How Grayscale became the world’s largest asset manager for digital currencies

Michael Sonnenschein:

You know, Bitcoin is something that could potentially change the world or create financial inclusion. And when I met Barry, I don’t know that I’d ever had a conversation with somebody that had really, really taken a deep dive, or even used phrases like, change the world, or reconstitute our concepts of money, or how value moves around the world, and I was completely enamoured by the opportunity. I would say, through the lens that we look at the world, the crypto ecosystem has continued to mature and continued to evolve, and we have remained committed and unwavering in the fact that we will be converting GBTC into an ETF.

We believe wholeheartedly that this product is not only the world’s largest Bitcoin product, it holds about three and a half percent of the outstanding Bitcoin flow. It trades hundreds of millions of dollars a day. It’s already an SEC reporting company. We think it is, of course, and remains only a matter of time. It’s a matter of when, not a matter of if, this is able to convert to an ETF, and that’s going to be a day that we will all celebrate with a lot of excitement because it’ll be many, many years in the making to get there.

Michael Sonnenschein:

Thank you so much for having me. I’m really excited to have this conversation.

Michael Sonnenschein:

Absolutely. So Grayscale, as you mentioned, we are the world’s largest digital currency asset manager. And that’s a lot of words, so let’s unpack what that means. We are an asset manager, which means that we offer products that allow investors to make certain investments. It just so happens that rather than focusing on stocks, or bonds, or commodities, or foreign exchange, our focus is entirely on digital assets.

So that journey for us began in 2013 when we launched our first, and what remains our flagship product, the Grayscale Bitcoin Trust. Today, as you mentioned, we have 15 different investment vehicles and about $45 billion of assets under management. What does that really mean? It means that we were early to identify that investors would want access to digital currencies, assets like Bitcoin, Ethereum, and Litecoin, and I’m sure quite a few others that folks have heard of or perhaps have even considered investing in. And we realised that because digital currencies have certain attributes that may make them tough to figure out where to buy them, or how to hold them, or transfer them, or safe keep them, well, maybe we could be the conduit to help a lot of investors get access to this ecosystem, but do so in a way that really felt familiar and comfortable for them. And so we’ve packaged digital currencies into investment vehicles.

And that’s not new, right? Investment vehicles exist for gold, for oil, for subsets of the investment universe, healthcare stocks, energy stocks, you name it. And so Grayscale has really been a really big catalyst for many investors, whether they are retail investors, or even institutions who want digital currency exposure as part of their investment portfolios but maybe don’t either have the legal or operational wherewithal to buy digital currencies or hold digital currencies directly.

Michael Sonnenschein:

Yeah. So I don’t know how quickly this conversation will be out in the market-

Michael Sonnenschein:

… but we launched the Grayscale Bitcoin Trust in September of 2013. Speaking with you today in September… Actually, what’s today’s date? Oh, wow. We are almost coming up on the eighth anniversary of the launch of the product. We have come quite a bit from those original early days of just focusing on Bitcoin, and now our products span over a dozen different and digital currencies, so been an exciting journey over the last eight years.

Michael Sonnenschein:

Let me talk you through what that journey has kind of been like. Number one, I unfortunately missed day one of Grayscale. Our founder is a gentleman named Barry Silbert. He started the fund in September, 2013, I joined him in January of 2014. So just a couple months.

Michael Sonnenschein:

Yeah, exactly. So I’ll take you back to then. I left traditional banking. I was working at a bulge bracket bank, actually I worked at three different bulge bracket banks, and then was looking for my next career move, and got very excited by the opportunity within digital assets. Thinking about Bitcoin is something that could potentially change the world or create financial inclusion. And when I met Barry, I don’t know that I’d ever had a conversation with somebody that had really, really taken a deep dive, or even used phrases like, change the world, or reconstitute our concepts of money, or how value moves around the world, and I was completely enamoured by the opportunity.

And when I originally joined, my role was really to spearhead our sales effort. We had about $60 million of assets under management, and, again, just that one product, Grayscale Bitcoin Trust, so that’s just a passive Bitcoin strategy. And over the years I continued to take on more and more responsibility, and ultimately became CEO of the business at the beginning of 2021.

But how conversations have changed over the last eight years, some of the things that have transpired are things I wouldn’t have even imagined. In 2013, I think maybe the only people that were talking about Bitcoin, and into 2014, were really, really wealthy entrepreneurs. A lot of folks that were primarily around the technology scene and the software scene. This was coming up in social gatherings, dinner parties, things like that. I think in late 2014 and throughout 2015 and ’16, we started to really engage more so with family offices. So again, starting to see a little bit of a ground swell from retail investors, but mostly larger capital was coming from very wealthy families, who if I really think about what their motivations were, they were excited by the technology. I think they were realising that there was an opportunity, a risk-reward scenario that maybe didn’t exist elsewhere. And then also given how small family offices are, once they have conviction in something, they could actually make an investment pretty quickly.

But I think it wasn’t until 2017 when Bitcoin kind of broke out to that new all-time high. Prior to then the highest Bitcoin I think had ever been was probably around 1,200 some odd US dollars, and when it broke out beyond that, I think that’s when it really started to capture the hearts and minds of institutions. There were starting to be the development of some really interesting trading tools. So indices were starting to get launched, accessibility started to open up. And I think for us and a lot of other folks, there started to really be this conversation around institutional adoption of digital assets and what is it going to take to get institutions involved with digital currencies.

And I think that’s only continued to unravel. As I speak to you today, you now have Fortune 500 companies that own Bitcoin on their balance sheet. If you’d asked me that five years ago, you could have even asked me that 12 months ago or 18 months ago, I’d probably tell you that would be long off. It would not happen so quickly. In the emerging markets you have countries like El Salvador that have now declared Bitcoin as legal tender. I mean, you really, really have started to see massive participation in this asset class on a global level that has really solidified its staying power. And despite all the progress, despite all the growth, and even just the growth at Grayscale, which we are of course super proud of, I got to say, I cannot characterise enough for anyone watching or listening how early days the entire thing still feels.

Michael Sonnenschein:

Well, I’ll start out by saying that there is no handbook, there is no guidebook, there are no cliff notes for how to launch these funds, particularly when it comes to digital assets. We’ve created products now around a totally novel technology. It’s not securities, these are not commodities, these are not FX. And so I think really the power of the way that we’ve built our business really has been leveraging some outstanding service providers obtaining some fantastic legal advice and really never losing sight of what’s most important to us, which of course is our investors, and ensuring that we’re taking all the proper precautions.

But we’ve definitely had to face a lot of, not only challenges, but it actually says we’ve really been the pioneers that have actually set a lot of the industry standards. So that’s been things like, really trying to ensure that anyone that we may work with for custodying digital currency, underpinning our products are folks that adhere to certain standards and have certain kinds of reporting, disaster recovery, certain other kinds of redundancies and security measures in place. We’ve had to really work proactively with auditing firms. For them, auditing different kinds of assets was certainly not something that was new to them, that may be a little less traditional, but they certainly didn’t have the familiarity or the comfort with digital currencies and perhaps how to audit those. And so that’s been another area we’ve really had to partner and kind of pioneer some of those conversations and practises.

And I really think underscoring all of what I’m sharing is that we as a firm have always taken a measured approach to what it is that we do. We are definitely a ask for permission not for forgiveness kind of organisation, but we do it in a way where, because we recognise the goal that we play, it’s always been important to us to really educate the people that we’re working with and really partnering with them to try and achieve that agility that is obviously really, really important to operating our products.

Michael Sonnenschein:

Mm-hmm (affirmative).

Michael Sonnenschein:

Well, I think for a lot of investors they’ve really been able to find different reasons why this as an investment resonated with them. I think certain investors saw Bitcoin as a digital gold or a digital store of value, so it may be able to fit in their portfolios as a replacement or a partial replacement for assets like gold or other assets they may own as an inflation hedge or a applied to safety asset so that their portfolios are protected when markets are turbulent.

I think other investors may have been excited about the underlying blockchain technology. This was a kind of a pure play for them and they believed in the inextricable tie between Bitcoin itself and the underlying technology, and that owning exposure to Bitcoin would be a more liquid way to, I guess, execute on that kind of a thesis. I think certainly many investors have long believed that Bitcoin is a new form of money, a new way that value moves. Maybe a displacement or a replacement of certain mechanisms that we use today to move value around the world. And so I think kind of depending on the type of investor that we were dealing with and certainly the types of investments that they are historically comfortable making, we were able to kind of find usually the right analogy or the right set of circumstances that would get them excited about it.

And at the same time continuing to reinforce education and doing everything we can to dispel any of the kinds of myths that may be out there around the asset class or any beliefs that kind of bubbled up to the surface that we knew in fact to not be true as well.

Michael Sonnenschein:

Well, I think a lot of that did start to occur really in 2016, 2017. For a long time we were operating Grayscale at a loss, and when we started to get to a significant size, we had no hesitations, prior to earning a profit, running the business, investing in the business, but certainly when we were able to turn the corner and start to achieve profitability it started to open up the potential for us to have extra capital that we could really emphasise our brand and lean into things like advertising and partnerships. And so being able to get the word out there about the opportunities that Grayscale offered investors certainly allowed a lot more investors to come to us as opposed to us having to kind of do outbound sales work as heavily.

But I think to one of your earlier questions, something that has also been pretty pioneering about Grayscale is the fact that we have historically and continue to launch each of our products as a private placement. So these are generally soliciting investments primarily to accredited investors. So high net worth individuals, family offices, hedge funds, endowments, pensions, you name it. And we’ve done something that’s been pretty novel. But again, asking for permission, making use of existing securities laws and regulations, which is that we moved to have those private funds actually pushed out into the public market. And so we now have six different products so far out of the 15 products that also trade on the public market every day. And so whether you’re here in the US, or you have access to the US securities market from other parts of the world, investors have the ability to also participate in Grayscale products right in their brokerage accounts, retirement accounts, you name it.

And certainly the success and the receptivity of these products in the public market, I think it has also been a really big catalyst for us that’s also allowed us to create a larger ground swell and also increase our investor base. So that’s also been something that we’ve looked back on historically that’s been a big part of our business.

Michael Sonnenschein:

Well, I think certainly we as a team developed a very thick skin and an iron stomach pretty early on, because you of all people and anyone listening or watching knows that digital currencies and Bitcoin as well certainly are no stranger to volatility. And so whether it was price movements that could have shaken people out or caused them to have their conviction begin to waiver, or it was the narrative. The early days of this asset class, and even still today. It’s been challenging for companies to get even bank accounts, or even just kind of simple services to really just help operate their businesses. The early days of crypto and Bitcoin, we were having to do a lot of work to dispel a lot of the narratives that this was for laundering money or for illicit activity.

Alex Cleanthous:

The next one that you launched was Ethereum in 2017. That now has over, well, of course I had a look online, it’s set around like $10 billion under management. I’m not quite sure if that’s increased because it changes so much these days. That’s what happened basically in the business that led to launching the second fund now. Because you’ve got the first one, it’s now hitting something and now you’re like, cool, okay, so now we are going to launch the next one. So what happened in the business to start that?

Alex Cleanthous:

And so you’ve launched another, if I am correct, because you said like 15 products now, because I had a look online it was 12 but I think there’s more now. You change so much. That’s the first thing that’s really interesting about this space, but how much harder or how much easier was launching the second and the third and the fourth product compared to the first one?

Alex Cleanthous:

So it’s easier but there are still challenges, and there’s like the different styles of products that are being created, which is really interesting, right?

Alex Cleanthous:

So it still has it’s challenges but you’ve got a few more processes now and a bit of a track record and a bit of history so that probably a fraction easier than those first three to four years. You talk about transitioning to exchange-traded funds now, because at the moment it’s trusts that then list on the stock exchange. But there’s all this, the ground swell that is starting to hopefully move towards exchange-traded funds. What’s the process there right now? Because obviously it’s in extremely early stages right now.

Alex Cleanthous:

It just seems like it’s a matter of time right now. It seems like-

Alex Cleanthous:

… the momentum is there, it’s just how long now. What’s left really to do?

Alex Cleanthous:

Yeah. And if we can look at companies like Vanguard and how much they actually have now because of the fact that they are like an ETF, this is going to be huge for Grayscale, so that’s very exciting for you. I wish you all the best to accelerate that process.

Alex Cleanthous:

You did mention you hold three and a half percent. See, again, last time I looked it was about two and a half percent, but you had about three and a half percent of all the Bitcoin. What’s your approach in the trust? Is it to buy and hold? Is that the strategy?

Alex Cleanthous:

And is there a limit to how many Bitcoin the trust can hold? Like in terms of the market size, in terms of the Bitcoin circulation?

Alex Cleanthous:

And again, that’s one of those good problems to have.

Alex Cleanthous:

You have another 14 products and you invest in companies like the Basic Attention Token and Decentraland and so on. How do you choose the next thing? Because you’ve got such a good start, now feels like the pressure of choosing the next thing is really, really important. So what are some of your considerations in the next product or the next digital earthy currency?

Alex Cleanthous:

That’s an amazing answer because you answered all of my follow up questions in that one answer, so that’s a very good answer. Thank you for that.

Alex Cleanthous:

Awesome. So what does a typical week look like for you now? Because there’s a lot of stuff going on with products, with interviews like this, and then you’ve got all the regulators, and sales, and client relationships. So what does a typical week look like for someone like yourself? Because you’re in a really interesting position.

Alex Cleanthous:

This is just a quick question just for myself. What time do you wake up in the morning, just out of interest?

Alex Cleanthous:

Got it. That’s just something which I’m just interested in personally. A couple more questions and then we’re done. First one is, what’s your best advice for people looking to launch an investment fund?

Alex Cleanthous:

Thank you for that answer. If you had to start again, would there be anything which you would have done differently?

Alex Cleanthous:

I think that’s a fabulous answer, and I think that’s something that there’s quite a lot of organisations that are actually starting to see right now, but before that was the expectation. It’s really hard to go against the expectation when everyone expects the meetings, and the handshakes, and lunches, and the dinners, and all that type of stuff. It’s been super interesting to see how the world has shifted the paradigm around the business side of things.

Michael Sonnenschein:

Yeah, you do.

Michael Sonnenschein:

I’m going to couch my answer in the following. I think both Bitcoin and Ethereum as assets are here to stay, and I see that based on the kind of the signals that I’m seeing in the market and who’s participating in this market. All that being said, it would be very difficult to pinpoint where Bitcoin or where Ethereum will be in the future from a price perspective. Certainly for an asset like Bitcoin, which is verifiably scarce, it’s simple supply and demand. If the asset is scarce and the supply is constrained and demand continues to grow, basic economics would tell you that the price of the asset would increase over time.

I personally continue to buy more of these assets daily. That’s just the degree to which I personally have conviction. That being said, I can’t underscore enough that digital currencies are volatile. We’re only about a decade plus into the journey of their life cycle, and so the same way that not every investment under the sun is appropriate for every investor, that also means that for every investor of digital currencies aren’t necessarily appropriate. But I am certainly optimistic about the road ahead for digital assets more broadly.

Michael Sonnenschein:

First of all, before anybody invests, we can’t underscore enough the importance of education. So come to grayscale.com, follow us on Twitter, follow us on LinkedIn, however you kind of want to engage. If you get to grayscale.com, there is a library, a wealth of resources that you can access totally, totally for free. We try to put out as much content as possible to make digital currency accessible, help people make informed investing decisions, whether it’s getting more educated on certain assets, thinking about portfolio construction with digital currencies. We try to address all those topics in our research library.

And then certainly those people that want to invest if they are accredited and have qualified as an accredited investor can certainly invest directly through the Grayscale website. And regardless of whether investors are accredited or not, they can also access Grayscale products on the public market right from their brokerage accounts.

Michael Sonnenschein:

Thank you.

Michael Sonnenschein:

I look forward to it. Thanks so much for having me.