specifications
permissions management and security and vulnerability management among other
things finally funds for those who remember the days of the dao
dan robinson of crypto vc firm paradigm tweeted upon hearing the news that the
ethereum classic chain had been 51 attacked i was told that this was the
immutable chain all right thanks for tuning in to learn
more about michael grayscale and the grayscale ethereum trust be sure to
check out the links in the show notes don't forget you can now watch video
recordings of the show on the unchained youtube channel
go to youtube.com c unchained podcast and subscribe today
unconfirmed is produced by me laura shin with help from anthony yoon
daniel ness josh durham and the team at clk transcription thanks for listening
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