Michael Sonnenshein: The Largest Crypto Asset Manager

Michael Sonnenshein is the managing director at Grayscale Investments, a trusted authority on digital currency and investing. In this conversation, Sonnenshein and Anthony Pompliano discuss bitcoin, institutional investors, and DCG's bet on Ethereum Classic.

• 0:01Speaker 00

  What's up everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off the Chain, simply the best podcast in crypto. Let's kick this thing off.

• 0:15Speaker 00

  Michael Sunshine is the Managing Director at Grayscale Investments, a trusted authority on digital currency investing. In this conversation, we cover a lot, including Bitcoin, institutional investors, and DCG's bet on Ethereum Classic. This conversation was incredibly informative, and Michael shared numerous fascinating stories. I hope you enjoy it as much as I did.

• 0:38Speaker 00

  This podcast is presented by Blockworks Group, the only blockchain event and media production company I trust. If you're an investor, lawyer, accountant, or entrepreneur, and want to attend exclusive events and dinners, visit them at blockworksgroup.io. I promise you won't be disappointed.

• 0:56Speaker 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.

• 1:24Speaker 00

  Before we get started, I wanted to tell you about our sponsor, BlockEstate, a security token project in the $200 trillion industry of real estate. They've partnered with Polymath and Coinlist Comply API to create one of the first tokenized real estate funds, and they have a unique buyback and burn model. To learn more, visit blockestate.com.

• 1:44Speaker 00

  All right, guys, we're here with Michael. This is going to be a great episode. Michael, thank you so much for coming.

• 1:50Speaker 02

  Thanks for having me.

• 1:50Speaker 00

  Absolutely. Let's just start with your background, because you've been in the space for quite a while. I think people probably don't know what you did pre-crypto.

• 1:58Speaker 02

  Sure. So I started out as a banker.

• 2:03Speaker 02

  Spent time at Bank of America, Barclays, and most recently JP Morgan. And I was looking for a challenge. I wasn't even necessarily looking for crypto. You know, my seat at JP Morgan, I remember sitting there looking at CNBC at the corner of my office and seeing the Bitcoin price rallying, you know, 20, 30, 40% and CNBC freaking out about it. But at that point, we're talking about late 2013, no one was really asking about crypto investing or, you know, whether there was even jobs in crypto. And I was getting ready to leave JP Morgan to work for a hedge fund. And I had the fortunate opportunity to meet the founder and CEO of my company, Barry Silbert, who at the time

• 2:44Speaker 02

  was running Second Market. And Barry had started investing in digital currencies and digital currency businesses as early as probably about 2011, 2012. He and Tim Draper, I think, were, you know, two of the first angels out there getting involved in the space. And at the time, Barry had already started a Bitcoin trading business through our broker dealer at Second Market, which has, you know, since become Genesis, and had started our first investment product, the Bitcoin Investment Trust in 2013. And when I had the opportunity to meet Barry, it was a really funny story. His assistant said, "Hey, Michael, do you know that you went to the same university as Barry?" And I said, "No, I didn't." This is literally as I was walking in the room to meet him. And he and I just hit it off.

• 3:29Speaker 02

  And he said, "Michael, come help me build something. You can always go work for a hedge fund, but I promise you, take a chance and you won't regret it." And about five, almost five years later, I haven't looked back once.

• 3:40Speaker 00

  Awesome, man. That's so interesting how, you know, the connection between a university experience. Was there anything that you guys specifically bonded over from like the time at Emory?

• 3:50Speaker 02

  Um, I think just having gone through the same undergraduate business program, you know, Barry's background was one of, you know, also being a banker, he spent time at Houlihan Lokey after undergrad. And, you know, I think having that Wall Street background and that mentality certainly helps when you're, you know, starting to run a regulated business the way that we do.

• 4:12Speaker 00

  Absolutely. It's, I've got this saying, I say, "Long Bitcoin, short the bankers." Right? It's like you did that with your career.

• 4:18Speaker 02

  Absolutely, absolutely.

• 4:20Speaker 00

  Okay, so let's talk a little bit about Second Market, right? So when you get there, like, what's going on? What is kind of the, you know, the split inside the company between crypto-focused versus non-crypto-focused? Just walk us through some of those early days as you got there.

• 4:33Speaker 02

  Sure. So there was already quite a bit of a bifurcation at Second Market, right? And kind of two competing cultures. You had one side of the company that was very much working on the private company market space. So they were focusing on liquidity events for private companies like Facebook and LinkedIn and things like that historically. And we're also helping to do capital raises and tenders. And then you had a whole nother part of the human capital at Second Market that had gotten into crypto. You know, Barry had given our trading desk the mandate to go figure out how to buy and sell Bitcoin. And the folks at Genesis were super innovative. They kind of mapped out who the big stakeholders were globally.

• 5:14Speaker 02

  This is way before the days of there being sophisticated order management systems and APIs into different exchanges and different wallet solutions. So they had already kind of really beefed up their operation. And then there was a few people that had worked on launching the Bitcoin Investment Trust, which was our first digital currency investment product. So, you know, there was a little bit of, I guess, differences in terms of mentality and excitement about things. And ultimately Barry stepped down as the CEO of Second Market, really to focus on the company's digital currency initiatives. And as we transitioned further towards the end of 2015, it was actually really an opportune time because NASDAQ came knocking and said,

• 5:57Speaker 02

  you know, "We really like this private company market platform that you built at Second Market." And NASDAQ ended up acquiring Second Market. And that caused half of our headcount to move over to NASDAQ. And the folks that remained were those that were working on our digital currency initiatives.

• 6:12Speaker 00

  Got it. And how much of the experience in kind of that regulated market that NASDAQ eventually bought helped in the early days of crypto versus is actually more valuable now?

• 6:24Speaker 02

  To NASDAQ or to us?

• 6:25Speaker 00

  To you guys.

• 6:26Speaker 02

  I think it was tremendously helpful, right? Because when you look at the legal frameworks, dealing with accredited investors, documentation, AML, KYC, you know, today we run as strictly regulated a business and stay as buttoned up as we possibly can. So it was an amazing prerequisite for kind of all the things we do today.

• 6:46Speaker 00

  Absolutely. And internally, when Barry's saying, "Look, we've got kind of our core business. It's driving great revenue, but I want to figure out this digital currency thing." What is people's reactions? Are there people who are, you know, there's people who want to run through the brick wall and then they love it? And then there's people who are detractors? Or is everyone on board? What's the split there?

• 7:06Speaker 02

  So that conversation slightly predates my joining Second Market. But to the best of my understanding, there were definitely some folks who thought Barry was crazy. And there were definitely some folks who said, "I've, you know, worked with Barry for a long time. He's a visionary. He's kind of that guy who can always see around corners." And I think he went to the Second Market board and said, "Hey, I want to take some of the company's capital and start building up some businesses and building up headcount around these initiatives." And they said, "Go for it." And when it started to demonstrate a track record of success and started building revenues, I think people were very quickly, you know, quick to glom onto it.

• 7:46Speaker 00

  Absolutely. And so, obviously, sell the Second Market business to NASDAQ and then, you know, now what is today DCG or Digital Currency Group. Explain kind of the structure there and how that came about.

• 7:58Speaker 02

  Sure. So when Second Market got sold to NASDAQ, about half of the company's headcount remained. And it was time for us to undertake an exercise to rebrand and kind of repackage who we were. And Barry decided to form a holding company called Digital Currency Group. And so, Digital Currency Group, or DCG, is a C corp. We hope ultimately it'll, at some point, have public market aspirations. And I think as we decided to go, or Barry decided to go rather, with a holding company structure, he started looking at business models like SoftBank and IAC. Berkshire Hathaway where you have this great holding company, it has a great brand, but all those companies I just mentioned, they don't really have a product or a service per se.

• 8:43Speaker 02

  What they do have instead is a balance sheet that lets them buy companies, incubate companies, invest in companies. And that's really the model that DCG has taken. And so when we formed Digital Currency Group, Barry did a small capital raise to bring in some kind of corporate and strategic investors. And so we're fortunate to have as backers DCG folks like Mastercard and Western Union and Foxconn and New York Life and Transamerica and really a whole series of kind of strategic corporate folks who clearly could see that the proliferation of the digital currency asset class was going to affect their business positively or negatively.

• 9:24Speaker 02

  And so if they were part of the DCG family, this would give them a front row seat. And I would say today, in terms of how we've evolved, DCG is broadly broken down into, I guess, three different buckets of assets. So the first bucket would be DCG's venture capital portfolio. This is not by any means a standalone fund, rather the VC investments that DCG is making are off of the company's balance sheet. And today Barry and our venture team have now invested in 130, I think a little more than 130 actually, digital currency businesses in more than 30 countries around the world. And so that certainly makes DCG the most prolific VC investor in the digital currency ecosystem.

• 10:09Speaker 02

  And it doesn't necessarily mean that we're the largest check writers, but I do think, you know, obviously a little bit subjective, but I do think it means we have one of the highest quality portfolios out there. We're very fortunate to have gotten involved very early in companies like Coinbase and Ripple, Bitpay, Zappos and

• 10:28Speaker 02

  I think our criteria is, certainly, we look very scrutinizing of all the opportunities that come our way, but we're seed-stage investors primarily. So at that point, when you're investing, we're really looking at entrepreneurs and we're investing in people, much more so than we are cash-flowing businesses. And I think that you'll continue to see us ramping up our VC investments over time. And it's been a really fantastic way for us to stay squarely at the center of the ecosystem. It's very easy, I think, at our company for all of us to come into the office every day and kind of tell each other, "Oh yeah, this whole digital currency thing, it's happening," right?

• 11:11Speaker 02

  Amongst these four walls, we can all talk about as much as we want. But when you have portfolio companies in Kenya, and Sweden, and the Philippines, and Mexico, and pretty much every corner of the globe you can think of, it becomes very validating to see what kind of volumes they're experiencing, what kind of user growth they're experiencing, what kind of contracts they're landing. That's been a really, really helpful and kind of validating source for the DCG family. The second bucket of assets, so outside of our VC portfolio, is digital currency directly. So on the DCG balance sheet, we have a couple hundred million dollars of digital currency. And I would say that we are pretty long-term and pretty patient investors.

• 11:56Speaker 02

  And the digital currency portfolio is broadly broken down into five different currencies that we have high conviction in. And those are Bitcoin, Ethereum Classic, Zcash, and then we are also newer and also big believers in two less-known currencies. One is called Mana, which is the native currency for the Decentraland project, and then a currency called Zen, which is the native token to the Horizon platform.

• 12:26Speaker 02

  And then the third bucket of assets are the subsidiary businesses that Digital Currency Group owns. So the first of those is called CoinDesk. I'm sure a lot of folks listening to this, and Anthony, I'm sure you as well, know CoinDesk quite well. So they've done a really good job of establishing a foothold on the reporting and kind of real-time statistics on what's happening in the digital currency ecosystem. And then they have also launched this really fantastic events business called Consensus, and they run events all over the world. And CoinDesk was an acquisition for DCG in, I think it was 2016. The other two businesses were the businesses that were incubated under Second Market. So our registered broker-dealer, Genesis, is our trading business.

• 13:11Speaker 02

  So Genesis Global Trading now has probably a foothold as the second or third-largest OTC digital currency trading desk globally. And I think they certainly have a competitive advantage in that they're an SEC and FINRA registered broker-dealer. And so for a lot of counterparties, they're, they look very favorably upon trading with a registered and kind of regulated entity like them. And then the third business is the business that I run for us, which is called Grayscale Investments. So Grayscale is a digital currency-focused asset manager. Today, we manage probably about $1.6 billion, $1.7 billion across a family of nine investment products.

• 13:53Speaker 02

  And at Grayscale, I think we are laying the groundwork, or have laid the groundwork, rather I should say, for hopefully becoming what will be the iShares, or the Vanguard, or the Wisdom Tree of the digital currency ecosystem. And when you kind of take a step back and you look at Digital Currency Group, you know, what Barry has really done in bringing together this VC portfolio, the operating subsidiaries, our digital currency holdings, he's created a center of gravity around Digital Currency Group. And I'm really excited to see what we build from here, but we seem to have our hand in a little bit of everything going on in the ecosystem, which keeps us really engaged and really involved.

• 14:32Speaker 00

  Got it. And so, you know, as you think about this, there's the parent company of DCG. You've got CoinDesk, right? You've got kind of the two trading or asset management businesses. How involved is Barry and the executive team at that parent company in the individual business units?

• 14:51Speaker 02

  Quite a bit, actually. So Barry is definitely involved strategically in all the businesses and spends time with each of the businesses. CoinDesk has its own CEO, a gentleman named Kevin Worth, who's fantastic. Michael Moro, who I think you've had on recently, is the CEO of the Genesis business. And then actually Barry also serves as the CEO of Grayscale Investments. So he does spend quite a bit of time with each of the businesses.

• 15:19Speaker 00

  Very cool. And how do you think about kind of asset management, venture capital investing? And then obviously you guys own a media arm, right? And so there's, from what I understand, some separation between kind of the media coverage and that asset management business. But you sit on the non-media side. Like, what is kind of your view of how those two interact?

• 15:43Speaker 02

  So there's a tremendous amount of separation. CoinDesk, the entire CoinDesk team and their entire operations sit in entirely different offices from Digital Currency Group, Grayscale, and from Genesis. So they have, you know, arguably their own culture, their own way of operating. There is by no means any kind of overlap in terms of business initiatives or anything like that. You know, certainly Grayscale, Genesis, a lot of our portfolio companies love to give stories to CoinDesk or interact with them. But we really always try and ensure that there is quite a bit of separation between the two.

• 16:23Speaker 02

  CoinDesk is really trying to be objective in reporting on the industry in a timely and compliant manner.

• 16:30Speaker 00

  Absolutely. No, it's fascinating. And then for those people who have projects or companies that they're building and are interested in potentially getting investment from DCG, what's kind of the best way for them to surface those opportunities?

• 16:45Speaker 02

  So I think one of the best ways that we get kind of deal flow or project flow is actually through our existing network of entrepreneurs. So I think that the entrepreneurs that are building companies, products, services, et cetera, in the digital currency ecosystem is a pretty tightly knit community and it's often our entrepreneurs that are referring other folks in. That's usually one of the best ways that we get alerted to, you know, new projects taking place. And other than that, I think DCG does a pretty good job of either hosting events or networking or being at certain industry happenings and that's another way that I think a lot of people get in touch with us as well.

• 17:25Speaker 00

  Absolutely. And so let's go kind of deeper on grayscale itself, right? So why don't you kind of explain what you guys are doing today, you know, what the different vehicles are, we'll go from there.

• 17:36Speaker 02

  Sure. So I think at grayscale, we definitely take the view that digital currency as an asset class has arrived and that it's here to stay and that investors want exposure to it. Digital currencies, though, have some unique properties. They require some intelligence and some experience with figuring out where to buy them, how to transfer them, how to store them, you know, keep them safe, et cetera. And I think that for us, we mostly look at other products within the investment universe that are construed as access products. So things like gold and oil that today have ETFs and that have, you know, notes and all

• 18:18Speaker 02

  different kinds of structures that are familiar and easy to access, that if they weren't around, investors would have a hard time gaining exposure to gold or gaining exposure to oil. And so at grayscale, what we've done is we've taken digital currencies and we've packaged them into securities, into familiar, transparent investment structures so that investors can gain exposure to them. And today, we operate eight single currency vehicles and then one diversified vehicle. And so our single currency vehicles are for Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, XRP, Zcash and Zen. And so each of those vehicles solely and passively holds a digital currency.

• 19:03Speaker 02

  So our Bitcoin vehicle, for example, just holds Bitcoin. There's no cash, no leverage, no trading, no arbitrage, nothing at all. And so if you're an investor and you want to gain exposure to Bitcoin, but you don't want to deal with figuring out where to buy it, or how to transfer it, or how to store it, or you're concerned about your private keys, or getting hacked, or not really having the technical know-how to do so, well, then you can buy shares of the Bitcoin Investment Trust. That is a really easy and familiar proposition. And same goes for any of our other vehicles. If you want exposure to Ethereum, or to XRP, or whatever it may be.

• 19:39Speaker 00

  But these are public vehicles.

• 19:41Speaker 02

  So there's actually two sides to how people get involved with us. So all nine products have daily subscriptions. So they're private placements, they're open to accredited investors, they have a daily net asset value. So every single day, investors coming to grayscale, buying shares of the products at that daily NAV, and then they're subject to a one-year holding period. Now, each of our vehicles, when they get to their one-year anniversary from their inception date, we actually then transition them out into the public market so that there's a public quotation for the shares. So today, two of the nine vehicles have been around for greater than one year. So those are the only two that have public quotations.

• 20:21Speaker 00

  And that is Bitcoin?

• 20:23Speaker 02

  That's Bitcoin, which trades under the symbol GBTC. And then our Ethereum Classic vehicle, which trades under the symbol ETCG. And so anybody who buys shares as an accredited investor, buys them through us at NAV, holds them for a year, and then is able to sell those shares out into the public market on the other side of a year. Now, if you're not an accredited investor and you want to be involved in grayscale, you're welcome to buy shares out on the public market. There's no holding periods, there's no minimum investment size, et cetera. But there has historically been a premium in the shares publicly, in GBTC and in ETCG. So it's important to watch the premium and just make sure that you understand what levels you're getting involved in the products at.

• 21:05Speaker 00

  And so the thought process here is if I invest in the private placement, I'm buying at NAV, right? And then if I'm buying in the public market, you get this premium and the premium's been pretty high, right? At times. How do you think about that? You know, is that sustainable? You know, where are you guys see that premium is a good thing? Is it a bad thing?

• 21:24Speaker 02

  Well, so one, I have to disclaim that, you know, the premium is really driven by market demand, right? We are not engaged in trading the shares in the public market. And so there has historically been an imbalance there where there is a quite a high supply of shares out on the market, particularly in GBTC. It's been quoted since the middle of 2015, but there has been, you know, not enough shares to meet that demand. And so there has been a, you know, quite a bit of a premium. I think today the premium is probably somewhere around 25 or so percent above NAV. But, you know, this is a, this is a really unique structure. When you look back at something like GLD, the gold ETF, when that got introduced in 2004, that was the

• 22:09Speaker 02

  first time that an investor could say, you know, I own Apple and I own Microsoft and I own stocks and bonds and all this stuff in my account. But now I want to add gold exposure right alongside all those other things that I own. And similarly, GBTC and now ETCG, you know, those are accomplishing those exact same kind of offering that the Spyder Gold did when it first got introduced. If you have a brokerage account, if you have an IRA, if you have a, you know, a mutual fund, whatever it may be, and you want to add this type of exposure, well, then something like GBTC is kind of the only way that people can get exposure to it.

• 22:44Speaker 00

  Absolutely. No, it makes sense. And then how do you think about, you know, these vehicles that you have out on the public markets? Everyone is, you know, hemming and hawing about the ETFs and ETNs and all these other publicly traded vehicles, right? Or kind of retail products?

• 22:59Speaker 00

  Let's just say that they're going to happen at some point, right? I don't know if it's a month, a year, or whatever it is, but at some point they happen. What do you think that impact is on your business? Is it kind of everyone benefits from just more retail investors in the public markets wanting digital assets? Walk me through kind of the thought process there.

• 23:15Speaker 02

  Sure. So well, number one, I think it's no secret, you know, grayscale spent a good portion of 2017 working with the SEC to try and register our Bitcoin Investment Trust, GBTC, as an ETF. Ultimately, we decided to withdraw from that process and continue kind of building assets and building out more products. And so we're certainly believers in the idea of having digital currency ETFs, but as you suggested, it could take some time until our regulators are comfortable with it. I think from our standpoint, we definitely think that having ETFs out in the market for Bitcoin and other digital assets will be net positive. When you look at what happened to things like gold, right, going back to GLD, you know,

• 23:59Speaker 02

  having a instrument like that out on the market for something like Bitcoin creates an entirely new use case that doesn't exist today. And especially for a fixed supply asset like Bitcoin, that could be really, really impactful to its price. And so I think that grayscale and certainly a lot of other folks in the industry are doing what they can to help educate regulators. We spend a lot of time with the SEC and a lot of time with FINRA, trying to keep them informed of what's happening in the space. We support entities like Coin Center down in DC, which are doing a great job of also, you know, conducting those types of meetings, writing, you know, thought pieces and helping to keep people informed.

• 24:40Speaker 00

  And Niraj has incredible memes on the internet.

• 24:43Speaker 02

  Yes, yes. Niraj is a, let's call him a Twitter master.

• 24:47Speaker 00

  All right. So you guys are doing a bunch of work that basically supports the overall industry as well?

• 24:53Speaker 02

  Absolutely.

• 24:54Speaker 00

  Before we move on, I wanted to tell you about our sponsor BlockEstate, a new security token project in the $200 trillion real estate market. They've partnered with Polymath and Coinlist Comply API to create one of the world's first tokenized real estate funds. Tokenization is the process of creating a digital token that represents ownership in a real world asset. You've heard me say it before, but a clear use case for this is real estate. BlockEstate aims to bring increased liquidity to this massive market. We're really, really thankful to the BlockEstate team for their support, so we'd appreciate it if you checked out their website at blockestate.com to learn more. If you're intrigued by what they're doing, feel free to reach out to them or give them a tweet on Twitter. Thanks so much.

• 25:35Speaker 00

  And then how do you think about kind of the future of grayscale, right? So today you've got the existing vehicles, two are public, it sounds like nine that are in the private placement space. Will you continue to kind of go after the long tail in terms of add more private placement token specific? Will you go more into like the indexing, right? That we haven't talked yet about kind of the bucket that you have for diversified exposure? What's the future look like?

• 26:02Speaker 02

  Sure. So, well, one, yeah, we talked briefly about the eight single currency products we have. The ninth product we have is our digital large cap fund, which we launched earlier this year. That product seeks to have as its holdings the assets which constitute the upper 70% of the digital currency market and holds them on a market cap weighted basis. So that's a kind of a quasi-index product, if you will, that has, you know, a rules-based methodology. I think that, you know, our product development team really has, I don't know, I'd say maybe 15, 20 different product ideas running on our list. And I think it's a little bit of a struggle for grayscale, if I'm being honest. We struggle with

• 26:44Speaker 02

  What it is that we see as being value accretive and things that we want to structure products around and where we think investors should be deploying capital, balancing that with what our investors and what the community as a whole is telling us they want exposure to. I think early on, if you look at the development of the existing product set, our first product was Bitcoin, our second product was Ethereum Classic, our third product was Zcash. These were all products and digital assets around which we had conviction and we would develop really robust investment theses around each of them. And I think that earlier this year, or maybe even late last year, we started to take a

• 27:25Speaker 02

  little bit more of an agnostic view about the world and say, well, if you look at businesses like Wisdom Tree, they have a product for Russia, for Japan, for China, for the Philippines, etc. And if they didn't have all of those different areas of the world represented, then there'd be a hole in their lineup. And I think Grayscale similarly took a view that we had to open ourselves up and open up products for Ethereum and Bitcoin Cash and XRP, etc. And so on a go-forward basis, I think that our eyes and ears are open. We're always looking at new protocols, always looking at new projects, and then certainly are very engaged with our investors to understand where they wanted to play capital as well.

• 28:04Speaker 00

  Got it. And so, as you guys are doing this, moving forward, your role is kind of unique in that you do a lot of stuff internally, right? So you do everything from help manage the team to strategy to product development and then fundraising itself, right? And so let's talk a little bit about kind of how have you guys gone from zero assets under management to 1.6, 1.7 billion dollars. That's not just roll out of bed and that happens, right? So how did you get there?

• 28:32Speaker 02

  How did we get here? I think we're exhausted. I don't know.

• 28:38Speaker 02

  I think that if I look at how we've raised assets over time, you know, one, I think we have a super high-quality investor base. We are very fortunate to call folks that are CEOs of Fortune 100 companies, family offices, hedge funds, you name it, as investors. So they have been exceedingly loyal to us and have done a really good job of, you know, introducing us to other folks and making referrals. That's been a huge help. But what I think when I look back at the life cycle of how we've raised assets, in the earliest days, 2013, 2014, we were spending a lot more time, certainly in the Silicon Valley, San Francisco area and in the New York area,

• 29:21Speaker 02

  really raising money from ultra, ultra-high-net-worth individuals and kind of CEOs of companies that wanted exposure to the space. And I think as you transitioned into 2015, 2016, we started to spend a lot more time with the family office set. You know, these were folks that were very agile and, you know, when they had a conviction about something, they would just kind of go with it. They have a pretty high risk tolerance as well. And throughout kind of the beginning of 2017 through today, I think we were spending a lot more time raising assets from hedge funds. And so our inflows, yeah, I think even just this year, have skewed to be a little bit more than 50% coming from institutions. And just to unpack that a little bit further,

• 30:04Speaker 02

  when I say institutions, I'm not talking about digital currency hedge funds. I'm talking about your typical long-short equity fund. It's everyone who has strategies around value to momentum to global macro. There really is no one type of investor that we're dealing with. And I'd say probably over the last three to call it six months, we're now starting to spend a little bit more time with like the pensions and endowments. And that's really, I think, Anthony, because the once taboo nature around investing in digital assets has really been shrugged off. Every investor wants to explore this. They know it's not going away and they have to figure out

• 30:47Speaker 02

  whether or not it makes sense for them to have exposure to the space. And if they're not going to have exposure to the space, well, then they need to be figuring out where else in the world they're investing and how the proliferation of digital assets are affecting. You know, certain places that they already have capital deployed.

• 31:03Speaker 00

  Absolutely. No, it's fascinating. And as you started to talk to these more institutional investors, where are they today? Are they interested? Are they learning? Are they, you know, get out of my office? Kind of where are they?

• 31:15Speaker 02

  So if we were having this conversation even, I'd say 12 to 18 months ago, I would be telling you that I'd go to a given major city, meet with a multi-billion dollar hedge fund or an endowment or whatever it may be, and I was still spending 30 to 45 minutes doing Bitcoin 101 and 201. We were talking about the way mining works, the way that, you know, proof of stake works, things like that. Today, those meetings have like no part of the conversation going into those, those types of topics. The investors are coming into the meetings, having done their homework. These are folks that are looking at the plethora of resources out there on the internet.

• 31:56Speaker 02

  People have written books, et cetera. There's so many great resources for people to get educated about digital assets. So that's been super validating to be able to go to a meeting and have people be super informed. So that's been a major change. I think now, though, most investors are asking us for our opinions around how this asset class affects areas that, that they have exposure to. And the truth is that it's too early to tell. I think you'll agree that, you know, there are some really interesting projects going on and the space has a ton of momentum. But at the moment, is there any one killer use case that we've identified for Bitcoin or for really any digital asset? No, because it's still so early.

• 32:38Speaker 02

  And so I can't tell you how many funds I've talked to that say, we've been a decade-long investor in payment company X or in credit card company Y. What does Bitcoin do to our, our long thesis? And I'll say, I don't know, but you know, I'll bet your bottom dollar that, you know, payment company or credit card company is either deploying, you know, human capital into looking at blockchain technology or digital assets and/or has already made investments in digital currency-related businesses because they know that they have to pay attention to it.

• 33:13Speaker 00

  Absolutely. And do you think that these people are buying into the qualitative argument, right, of Bitcoin is a store of value, a medium of exchange, it could one day be the global reserve currency, it's a hedge against inflation or economic chaos, etc. Or do you think they're looking at it more from a quantitative standpoint in if I add 1% of my assets into digital assets, here's the impact it could have on my portfolio?

• 33:37Speaker 02

  I think it's a little bit different with each investor. The notion of Bitcoin being digital gold, a digital store of value, a gold 2.0, a superior form of gold, that narrative has certainly been sticking with investors as we talk to them. And so we definitely are seeing some investors rotate some of their exposure to things like gold and other inflationary hedging assets into things like Bitcoin. There is no question that people get that. And we have to be a little careful, though, sometimes, because there are some people who are gold bugs and really do believe in things like gold and other things that have kind of been these time-tested areas to go

• 34:18Speaker 02

  to as a safe haven. So that has certainly stuck. I think, though, if people are building diversified portfolios and are always looking for new areas to generate alpha, they cannot probably find other assets that have the same risk-reward profile that something like Bitcoin or digital assets in general do. And so when sized appropriately as part of a diversified portfolio, we're definitely seeing investors putting on 10, 20, 30, all the way up to maybe 200 basis points of exposure. Because if digital assets like Bitcoin do some of the amazing things that we think they can do, well, then that 10, 20, 30,

• 35:00Speaker 02

  up to 200 basis points, actually becomes a really meaningful driver of returns. And in the event that it doesn't do that, well, it's a small enough position that it's not going to kill their performance and it's not going to be that material to their overall strategy.

• 35:16Speaker 00

  Absolutely. What's the absolute worst reaction you've had in an investment meeting?

• 35:22Speaker 02

  It's probably, it's been a while, but I'd probably say it was probably about two, three years ago when people were much more focused and the popular press wasn't doing that good a job of explaining what Bitcoin and digital currencies were in general. And we had this kind of very heated argument around, you know, the anonymity of Bitcoin and the fact that it was being used for money laundering and drug trafficking and things of that nature. When in fact, you know, and I know you certainly agree with this, that this is probably the worst mechanism possible for conducting anything at all nefarious, right? We are investors now in companies like Chainalysis and Elliptic, who are doing fantastic work on blockchain surveillance and monitoring.

• 36:07Speaker 02

  They're working with law enforcement and government agencies and they love this, right? Because they catch bad people doing bad things very, very easily. You know, Bitcoin and digital currencies leave a quote unquote "digital breadcrumb" on every single transaction. So people are always able to be caught. Compared to the physical world, when you use cash, it's quite hard to, you know, trace those types of transactions.

• 36:30Speaker 00

  Absolutely. And how many of these people do you think are, that are investing, aren't yet ready to invest with the institutional capital that they oversee, but they're personally invested? Like, are there situations where they're saying, "Look, I actually personally believe, but from institutional fiduciary standpoint, I'm not yet ready to deploy capital"?

• 36:50Speaker 02

  Well, so the traders at a lot of shops have been involved for a while, right?

• 36:54Speaker 00

  I can only imagine why.

• 36:56Speaker 02

  Well, there's a couple of actually pretty good reasons why that's the case, right? Number one, these are typically folks whose, you know, personal trading activities are very closely monitored. They have all kinds of restricted, you know, lists that they have to adhere to, et cetera. But Bitcoin and digital currencies aren't things that generally fell onto that list the way maybe Coca-Cola or, you know, some other public stock did.

• 37:19Speaker 00

  And what you're, just so people understand, what you're describing is if you're a trader and... For a whole host of reasons, your company may be involved or have information, etc. So you can't trade certain securities for a set period of time. What you're saying is basically these people want to go trade cryptocurrencies because those cryptocurrencies are almost never on the no-trade list.

• 37:38Speaker 02

  Exactly, exactly. And so I'd say probably, you know, when we started talking to hedge funds, call it 18, 20 months ago, it wouldn't be uncommon to start seeing some of the portfolio managers or, you know, head PMs, founders, etc., want to deploy some capital personally. They got the thesis, you know, they have a high-risk tolerance. Those are folks that have been doing so for a while. But again, because that taboo nature has been shrugged off, there is no reason that LP money is not being deployed into digital currency now. The LPs are talking about it, asking for it, and it's not crazy when the quarterly newsletter goes out to all the LPs and the PM wrote that we're now investing in digital currencies.

• 38:23Speaker 02

  In fact, I think a lot of LPs value the fact that these funds are now thinking about new and opportunistic ways to generate returns.

• 38:30Speaker 00

  For sure. What do you think in terms of, you know, look, you and the Grayscale team manage billion and a half plus dollars. How do you guys think about Bitcoin as this economic hedge, you know, and the way that it could play out if there were some of these crisis or chaotic events that occur?

• 38:50Speaker 02

  Well, so we actually wrote, my colleague Matt Beck wrote a really great paper about this very topic. So if you go to the Grayscale website, grayscale.co, you can take a look at it on our Insights page. We looked at a couple of global macro shocks, things like Brexit or Gregxit or the Chinese devaluation of the renminbi. And when you look at how traditional assets reacted in the wake of those types of shocks, Bitcoin actually holds up quite a bit better. And so I think in our view, that'll probably continue to be the case. We look at what's going on globally and we're amidst a currency crisis. We're looking at places like Venezuela and Argentina and capital controls in China.

• 39:33Speaker 02

  Etcetera. The promise of a decentralized, non-government, non-central bank-backed currency is a very, very powerful thing. When half the world's adult population does not have access to financial services, the ability to store value or have your money in pretty much anything other than your local currency, that's a pretty powerful concept. We think it's actually almost even more powerful than the proliferation of the communication space and cell phones coming along. That was, that was a big one. And we think this is, you know, potentially even bigger. We think that this is the springboard to financial inclusion.

• 40:13Speaker 00

  Yeah. I mean, look, it's, we talk a lot about this idea of like beginning to trust math and software over humans, right? And so if you think of all the central banks kind of led currency, there's humans making decisions. But really, when you go to a transparency conversation, like I tweeted the other day, and I said Bitcoin is more transparent than the Federal Reserve, right?

• 40:36Speaker 02

  It's true.

• 40:37Speaker 00

  Because you understand how the system's designed. You understand every single transaction from the beginning of time till today. You can go look at it. You understand what's going on right now. You can actually look at the real time data. And then you know what is supposed to happen in the future.

• 40:48Speaker 02

  Absolutely.

• 40:49Speaker 00

  Right? And I don't know if you can say that about a lot of fiat currencies.

• 40:52Speaker 02

  Yeah, you won't know how much is being printed, or how much is being retracted, or what inflation rates are going to be, or, you know, what may happen the next time we have a, you know, you know, economic crisis. So it's, it's a powerful concept. There's no question about it. And we'd take the view that the genie's out of the bottle. We're excited to see more regulatory clarity come into the space. We're excited to see more institutional capital flow into the space and for a lot of our portfolio companies to continue building out, you know, everything from order management to custodial solutions to, you know, trading venues and, and different things that can kind of support the underpinnings of this ecosystem. But again, the genie's out of the bottle.

• 41:35Speaker 00

  Absolutely. No, I completely agree. All right. Let's go into some rapid fire questions. And then at the end, I'll let you, let you ask me some questions. Actually, you only get to ask one because we got a couple of people have tried to ask too many. But what do you think other than a DCG company is the most important company in the crypto space?

• 41:52Speaker 02

  Ooh, that's a tough one. We've definitely, I think, been really good about being involved in some of the best and brightest entrepreneurs. One company that recently has come out, which DCG is not involved in, is looking at BACT, which is the new futures-based exchange that ICE is deploying. That's important. The proliferation of futures on CME, CBOE, has been great. It's brought a lot more folks into the space and given folks hedging instruments, et cetera. Really excited to see what BACT is going to do as well and how the market's going to receive that.

• 42:33Speaker 00

  Absolutely. No, I think that that is a very interesting one. All right. What is your most controversial belief? What do you believe that you think the highest degree of other people would disagree with?

• 42:43Speaker 02

  I don't know if it's as controversial as it once was, but I think when we meaningfully got behind Ethereum Classic, a lot of people thought that we were nuts.

• 42:53Speaker 00

  All right, hold on. We got to talk about this. So let's walk through the difference Ethereum Classic, Ethereum, and kind of why you guys stuck with Ethereum Classic over Ethereum.

• 43:06Speaker 02

  Sure. So we have long been believers in the idea of Ethereum as a technology, looking at a decentralized global computer that can give rise to smart contracts and all other kinds of really interesting digital applications. We thought that the Ethereum community, the developer community around it, was really robust, really strong, but had a difficult time finding either companies to invest in or reasons to start buying the Ethereum currency or the Ether currency itself. And after the DAO and kind of seeing the split between Ethereum and Ethereum Classic, well, very quickly, in the Ethereum Classic community, some of the developers instituted

• 43:51Speaker 02

  some really positive governance and economic principles into it that, for us, were pretty closely mimicking what had and what continues to make Bitcoin pretty successful. And that was to cap the supply on Ethereum Classic, to have a decentralized governance model, right? Where you now have different teams of developers working on the protocol and, you know, not necessarily coming to consensus around things and kind of always challenging the status quo, which we thought was super important. And when you start looking at things like that, we said, wow, well, Ethereum Classic is kind of being left for dead. And I think a lot of people are overlooking some of these new and really novel attributes around it. And I think we started probably getting involved in Ethereum Classic when it was, you know,

• 44:36Speaker 02

  probably sub a dollar, maybe 50 cents. And I think a lot of people thought we were nuts. And when you look at how far that ecosystem has come along today, it didn't die. It attracted a lot of developers and that ecosystem is thriving. So I think that, you know, today, people think we're a little less nuts than maybe we once were. But again, that was pretty controversial when we kind of staked ourselves around ETC.

• 45:02Speaker 00

  And I think that the, the counter argument that people would have, right? So all the people on Twitter who are going to listen to this and go nuts, right? What they, I think, would say is, yes, but if you compare it to what has happened with Ethereum, if you compare it to all the developer activity and the attention that was now known as Ethereum has gotten, did you make a mistake?

• 45:23Speaker 02

  Well, I would say that, you know, Ethereum Classic is certainly the David to the Ethereum Goliath. There's certainly been more developer work or more corporates throwing money at Ethereum or, you know, perhaps more resources being thrown on Ethereum. But I think what people often overlook is that Ethereum and Ethereum Classic are the same technology. And Ethereum Classic trades for, I don't know, 1/20th or 1/25th the price of Ethereum. And so if you have a belief in Ethereum as a technology generally, then maybe there's no harm in owning both Ethereum and Ethereum Classic. So certainly too early to say if one will win or whatnot.

• 46:04Speaker 02

  But I also think that Ethereum over the last year has also really been utilized and its price appreciation has most been associated with ICOs, which has not really been a use case or any kind of utility around Ethereum Classic. It's kind of stayed away from that.

• 46:18Speaker 00

  Yeah. And I think that also we're still pretty early, right? So to your point, you know, anything could happen. I mean, this is crypto, anything, literally anything can happen. Okay, so let's say you've got a magic wand, you can wave it and change any one regulation in the United States. What regulation do you think should be changed?

• 46:38Speaker 02

  Phew, that is a difficult one.

• 46:45Speaker 02

  I don't know.

• 46:46Speaker 00

  Or improved, doesn't it have to be changes, like just improved?

• 46:49Speaker 02

  Improved.

• 46:51Speaker 00

  Something that you guys deal with on a daily basis, or you know, something, maybe it's even just the ETF application process, you know?

• 46:59Speaker 02

  No, I mean, I gotta hand it to our regulators. I mean, I think some people may end up throwing some shade at me for this, but I think by and large, they've done a pretty good job so far. I mean, you and I spend 24/7 in this ecosystem and you and I can barely keep up with it. So it's hard to expect regulators that have a score of other asset classes and instruments that they have to be looking at and regulating, that they're keeping up with this. So I think the fact that in the five years I've been in the space, that we've gotten clarity from the IRS on taxation, we've seen, you know, statements from the SEC around Bitcoin and Ethereum, and we've had some of the, you

• 47:41Speaker 02

  know, Bitlicense and some of the other things that have come through, you know, I think we've actually made quite a bit of progress in the space. And I think it's good to see them starting to crack down on some ICOs and some of these other kind of illegal asset raising schemes. So more of that to come, but I don't think there's much that I would change.

• 47:59Speaker 00

  Got it. Okay, that's fascinating. All right, so let's talk, let's talk about aliens real quick. So we're just gonna settle on aliens exist somewhere in the world. And do you think they have pets?

• 48:15Speaker 02

  Do aliens have pets?

• 48:16Speaker 00

  Like every time you think of an alien, it is in a human-like comparison, right? There's aliens that are human-like, but we never talk about the animals. Are there alien animals, alien pets?

• 48:28Speaker 02

  I mean, if you think that dog is, the dog is man's best friend, then one maybe has to assume that there's something else that's aliens' best friend. So, so why not?

• 48:40Speaker 00

  I always imagine them getting off of like the spaceship and they've got their dogs and all their different pets and stuff that are just coming to hang out with us. All right, so you could ask me any one question. What do you got?

• 48:53Speaker 02

  Okay, so what is the protocol or the application that gets you most excited about what's taking place in this ecosystem right now?

• 49:07Speaker 00

  Yeah, so it's a boring answer. It's Bitcoin, but for probably a different reason. So I think everyone knows very kind of bullish on the economic argument around, you know, a censorship-resistant, deflationary, you know, economic model, right? So I think that's kind of table stakes at this point.

• 49:28Speaker 02

  Well, and a tangential question is, has the 2018 kind of bear market made you more of a Bitcoin maximalist?

• 49:36Speaker 00

  Okay, so let me answer that one in a second. I think the reason why I'm probably most excited about Bitcoin is I think we get very attracted to innovation and this thought process that, you know, we need to test new things and try new things, etc. I think Bitcoin is the core value prop is security of the network, right? And so if you kind of draw a spectrum on the far left side, you have security. On the far right side, you have innovation. Bitcoin is like as far to the left as you can get because it prioritizes that security. And I think what we've seen is more and more people push the envelope going to the right of the spectrum and they're trying to innovate and do all these things. And Bitcoin is actually in a position of power, right? They kind of can allow people to do that with different projects, different chains, etc.

• 50:19Speaker 00

  And they're picking the things that work, that are valuable, that people seem to adopt, and then they can incorporate it into the Bitcoin chain, right? And so I think that it's one of these things where there's a quote that I really like. It's be the first, be the best, or be forgotten. And I think not only was Bitcoin first, but I think it's the best, right? In terms of today. And so if you can be both the first and the best, it's a really powerful position to be in. Now, in terms of this bear market. I think regardless of market cycles, everyone has to go through like this, uh, this cycle of, uh, okay, I found out about Bitcoin. Bitcoin's awesome. I love Bitcoin. And then they go through the innovation cycle, right? Like what else can you do? Oh, there's this ICOs thing. That's interesting. Oh, there's this other thing. There's all, you

• 51:03Speaker 00

  know, and you keep going through all of these different applications of a blockchain. The enterprise blockchain, tokenized securities, I mean, all, literally all the way around. And you come back and you realize the strength of the Bitcoin network is the security and all of those things are possible, right? Where obviously people are showing that they're possible. Um, but if they can be built on a highly secure chain, then you get the best of both worlds, right? And so I think that, um,

• 51:28Speaker 02

  But don't you hate when people are like, is Bitcoin the MySpace to the eventual Facebook? You know, and, and what am I missing here?

• 51:34Speaker 00

  Yeah, I, I think that the, the, so two things. Uh, I hear this all the time, right? Is, you know, oh, how many companies were the first in the space that ended up existing, right? And there's two components that are really important to this. So the first being that Bitcoin's not a company, right? It's not like somebody else is just gonna come along and build a company with a better business model, right? The second thing is, uh, actually a couple of things. So second thing is the network effect. Bitcoin has the strongest network effect and a network effect is a very hard, uh, moat to defeat.

• 52:06Speaker 02

  Totally. And people overlook the switching costs, right? If, if, if everyone's about to say, oh, there's this other thing coming along. Well, look at how much has been built and invested in Bitcoin and, and what the cost would be to switch from Bitcoin to what that other thing were, was, right? Um, and they overlook the open source nature of Bitcoin, right?

• 52:23Speaker 00

  Absolutely. And, and this is important, the, the fact they bring up MySpace and Facebook's really important because, um, you know, one of the things that people forget about MySpace is MySpace, uh, did not have the newsfeed-like applications that, uh, Facebook had. So really what MySpace was, was a database, right? I could come and I could look at your profile and I could do all this stuff. And so it was a, a very loose definition of a network, but Facebook actually locked people in the network, right? You could go to the newsfeed and then you could see all this content and there's one central location and people are kind of tied in. And so it's not good enough to just have adoption, right? And have kind of all of the different nodes. You have to lock the nodes in, right? And that's Facebook did a fantastic job of doing that.

• 53:08Speaker 00

  They also had Real Identity, a bunch of reasons why they want, right? I think what Bitcoin did was through the incentive mechanism, the block reward, you know, proof of work, all these different aspects, they locked people in the network, right? And so when they do that, it's really, really painful for people to leave, right? And then also, every new entrant is more likely to join the longest standing chain with the greatest network lock-in, right? So I think that's what we're seeing. The bear market, I think, definitely helps people kind of go towards Bitcoin, right? And kind of gravitate that way. But one thing that I'm really interested to see is how many new entrants go to Bitcoin

• 53:51Speaker 00

  versus a different digital asset during a time of economic crisis? So if the thought process around Bitcoin is it is a hedge, it is some sort of safe haven asset, etc. Well, a lot of people talk about Bitcoin specifically, but there's a whole host of digital assets now. There's, you know, 1900, 2000, or whatever it is. If all of a sudden we have a huge recession in the United States again, there's higher inflation, you know, all the kind of ingredients to a bad situation, do people run to Bitcoin? Do they run to Bitcoin and Ethereum? Bitcoin Ethereum, Ethereum Classic, Bitcoin? Or maybe they go to some completely different asset that's not Bitcoin?

• 54:26Speaker 02

  It's a good question. I mean, I think that's one of the reasons why we've seen so many index-like products being launched. It's one of the reasons Grayscale launched the Digital Large Cap Fund. We started hearing from a lot of folks, I think I miss Bitcoin, or I think I missed Ethereum, or I want to put money to work in the space, but I don't think I know enough to pick winners and avoid losers. And so this idea of getting broad market exposure actually kind of makes a lot of sense, right? That's why there's things like the SPY ETF, right? And you get exposure to the S and P 500 companies. And so we've had a lot of success there, as have a lot of other businesses launching index-like products. And maybe those are good things.

• 55:07Speaker 02

  Maybe those give people the diversification benefits within digital currency, as well as having the digital currency exposure on within the context of a diversified portfolio.

• 55:17Speaker 00

  Absolutely. No, I think it makes complete sense. And I mean, look, I love the fact that you started your career out in banking. And so it's, you know, long Bitcoin, short the bankers.

• 55:26Speaker 02

  Sure, sure. I'll take that one. I like that one.

• 55:29Speaker 00

  All right, man. Thanks so much for coming. This is super fun. I really appreciate it.

• 55:31Speaker 02

  Of course. Thanks for having me.

• 55:34Speaker 00

  Thanks again to our sponsor BlockEstate. To check out their tokenized real estate fund, you can check out www.blogestate.com. Hey, everyone. Pomp here. If you liked this episode of Off the Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off the Chain homepage, scroll down until you see the five blank stars. Taking 15 seconds to fill those stars in and leave a quick review goes a long way in helping us take the entire crypto ecosystem to the top of the charts. I appreciate you listening and see you next time on Off the Chain.