Grayscale Investment CEO Discusses Bitcoin’s Appeal

Grayscale CEO Michael Sonnenshein discusses the reasons for bitcoin’s meteoric rise over the last year, and the prospects for a bitcoin ETF.
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Grayscale Investments is looking to become to cryptocurrency fund investing what Vanguard is to index investing, and it’s off to a pretty good start.

It’s already the largest cryptocurrency asset management firm in the world with $49.2 billion in assets under management as of Tuesday, up an incredible 2,360% from just $2 billion at the beginning of 2020. Its flagship fund, the Grayscale Bitcoin Trust GBTC, has been around since 2013 and allows investors to get exposure to bitcoin without owning it directly, which many can’t or don't want to do. The fund has now become so big that it owns more than 3.5% of the world’s entire bitcoin supply, and Grayscale now operates 13 other cryptocurrency-focused trusts.

Last week, Grayscale affirmed its intention to eventually convert GBTC into an ETF, which would make it available to an even wider group of investors at a lower cost. When this would happen is still unknown, however, as the SEC still has yet to approve such an investment offering, but many are betting it will be soon.

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Michael Sonnenshein has been with Grayscale since 2014, and was promoted from managing director to CEO in January. Here he answers questions about bitcoin’s past, present and future in a lightly edited transcript of a discussion held earlier in the week with TheStreet.

What do you think has been responsible for the huge run-up in bitcoin prices in the last year or so?

I think we’re seeing a confluence of factors around crypto that have never previously existed.

Number one, over the course of 2020, you saw investors having to navigate an unprecedented environment in the financial markets in the wake of COVID. You saw this material deleveraging in the market about a year ago that caused crypto to crater even harder and faster than it did in other asset classes. And I think for many investors, the perception around investing in crypto changed very materially because crypto bounced back harder and faster than other asset classes over the course of 2020. So I'd venture to say that the resilience of crypto really solidified its role in investor portfolios, and that staying power became something very tangible for the investing community.

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Number two, you also saw some very noteworthy, very closely-followed, very experienced investors, entrepreneurs and business leaders publicly state their support for participation in digital currencies like bitcoin, whether it was Paul Tudor Jones or Stanley Druckenmiller, or innovative leaders and companies like Square and Twitter and MicroStrategy and now Tesla. You never previously had that level of air cover or public support and participation, which definitely added a level of validity to the asset class.

And number three, you also saw that the policy response to the economic slowdown related to COVID has been to print and inject our financial system with fiscal stimulus. And many investors have been looking for opportunities in their portfolio to combat the dilution that is caused by financial printing, which has caused them to be attracted to bitcoin’s verifiable scarcity.

So that’s referring to the fact that there will only ever be 21 million bitcoins ever created, right?

Exactly.

Where do you see prices potentially going in the next 12 months or so?

Well we certainly aren’t ones to ever speculate on the price of bitcoin, but we remind folks of two things -- one that there is a very different set of tools available to them to look at valuation metrics for an asset like bitcoin than they would for a cash-flowing security like the common stock of a company. So we not too long ago published a paper called Valuing Bitcoin just to give investors an updated and differentiated framework for valuation metrics.

But two, we would say that we are exceedingly encouraged by who is participating, the level of conviction they seem to have in investing in crypto, as well as the time horizon for doing so. And when you think about the fact that bitcoin is a verifiably scarce asset, demand becomes the driver of price discovery, since the supply is known and predictable. And so one would think that based on simple supply and demand, that greater demand would lead to greater price.

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When you say you’re encouraged by who is participating, are you referring to the growing number of institutional investors?

Certainly institutional investors, who have been working very closely with Grayscale now for the last 18-24 months. But also just looking at other companies like Coinbase, that are about to go public. The adoption and growth rates that they’re reporting--it’s just staggering, when you think about their new user sign-ups compared to that of traditional brokerage firms.

So you’re talking about not just investors in Grayscale, but companies that are operating in the crypto space then, right?

Yes, this ecosystem is maturing, which is very exciting to see. We still need to remind ourselves that this all only started only a little over a decade ago. We have a robust derivatives market, a much healthier two-sided market, and we're starting to see the true development of everything from order management systems to tax lot reporting to various trading tools and portfolio management tools that investors need to include in their asset allocation.

So what prompted you to issue that statement about your 100% commitment to converting GBTC to an ETF?

There actually was nothing new in the statement. Since 2016, we’ve been working on the development of a bitcoin ETF, and spent the better part of 2016 in SEC registration and [talking with the SEC in] 2017, but ultimately removed ourselves from that process, realizing that the regulatory environment was not ready to approve a bitcoin ETF. So we were simply reconfirming our commitment to bringing a bitcoin ETF to market by converting our flagship offering GBTC into an ETF. And wanted the investment community to know we are still as committed as ever to it.

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Do you have any expectations as to the timeline when you might be able to get regulatory approval to offer a bitcoin ETF?

We unfortunately don’t. We look very closely at some of the previous bitcoin ETF denial letters that the SEC has issued in response to other potential products coming into the market. We’re very keyed in to whether or not those deficiencies in the market are being ameliorated to the liking of regulators and are monitoring the environment quite closely.

There have been a variety of applications that were outright denied and that comes with a letter that speaks to the causation for the denial. So that's where a lot of folks are interested in seeing if the elements of the ecosystem have changed.

What has been the nature of the reasons given for the denials?

They’re looking for things like surveillance of the domestic bitcoin market -- that would constitute surveillance sharing agreements between the exchanges like you may see in equities or other asset classes. And things like seeing significant regulated markets. Those are some of the larger items they’re looking for.

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Can you explain what ‘surveillance’ refers to here?

So, for instance, things transpire in trading markets where folks may say there’s anomalistic trading in a given asset. And they may see that on one exchange or another, and they’ve entered into agreements with one another to be able to surveil anything from spoofing to anomalistic trading to bizarre trading patterns and things like that. And wanting to see that level of surveillance sharing among exchanges to ensure that that underlying market is not being manipulated.

What do you think will creating a bitcoin ETF available to U.S. investors do for bitcoin investing?

We’ve done some interesting surveys of both investors and financial advisors, and there’s a quite a bit of proclivity amongst both audiences to be either waiting for or only actioning an investment in bitcoin when, in fact, there is an ETF available to them. I think it is well-received as an investing structure, and so many folks are encouraged and excited by being able to utilize one in their portfolio. And so we would be of the belief that approval of an ETF would open our product -- and bitcoin as a whole -- to a wider audience of investors than maybe currently are participating today.

Do you have any expectation of how big that audience could be?

Not necessarily. We look at different things. Financial advisors in the U.S. oversee about $4 trillion in assets. It’s tough to say but we certainly think there’s a large addressable market that would be utilizing a bitcoin ETF to add that exposure to their portfolios.

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Who do you think should invest in Grayscale’s eventual ETF?

I think based on who’s already an investor in GBTC, it’s a very, very varied audience. It’s institutional investors, it’s individual investors, it’s investors who want bitcoin exposure in the form of a security for their retirement accounts, for their tax-advantaged accounts -- things like an IRA or a Roth IRA. So I'd say it’s a very wide-ranging group of investors that are already involved in GBTC, and an even larger group of investors that we could see getting involved if it were to convert to an ETF.

Do you think bitcoin will eventually be accepted widely as an actual medium for exchange?

I think that the near-term, developed-world use case for bitcoin is not necessarily as a medium of exchange. In the developed world, people have robust access to financial services and so we’re not looking for bitcoin to replace the use of the dollar. We certainly do see it displacing a lot of the occupancy within portfolios that gold currently has -- a lot of investors ascribe it to being a digital gold, or a digital store of value. And so we certainly see that as one area where near-term investors seem to have glommed on to.

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Do you think there’s anything major that still needs to happen for bitcoin to become more widely invested in or used?

We’re just really seeing the development of the infrastructure being built. I’d say there’s so much being done around crypto today but it largely -- perhaps purposefully -- has not yet connected to the legacy financial system. And so over time, you see that the number of users and the level of investment in crypto has the potential to expand quite significantly if the crypto ecosystem is bridged to the legacy financial system. So a lot of what we’re focused on in terms of development and growth has to do with the development of infrastructure.