336: Grayscale CEO Michael Sonnenshein On Investing In Crypto

Michael Sonnenshein is the Managing Director at Grayscale Investments, the largest digital currency asset manager. In this role, Michael oversees the daily operations and growth of the business and its more than $4 billion in assets under management. In this conversation, we discuss Grayscale's Q2 results, where the capital inflows are coming from, why investors are flocking to digital assets, how Grayscale thinks about the premiums, and whether Grayscale will eventually own all the Bitcoin being mined. =============================== The Trends premium weekly report helps you understand market trends poised to skyrocket and how you can pounce. Join the private network of 5k+ builders, founders, and investors spotting tomorrow’s trends. Expand your network, and discover the next big business idea before it explodes: https://trends.co/pomp/ =============================== Crypto.com is the only all-in-one platform that allows you to BUY / SELL / STORE / EARN / LOAN / INVEST crypto all from one place. Join over 1 million users currently using the Crypto.com app. Download and earn $50 USD using my code ‘pomp2020’, or use the link https://platinum.crypto.com/r/pomp2020 when you sign up for one of their metal cards today. =============================== Pomp writes a daily letter to over 50,000 investors about business, technology, and finance. He breaks down complex topics into easy to understand language, while sharing opinions on various aspects of each industry. You can subscribe at https://www.pompletter.com

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Anthony Pompliano?

  What's up everyone, this is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off.

• 0:11Anthony Pompliano?

  Michael Shunensai is the Managing Director at Grayscale Investments, the largest digital currency asset manager in the world. In this role, Michael oversees the daily operations and growth of the business, and it's more than $4 billion in assets under management. In this conversation, we discuss Grayscale's Q2 results, where the capital inflows are coming from, why investors are flocking to digital assets, how Grayscale thinks about the premiums, and whether Grayscale will eventually own all of the Bitcoin being mined. I really enjoyed this conversation with Michael as always, and I hope you enjoy it as well. Before we get into the episode though, I want to quickly talk about our sponsors. The first is Trends from The Hustle. You guys know my rules of business.

• 0:55Anthony Pompliano?

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• 1:40Anthony Pompliano?

  and show you exactly how you can capitalize. Guess what? They also want to reward your and my ambition. That's why they're giving us two weeks of access for just $1. Sam, Adam, and the rest of the team at The Hustle love the podcast, and they want our listeners to join their community. So right now, you can get your first two weeks for just $1. That's right, $1. Go to trends.co/pomp to start your $1 two-week trial. T-R-E-N-D-S. T-R-E-N-D-S.co/pomp for $1 two-week trial. I'll see you on the inside. Our next sponsor is Crypto.com. They have been a longtime supporter of the podcast.

• 2:22Anthony Pompliano?

  They are an all-in-one platform that allows you to buy, sell, store, earn, loan, or invest crypto, all from one place. You can join over 1 million users currently using the Crypto.com app. Go in the description and click on the link there. Crypto.com. They've got an awesome URL. They're driving mass adoption. They continue to launch products and it's an all-in-one platform. We can buy, sell, store, earn, loan, or invest crypto, all from one place. Crypto.com. All right. Don't forget that I write a daily letter to over 50,000 investors about business technology and finance as well. I break down complex topics into easy to understand language

• 3:02Anthony Pompliano?

  while sharing my opinion on various aspects of each industry. You can subscribe at pompletter.com. pompletter.com. All right. Let's get into this episode with Michael. I hope you enjoy it.

• 3:13Speaker 01

  Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only.

• 3:39Anthony Pompliano?

  All right, guys. Bang, bang. I've got Michael here with us. Thanks so much for doing this, man.

• 3:44Speaker 02

  Yeah, great to chat. I think it's been too long since the last time we sat down.

• 3:49Anthony Pompliano?

  You have been hard at work, it appears like. So for those who haven't been paying attention, Grayscale, I think, might have already been the largest digital asset manager, but has continued to lengthen that lead, if you will. And now the latest numbers are $4 billion in assets. First, congratulations on that.

• 4:11Speaker 02

  Thank you. Thank you.

• 4:13Anthony Pompliano?

  And maybe I figured, let's just start there. I think that's a kind of a headline number. People see, you know, $4 billion in assets. About 2 billion of that, it sounds like, came over the last 12 months. So maybe just walk us through from, you know, your seat, running this absolute beast of a company. Where's the money coming from and what's driving those investors to to seek out digital assets and the structure that you guys have?

• 4:37Speaker 02

  For sure. So first I just, you know, kind of introduce Grayscale for folks that that don't know us. We are the world's largest digital currency asset manager. Really, for us, it's been about providing access and exposure to the asset class. And so today, we offer 10 different investment products where investors can gain exposure to either a single digital currency, in the case of some of our single asset products, or a basket of digital currencies in the case of our diversified fund, Grayscale Digital Large Cap Fund. And I really think for Grayscale, it's really been about not trying to reinvent the wheel. We've been taking our cues from the incumbent asset managers, really trying to find the best service providers we can.

• 5:21Speaker 02

  And again, the way that investors are used to getting exposure to either certain commodities or certain subsets of the market, they can actually use Grayscale to gain exposure to different digital currencies. And I'd say, you know, for for most investors, you know, Grayscale has been around now since late 2013. And while it's been fantastic and rewarding to see it become orders of magnitude easier for investors to access digital currency directly, many investors still don't want to. They don't want to figure out where to buy digital currency, how to transfer it, store it, safe keep it. And the Grayscale family of products really is that all in one solution that looks, feels, and acts the same way investors have an experience buying, you know, any other financial product that gives them

• 6:06Speaker 02

  exposure to a commodity or, again, a subset of the market. For us today, I'd say overwhelmingly, our inflows into the products where we actually are directly raising assets is probably over 80% these days coming from institutional investors. So I'd say we're talking primarily about hedge funds, non crypto hedge funds, but that also means that we serve a whole swatch of high net worth individuals, family offices, other types of institutions, financial advisors, RIAs. And then because some of the great scale products are also publicly quoted, we also serve really any investor that has access to the public markets where they can trade

• 6:47Speaker 02

  in great scale products in their brokerage accounts, IRA accounts, et cetera.

• 6:52Anthony Pompliano?

  So I think that one of the things I've seen a bunch of people kind of arguing back and forth on Twitter, which always cracks me up. I'm like, hey, look, I'll just ask the guy when I have him on the podcast is, so I do have like 80% comes from institutions, right? First of all, that's incredibly impressive number. I think it serves as a great data point in terms of the interest that's coming from those types of organizations. I think kind of the detraction argument that I see on Twitter is like, oh, hedge funds aren't institutions. Now, I think you and I both know that hedge funds by definition are institutions. I think it's more of this thing where people kind of, they're talking about the endowments, the pensions, the foundations, the Wall Street banks, whatever, when they say institutions.

• 7:33Anthony Pompliano?

  So maybe just help talk through like, one, how do you guys think of institutions? And then also, two, if you can just break down like, out of that 80% institutions, any ballpark numbers on like, what's hedge funds versus what other organizations look like?

• 7:48Speaker 02

  Yeah, I think for us, we certainly believe hedge funds are institutions, right? You're talking in our opinion about professional investors who have underlying people that are trusting them to allocate their money according to a prescribed investment mandate. And they're being paid a fee to do so, and often case handsomely. And I think for a lot of those types of investors, moving into digital assets has been a leap. It's a leap that a lot of them took, probably starting about two, two and a half years ago. But today, I think that the underlying investors are really giving them really all the wherewithal they need to invest in in digital currencies on behalf of clients. And we're not just seeing this in the hedge fund community.

• 8:31Speaker 02

  You know, we're fortunate to count other types of institutions or other types of professional investors as clients as well. So that can be an endowment. It can be a registered investment advisor. It could be a private organization. It could be a, you know, a bank. It really runs the gamut. But I would say overwhelmingly, it is going to be when we talk about institutional flows overwhelmingly hedge funds. And I think, Anthony, the reason that that is, is because when you're talking typically about a hedge fund, there are certainly decision makers at a hedge fund, but there's also going to be fewer decision makers than there would be when you're talking about going through the investment committee of an endowment or a pension or something like that.

• 9:16Speaker 02

  And those organizations also just tend to move slower. So hedge funds tend to have a conviction in something. They do their due diligence and they kind of move forward.

• 9:26Anthony Pompliano?

  Yeah, and so obviously to see that $2 billion over the last 12 months, give or take, kind of inflow into all of the different funds that you have. One is impressive, but it's even more impressive when I think you look at it from a good portion of that, call it four to five months, ends up being a global pandemic and economic shock. Maybe talk a little bit just about like, how does the macro changes help or hurt kind of the argument for institutions gaining exposure? And then other things that you may see as to why people are seeking out this exposure?

• 10:01Speaker 02

  Yeah, I mean, I certainly want to be sensitive and say, first of all, you know, on behalf of the entire team. You know, everyone globally is on our mind. We know it is a very challenging time for individuals, for families, for companies, you name it. And so we certainly want to be conscientious of, you know, some of the uphill battles that a lot of folks are are fighting amidst the environment. But if you if you drill into what's been happening in the investment landscape. In the in the wake of that, there's been quite a bit of activity. So if you look back at 2019 before the pandemic hit, Grayscale had a record year.

• 10:41Speaker 02

  We raised over $300 million last year, and we've never seen inflows like that before. That momentum really carried itself into the first quarter of 2020 when we raised over half a billion dollars in just one quarter. And it really wasn't until the pandemic hit in late or mid-March of 2020, I believe, that we really started to see kind of what the fallout of that was going to be across different asset classes. And so, you know, definitely being long volatility was a winning trade in the first quarter. But then what we saw is that that really subdued in the second quarter of 2020. And while a lot of risk assets sold off after the pandemic hit,

• 11:25Speaker 02

  we saw the resilience of the digital currency market be a lot more pronounced than it was for other asset classes, equities, bonds, et cetera. And so the second quarter of 2020 broke yet another record for Grayscale. We brought in over $900 million in the second quarter of 2020. And, you know, I think we have to think about what's driving that. And to some extent, you know, one might think that economic uncertainty and not really knowing what the outlook is going to be, when COVID may subside, when we may have a vaccine, may just be causing people to take risk off and be on the sidelines.

• 12:05Speaker 02

  But I think now what we're seeing is assets like Bitcoin and just digital currencies in general are being sought out by investors looking for uncorrelated return streams, you know, new sources of alpha. And again, that digital gold narrative is still really playing out. When things go bad, investors are looking historically to things like bonds and gold. But now that subset of investments you might choose when things go bad includes assets like Bitcoin. And I think especially in the wake of how government intervention has, you know, Come into the fold in the wake of the pandemic. You've just seen this unlimited fiscal stimulus being injected into the financial system.

• 12:48Speaker 02

  And when you think about that, it's causing a lot of investors and a lot of the conversations we're having with investors to revisit some of the core attributes of digital currencies like Bitcoin that do in fact have a verifiable scarcity to the amount of Bitcoin that will ever be. And when you start having these conversations, investors really understand why not only the world has gone increasingly digital, but why a digital currency has now more than ever a role in the world we're living in and a role in the world that we're going to be living in moving forward.

• 13:18Anthony Pompliano?

  Yeah, and it's really interesting to think about Bitcoin is kind of the headline, right? That's what always draws all the attention. That's what everyone writes about, but you guys offer a number of other assets. So maybe talk a little bit about what are those other assets that you offer? And then how do you see the inflows being split up among those various assets?

• 13:36Speaker 02

  Sure. So we now have nine single currency products. So we have products that are just solely and passively holding Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, XRP, Stellar, Horizon, and Zcash. I think I just hit all nine of them. And then the Digital Large Cap Fund is our diversified offering, which holds a market cap weighted basket of digital currencies that gets reevaluated every quarter. Today, that consists of Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and XRP. And so, you know, when you think about the different assets that grayscale products

• 14:19Speaker 02

  offer investors exposure to, you're really looking at that upper, you know, 70%, upper 75, upper 80% of the digital currency market today. And I'd say that for a lot of investors, not surprisingly, hopefully for you, Pom, but most investors' first foray into grayscale products is still usually in Bitcoin. And that's not going to surprise anyone listening to this either, right? Bitcoin has probably overcome the most adversity. It's probably where investors have spent the most time and there's the most resources available. to them, but I would say it's interesting to know how much investors are diversifying away from grayscale products. So I would say this quarter, the demand for products in Q2

• 15:03Speaker 02

  outside of Bitcoin is up thirty five percent quarter over quarter. So we had record quarterly inflows into the grayscale Ethereum trust. And then we actually also saw some of the highest allocations into, you know, the grayscale Litecoin trust that we've had all year so far, as well as into the grayscale Bitcoin Cash Trust since, I think it was the second quarter of 2018. So investors are definitely looking at other products within the grayscale family. And that's a theme that's been going on for a while and one we're monitoring closely. But investors not only see the diversification benefit of having digital currency exposure, but also having exposure to more than one digital currency.

• 15:48Anthony Pompliano?

  So I think most people in crypto will know almost everything that you just said in terms of the names of the assets. The one that may stick out to them is Horizon. Talk a little bit about what that is and why you guys chose to incorporate that.

• 16:01Speaker 02

  Sure. So Horizon is a privacy preserving digital currency that was something that came on to our team's radar over the past couple of years. And I think it dovetails nicely with grayscale already offering the grayscale Z Cash Trust. I think from our perspective and what conversations we have with investors, they believe and understand that the world and privacy with it is changing quite a bit. And we have seen there be quite a bit of demand for protocols that preserve financial privacy. And we're not talking about financial privacy that lends itself to nefarious activity

• 16:47Speaker 02

  or anything, you know, that would be untoward. We're talking about the ability for investors to be able to store value or transact in a way that can protect some of the details of those types of transactions. Horizons. Um, Horizon is an asset, however, that kind of builds upon some of those foundational elements that you may see in Zcash, but also lends itself to other applications as well that maybe the code base of Zcash or other privacy preserving digital assets don't necessarily lend themselves to. So, um, it's a lesser known and probably certainly a smaller cap digital asset than some of the other products we offer, but nonetheless thematically is something that definitely has and I we believe continues to resonate with investors.

• 17:32Anthony Pompliano?

  Got it. And then talk a little bit about, uh, one of the things that I think investors are scared of, but also some investors are excited about is the premiums on, uh, the various funds. So for those that don't know, uh, basically a premium is when the fund itself holds a certain amount of assets, let's say a million dollars worth of an asset, but it's actually trading at a value above that. So it could be 1.1, 1.2 million dollars. That delta between where it's trading and the actual asset value is a premium. At times there's, uh, certain vehicles you guys have that have, you know, almost no premium, right? Kind of five, 10% tech premiums all the way up to, I think, the Ether Trust at one point, uh, I saw had like an 800% premium. And so kind of just talk a little

• 18:14Anthony Pompliano?

  bit about how you guys think of the premiums and across the different assets, uh, as well.

• 18:19Speaker 02

  Sure. Yeah. So let's step back for a minute. So, you know, if, if someone is an accredited investor, um, you know, they can buy any one of the grayscale products directly from us at net asset value. Um, now so far, um, four out of the 10 grayscale products have been approved for a public quotation. So that's our Bitcoin product, um, the Ethereum product, Ethereum classic product, as well as the grayscale digital large cap fund. And so it's important for me to reiterate here that grayscale does not trade in, we're not market makers, we're not dictating the price at which any of the four products I just mentioned are trading in the public market on any given day. Uh, instead,

• 19:00Speaker 02

  these products are really driven by market demand and market sentiment. Um, and so I think today, the price at which these products trade in the market. Is really being driven by a couple of factors. I think one, there is today, very, very, very few, if any, access products for digital currency. And so as an investor, if you're typically used to having a brokerage account, an IRA, whatever it may be, and you're used to accessing stocks, bonds, ETFs, mutual funds, et cetera, through that platform. Well, now you can also get yourself digital currency exposure through any one of the grayscale products that are publicly traded. And so there is kind of an ease of use, a liquidity.

• 19:44Speaker 02

  And then it also negates the need for investors to navigate buying, transferring, holding, storing, safekeeping, you know, digital currency directly. And I think one of the other big areas where we see a lot of uses of the grayscale products is also in retirement accounts. So we do not only have investors who want to make these allocations for the medium to long term, but they want to do so in a tax-efficient way. And so they look to deploy investments in grayscale products inside IRAs and Roth IRAs and 401Ks. And so we're not only facilitating that in our private placements, which we do for investors often, but also on the public market as well.

• 20:22Speaker 02

  And so again, if you have one of those types of accounts, but you're restricted to solely buying publicly listed equities or bonds or ETFs, well, then you really would have a very difficult time buying Bitcoin directly in that kind of account or buying Ethereum directly in that kind of account. So there again, you know, having the grayscale product really is providing a value to investors and giving them the ability to get exposure, whereas otherwise would not be able to.

• 20:49Anthony Pompliano?

  Yeah, it's really interesting. And I guess as part of this, maybe talk a little bit about where you see most of the inflows. Is it in the public markets or is it in those private placements?

• 20:59Speaker 02

  Yes, so the inflows that we get are only into the private placements themselves. So investors who are accredited and who are buying the private placements from us, their liquidity option is selling into the public market after they've held their shares for a statutory amount of time. In the case of Bitcoin, that's only six months. Because that is an SEC reporting company. In the case of some of our other products that are publicly quoted, that's actually a 12-month period. So inflows really only come into the private placement. On the secondary market, over time, what we've seen and what we believe we'll continue to see is that the volume and the number of shares in the public market will grow over time

• 21:41Speaker 02

  as more and more investors who bought on the primary side have their shares roll off into the secondary market.

• 21:47Anthony Pompliano?

  And obviously, when people hear inflows, they think, okay, what about outflows? How do you think about outflows and how do you measure that, if at all?

• 21:54Speaker 02

  Sure. So we actually don't offer redemption programs in our products. So the grayscale products have these ongoing private placements where we're taking inflows. And then the liquidity option is actually to move your shares out onto the public market after that holding period versus a traditional creation-redemption process, where actually the share count could, in theory, be lowered and the underlying asset sold. That is not, in fact, the case inside our products, but rather the assets raised just roll off into the secondary market and continue to be a part of the products.

• 22:33Anthony Pompliano?

  One of the things that people have talked a lot about over the years is a Bitcoin ETF. You guys obviously have the closest thing to that. It's a little bit different structure, but it has served the purpose that an ETF could serve in terms of allowing people to get exposure in a liquid way in a various number of investment mechanisms, whether it's in retirement dollars or not. What are you guys thinking about or kind of paying attention to in terms of that ETF process? And then maybe a potential approval at some point?

• 23:06Speaker 02

  Sure. So we think a Bitcoin ETF is a matter of when, not a matter of if. I think, you know, the regulators have done a fantastic job of staying ahead of the curve on the digital currency asset class as a whole. Pom, you know, you spend a lot of your time trying to stay on top of what's going on in the ecosystem. I do myself. At times, it almost seems untenable because of how fast the asset class is evolving and moving day to day, week by week. We like to sometimes say, you know, a week in the digital currency world is like six months in the real world. And, you know, I think with that being said, our regulators have recognized digital currency,

• 23:50Speaker 02

  Bitcoin in particular, in a lot of ways that lend a lot of validation to it and should really, in our opinion, not be deterrents for investors accessing the asset class. So, you know, we've gotten guidance from the IRS, we've gotten guidance from the SEC, we've gotten guidance from the CFTC. You know, the Grayscale Bitcoin Trust is now an SEC reporting company. So they've taken a really proactive approach and there are in fact ways to work with regulators on the asset class within existing frameworks, but they're just not ready to approve an ETF yet. And I think that they've been pretty explicit about wanting to see certain dynamics within the market mature a little bit more. Things like, you know, maybe a more global order book for Bitcoin, maybe things like

• 24:35Speaker 02

  surveillance sharing agreements, maybe a little bit more regulation and oversight of the different marketplaces and venues where digital assets are being traded. And, you know, I think that that's something that certainly we as a firm and me as an individual, I'm excited to kind of see how the ecosystem continues to mature. I've been in the space now, you know, seven years and it's amazing to see how much progress has been made. So I think, again, it's going to be a matter of when, not a matter of if. And investors just need to be patient. But luckily, in the meantime, there's tons and tons of ways for investors to access digital currency directly through futures, through Grayscale products, through all kinds of means in order to participate in the asset class now and not have to wait for an ETF.

• 25:21Anthony Pompliano?

  As an ETF eventually gets approved, right, when you say kind of when, not if, what would be the potential impact on your business or kind of what would you guys do differently when that day comes?

• 25:31Speaker 02

  Sure. So, you know, I do think that it's worth noting that in 2017, we were working to move the Grayscale Bitcoin Trust up to the New York Stock Exchange as an ETF. And while we made a lot of great progress with the SEC, we ultimately pulled out of that process, recognizing that they, again, just weren't ready for it. And so I do think that there will be a time eventually where, you know, this product is able to hopefully one day, you know, be able to achieve that, that level of registration and change that product structure. And eventually, we hope to be able to turn, you know, the entire product family into ETFs. But we're only, you know, 10, 12 years into the life cycle of the, of the asset class.

• 26:15Speaker 02

  And again, I think we just need to be patient. But, you know, we'll certainly be there when our regulators are ready for it and, you know, try and stay on top of those conversations as much as we can.

• 26:25Anthony Pompliano?

  Most of the products that you have, from all the products you have, are what I would consider kind of straight down the fairway. You want exposure to X asset, either directly or a basket of them. That's what you provide. Have you guys thought about or have any plans to create vehicles where it may be an asset that then earns interest or any sort of kind of bells and whistles that would be attached to not just be direct exposure to an asset, but the kind of additional value?

• 26:52Speaker 02

  Sure. So, number one, I would just say, you know, the Grayscale team, you know, myself included, everyone has really spent their time in financial services firms, banks, et cetera, before working at Grayscale. And so we're all, all too familiar with every different flavor of investment product, right? And so I'd say at any time, our team is maintaining, call it 20 to 30 different product ideas that we're ready to bring to market. Now, the question always remains and the difficulty that we have as a team is, where is it that we are seeing value and what's feasible for us to do? What do we think will resonate with investors versus what are investors telling us they want? And what areas of the market do they want exposure to?

• 27:38Speaker 02

  So I may regret this later, Pom, but if people ever have ideas for grayscale products, feel free to tweet me at Sun and Shine. I'd love to hear your ideas that you have. Many of you already do that on a daily, if not multiple times a day basis. And we certainly take any and all of those things under advisement. But what I can share for now is that the grayscale product family will certainly not stop at the existing 10 products. There are definitely more products to come from grayscale.

• 28:08Anthony Pompliano?

  You know that you just opened the door for every shitcoin in the world now. Things are going to get a grayscale vehicle.

• 28:17Speaker 02

  Well, I will tell you though, on that point, right? There are definitely certain things that we look for when structuring products, right? We're looking for a real, you know, reference rate and a, you know, a real discernible market that's accessible and regulated. We're looking to make sure that there's sound custodial solutions around, you know, products, around certain digital assets that we can, in fact, go ahead and create a product around that digital asset. You know, the list goes on and on, but I would just say there are some very practical implications that definitely need to be considered in the context of evaluating any digital asset for inclusion in a grayscale product.

• 28:55Anthony Pompliano?

  So that brings us to one of the most asked questions that I got, which was, does that mean Dogecoin is out after the recent TikTok influenced the price increase?

• 29:05Speaker 02

  You know, I cannot say that we would ever or would not ever create a grayscale Dogecoin trust. But I myself too have been looking at how Doge has been reacting in the wake of all that's been happening with it on TikTok.

• 29:24Anthony Pompliano?

  That is the politically correct answer. I think it's absolutely incredible to watch something like that happen.

• 29:30Speaker 02

  Well, I think it goes to show you the strength of the digital currency community, right? There are a lot of passionate folks, a lot of passionate voices, and you know, we're seeing a ton of financial innovation coming around it. And what a better time than to be working on it in the wake of everything going on in the world.

• 29:49Anthony Pompliano?

  Yeah, so as much as I'm joking about Dogecoin, it does bring kind of a more serious question, which is around performance, right? So obviously, there are a number of investors that specifically want exposure to crypto assets because of past performance or belief in future performance. There are a number of investors who buy into the qualitative type argument, right? Hey, there's lots of inflation coming. I want to hedge and do things like that. How do you guys think about the performance of the assets affecting either positively or negatively? Inflows and kind of conversations with the institutions that you speak with?

• 30:22Speaker 02

  Sure. So I'd say, you know, we now have quite a few quarters of empirical data that are showing us that investors are tactically adding to their positions when they see a drawdown in price. Again, because our products carry, when you buy the private placement, the statutory holding period, we're really serving a community of investors that are really allocating to digital currency for the medium to longer term. And so when they see a pullback in price as a result of any number of factors that may be affecting it, it's been really rewarding to see that they're viewing that as an opportunity versus a we're scared. We wish we hadn't gotten in as early. We wish we were now first building our position.

• 31:07Speaker 02

  And so we work with a lot of institutions to, over time, help them average in to a or, you know, size up to a certain allocation that they're looking to make. And again, while a lot of the focus continues to be in a lot of the inflows are on assets like Bitcoin and Ethereum, it is worth noting that in the second quarter this year, you know, digital assets broadly outperformed, you know, most indices.

• 31:33Speaker 02

  Some of the assets that we provide products around Zcash, Ethereum and Stellar were some of the top performers, right? Zcash was up seventy-two percent in Q2, Ethereum up sixty-two percent, and I think Stellar on a similar footing. And so I think a lot of investors are paying attention to price movements and then also looking at portfolio construction. What does your portfolio look like when you make room for fifty basis points of digital currency? Or, you know, a hundred and fifty basis points of digital currency? And they backtest it and they do see that this can really help build a more resilient portfolio. And that's undisputedly something that is definitely resonating with investors.

• 32:16Anthony Pompliano?

  So there's a lot of investors who will say, I hear all of the kind of increase in price in a quarter, half a year, a year, whatever. But for example, in March, there was a fifty percent drawdown in a single day of Bitcoin. Maybe talk a little bit about kind of one, any stories from watching that happen? But then also two, you guys have a very unique kind of structure in that either one, the investors are in illiquid vehicle. Meaning that even though the asset is liquid, they can't sell their stake in the private fund. Or two is most of that drawdown or kind of the most severe part of that drawdown happened after the stock market had closed, right? Even if you held the liquid shares, you were kind of hands tied till the morning.

• 33:01Anthony Pompliano?

  So maybe just kind of talk through like one, any cool stories from that day? And then two, how the structure either helps or hurts investors in those types of situations?

• 33:09Speaker 02

  Sure. Well, I will say that seven years of working in the digital currency ecosystem, I have an iron stomach. I have been through so many days of not just fifty percent drawdowns, but even more than that. And at times when. You couldn't even point to any reason why digital currency might be moving or having a precipitous drop. So I myself feel unfazed by those events, right? I certainly am somebody who is allocated to digital currency personally and for, you know, the long term, believe that, you know, we're still in the early innings of, you know, where this asset class can ultimately

• 33:51Speaker 02

  go. When I think back to the big drawdown that we saw in March, I can tell you with certainty, there was not a single email or phone call from an investor that day to myself or anyone on our team saying, "Oh, my God, I need to get out of this. I can't believe this asset class could do this in such a short period of time." Did we instead have conversations with investors around what may be driving some of that, seeing how other risk assets or really pretty much almost any asset or investable area of the world kind of couldn't dodge their way out of this global liquidity crisis and massive deleveraging? Yeah, we

• 34:33Speaker 02

  were certainly having that conversation, but there was never a run for the hills because digital currency is taking a big dip. Again, instead, these are moments where investors view these things opportunistically and, you know, look to those kinds of moments to, again, really add to a position.

• 34:50Anthony Pompliano?

  Yeah, it's very, very interesting. One of the things that people have been talking about a lot online and I joke and say it's back of the napkin math, only with people who may not be the best at math, is there's a rumor that Grayscale is buying up all the Bitcoin, right? And what really people are talking about is they're trying to back into how much Bitcoin is Grayscale accumulating, how much Bitcoin is being mined in a day, a week, a month, a quarter, whatever. And so this thought process of like, "Oh, my God, Grayscale's going to own all the Bitcoin," either out of fear or out of like, "Oh, if Grayscale owns all the Bitcoin, then of course the price has to go up because there's none for everybody else," right? So maybe just kind of talk through like, I'm sure you've

• 35:34Anthony Pompliano?

  seen that flying around on Twitter, like thoughts and kind of any response there.

• 35:39Speaker 02

  Yeah, you know, it's it's an interesting calculation that back of the napkin calculation that some folks are doing, right? You know, the the the process that people or the calculation that people are undertaking is that particularly in the wake of the Bitcoin halving, which we experienced earlier this year, what they are saying is that the rate at which Bitcoin are going into the grayscale Bitcoin trust is going into the investment vehicle that we manage at a rate faster than new Bitcoin are coming online and becoming part of the circulating supply of Bitcoin. Now, what should you take away from that?

• 36:22Speaker 02

  You should not be taking away that Grayscale is buying up all the Bitcoin and there's going to be none left for you. What you should be taking away from that is what that should tell you about investment demand. Grayscale is an asset manager and we are trying to satisfy investors' appetite for exposure to digital currencies and in this case, exposure to Bitcoin. And so if the rate at which we are having to try to satisfy our investor demand is happening faster than new Bitcoin is coming online, then that should be an important indication to really anybody undertaking this, that demand is outstripping the new supply coming into the market.

• 37:04Speaker 02

  So our inflows and our share creation has nothing to do with how many Bitcoin are coming online or coming into circulation, but should instead, again, be viewed as really a a a measure of demand, which is why on a quarterly basis, you know, we put out this asset raising report. You know, this is why each quarter we try and detail out for investors, which are the products that, you know, achieved the most inflows, which are the investor types that were most active in the prior quarter. Are there any trends or are there any interesting data points to extrapolate for investors? Because ultimately, we're trying to give investors intelligent and actionable insights. And if this report, being the largest asset manager in the space, can do that, then it's

• 37:49Speaker 02

  really quickly quite to come really the de facto sentiment indicator for investment demand for the asset class.

• 37:56Anthony Pompliano?

  So I think a lot of people then say, okay, where does Grayscale get the Bitcoin or other assets that they do when they're creating the shares, actually fulfill that demand?

• 38:05Speaker 02

  Sure. So some of you may know, and Pomp, you may have spoken to him before, our sister firm is called Genesis. Their CEO is my friend and colleague, Mike Morrow. And so Genesis and Grayscale work very closely together. Genesis is an over the counter digital currency trading business that also has a very robust lending and borrowing facility, as well as now a derivatives business. And because Genesis is a broker dealer, we work exclusively with Genesis on sourcing digital currencies that go into all of the Grayscale products, right? For Grayscale, it's really important for us and to the investors we serve that we're

• 38:49Speaker 02

  doing everything as compliant as possible. And so working with a regulated entity, you know, a broker dealer in this case, really allows us to do so. And so Genesis's counterparties are all either individuals, funds, holders, miners, companies, anybody who is dealing in digital assets, but can pass all of the anti-money laundering, know your customer, all the background checks, et cetera, that any counterparty would need to be approved in order to trade with a broker dealer. And so we work exclusively with them. And, you know, their counterparties are now providing a pretty robust pool of liquidity so that

• 39:30Speaker 02

  as investors are coming into the funds, we have ample ability to buy Bitcoin or the applicable digital asset in order to fulfill whatever demand is being had.

• 39:40Anthony Pompliano?

  Got it. And I guess as you go into other assets, so not just Bitcoin or Ether and kind of the large market caps, does that get harder? Does that get easier? Like, how do you think about actually acquiring it? And so, go to the extreme example, if you started a Doge coin vehicle, right, and it's got a smaller market cap, and you need to go acquire a bunch, like, what does that do? To change the processor operationals.

• 40:08Speaker 02

  Yeah, so I think that actually dovetails nicely with a comment I made before, which is like, there are some, you know, operational hurdles that we need to make sure are achievable when we think about product creation. So if there is not going to be a liquid enough or accessible enough or compliant market for Genesis to be able to go out and source digital assets in, in order to satisfy the demand that investors may have for a given product we offer and inherently the underlying asset that that product's invested in, then that poses a big challenge for us and would be a roadblock to us being able to serve certain types of digital currencies inside our products.

• 40:50Speaker 02

  It's also worth noting, though, that in some instances, we also have investors who already own digital currency and can facilitate creations of grayscale products using digital currency they already own. So it negates the need for Genesis to go out and source it, but rather those investors are coming to us with digital currency they already have can instead invest it into the products. So they then end up owning shares rather than the digital currencies themselves. And again, when those come through, because they're running through a broker dealer, relying on partners like Chainalysis and Elliptic and all of the great blockchain surveillance and monitoring tools that are available to us

• 41:32Speaker 02

  to order, in order to make sure that the coins we're taking into our products aren't back clean.

• 41:37Anthony Pompliano?

  Got it. I normally end each episode asking the same two questions. We've already had the pleasure of talking about your favorite book and Alien. So I have two separate ones that are more grayscale specific, kind of in looking in the future. The first is, as you kind of evaluate the company today and as you move forward, what do you feel like is the company's greatest weakness or the thing that you want to spend the most time working on to improve over the next, call it 12 to 24 months?

• 42:05Speaker 02

  You didn't prepare me for this, alright?

• 42:10Speaker 02

  I'd say for us, an area that we're really investing heavily in over, call it the next year, year plus, is going to be a lot more technology. We are really wanting to make investors' experiences with us ever more tailored to the types of products that they're interested in and want to make sure that people have an even better experience with Grayscale. And I think along with that is also continuing to really invest in talent. We've been continuing to hire and expand the Grayscale team, and I think that we will also really continue to invest in people. But I wouldn't say people are a weakness at the moment, just to be clear.

• 42:55Anthony Pompliano?

  I love that answer. Didn't mean to put you on the spot. And then I guess the second question is, you're already the largest digital currency asset manager in the world, got $4 billion in assets, got a number of different vehicles in which people can invest. What is the goal or the mission at this point? Where does Grayscale go? And if you kind of look out 10 years plus from now, how big can this get? Or what do you and the rest of the team aspire to build here?

• 43:22Speaker 02

  Yeah, I would say that for us, it's really about opening up exposure to the digital currency asset class. I think we all continue to believe that it is early days that digital currencies, looking at their market cap, is really almost nothing compared to the size of some of the markets they stand to disrupt. And so if we're successful in our mission, we are not only continuing to offer best-in-class, institutional-grade solutions for investors to gain exposure to this Mason asset class, but we're also going to be a meaningful piece of helping to educate individuals and entities

• 44:03Speaker 02

  and institutions about the asset class, and also being good stewards of seeing the technology continue to grow and advance. And so I think from our standpoint, we're constantly looking for opportunities to serve in those capacities and really grow the pie as a whole, really for people everywhere.

• 44:24Anthony Pompliano?

  That's awesome. Where can people find you online? And if they want to learn more about grayscale or investing in any of the products, where can they go?

• 44:31Speaker 02

  Sure. So you can find me, I'm on Twitter and I'm a little scared after this chat with you, Tom. But you can find me at sun and shine, at my last name on Twitter. You can find grayscale at grayscale.co. That's grayscale.co. And there we have a whole host of great research reports, all kinds of primers on digital currencies. If you're looking to get a little smarter on a specific digital currency that you haven't maybe spent as much time on before. And then certainly our team, you know, likes to and will often post as much as we can.

• 45:12Speaker 02

  Various content we're putting out, webinars we're doing, really any way to engage with our team, certainly on Twitter. So our Twitter handle for grayscale is at grayscale invest. And we look forward to connecting with all of you there.

• 45:28Anthony Pompliano?

  Awesome, man. Michael, it's always a pleasure to talk to you. You guys are absolutely killing it. So congrats on all these success and we'll keep cheering for you, but I will do it again in the future.

• 45:37Speaker 02

  Awesome. Thanks, Tom. This is great.