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Thursday, September 30, 2021


 from day 1 bloomberglive  global investing  oct 2021

min 60-85

8:02 AM - The Trillion Dollar Question: Should Crypto Be in Your Institutional Portfolio?

·         Michael Sonnenshein, CEO, Grayscale Investments

·         Sebastian Bea, President of One River Digital, One River Asset Management

·         Moderator: Carol Massar, Co-Anchor Bloomberg Businessweek, Bloomberg Television and Radio

Carl-. I'm joined today right now, by Michael sonenshine. He's CEO grayscale Investments and Sebastian Baya. He's president of One River digital at One River, Asset Management, 


. I would say that depending on the type of institution that you are crypto. Most certainly can find a home within the portfolio. One of Amazing things about crypto, whether that's Bitcoin,or other digital assets is that they don't squarely fit into the definition of currency or commodity, and what we've really seen a grayscale is that investors of all different investment mandates and no matter where they've historically felt comfortable investing that they've found an analog into the crypto ecosystem.And so allocations have come from Global macro funds, risk, arm funds, momentum funds, deep value... for many investors as they're seeking out diversification, trying to build more resilient portfolios. They're having a difficult time. Accessing asset classes, other than ones, like crypto where the risk-reward potential just far outweighs any of the other things that they may be able to look at.


carol- when it comes to endowments and Pension funds. What are you seeing in terms of that area? Are we seeing are starting to see any kind of serious by in?

01:04:38 Michael, it's been a really interesting Evolution there. Many of the pensions University endowments corporate endowments. They've long actually had allocations to many Venture Capital funds. And as you know, many of the VCS have been on the crypto train for quite some time. And so while I'd say maybe 18-24 months ago, you could query an endowment or a pension and asked them if they had crypto exposure, and then sometimes say that because of that VC investment that underlying had made investment in digital currency businesses or into digital currency, protocols directly that they somehow had some exposure now, through our conversations, a grayscale with many of these folks. They've come to realize that that's probably not enough exposure for them. And so we have begun to see Endowments pensions move into crypto directly so that they have now really an appreciation for not only making investments in crypto need of businesses that are supporting the picks and shovels of this industry, but also recognizing that having exposure to tokens directly could be a very liquid way to gain exposure to this asset class.


Sebastian,- for big institutions, I think the question is what outcomes do these assets break, right? What opportunities do they offer? And for us, there's really four :, its potential to offer, a new inflation, hedge and investment in Innovation, as well as a source of income. And lastly, for some potential play on inefficiency, 

when Pension funds and endowments are thinking about what role these assets are going to play. Clearly growth has been a part of that inventor, but when they think more broadly, they have to think about what are the problems I have in my pension fund today and why are these assets uniquely Suited? Why is this digital ecosystem? Uniquely suited to be the next allocation, right at a high level. What we don't see in the industry is large dedicated.  There's just two on-screen today and there's not many others and that tells you, how early we are.


We think that there are analogs with digital with other. New assets that have come before, think of risk. Parity, Emerging Markets, Etc, or pension plans at first had no exposure and eventually they recognize that these new assets solved problems. And so they made dedicate allocations within their plans and then dedicated managers went and serve those needs.


carol So help me out  just look at Bitcoin in April. It was above sixty three. Thousand late May was down to around. 33,000 July. It was below. Thirty thousand a year ago. It was 10,000 and change today, its back around 50,000 for the first time in a month. I mean, if we saw another asset class with this, kind of volatility, we would say this is high-risk. It's not for everyone. Isn't this to the case. Michael, when it comes to things like crypto.


It's certainly the case. It's not for everybody.The same way that every investment opportunity is not That every investor ends up actioning for their portfolios.


I think one of the important things that Sebastian brought up is just how early it is. You are seeing tremendous coverage around, cryptocurrency, and popular Financial media.

You're seeing the on ramps into the ecosystem to continue to get developed, but it really is still early days. Bitcoins only. Been around for the last 10 or 12 years. And so, one of the important things to remember, when we think about institutions is that there are still some legal and operational hiccups when it when it comes to whether or not they can allocate, many of them don't have the legal or operational wherewithal to hold the instrument like Bitcoin directly  And so what we're starting to see is some of these institutions, either leveraged investment vehicles that can give them, that type of exposure, whether that's through grayscale or otherwise, Or they're actually developing dedicated funds, whose documentation and investment mandate actually does allow for that type of exposure. 

sebastian. We think that this asset class is new and important, and it's much more than one or two assets. Right? We think that the resiliency you seen in the case of Bitcoin and with etherium relates ultimately to the powerful impact that these could have in changing the way that we move assets, right? So the web moves information, And you see people talk about web 3.0. What are they talking about? What they're talking about here is that cryptocurrency will likely be the way that we move assets around the world. That's why t institutions are paying more attention to these to these assets and these opportunities and that's why they're not deterred by the high volatility and the uncertain nature of the assets and how they're held, you know, that's why candidly we were brought into the space by one of our largest. Alliance last year when we entered the markets and we made the largest institutional allocation to bitcoin etherium. When Bitcoin was a 15,000 and etherium was at 400 our client and other clients are definitely concerned about the volatility and and the way which is Essence trade, but they see the potential and they need, as Michael said, there are hiccups it with regards to legal and operational. TThis industry is growing, its partners and plumbing to enable institutions to on board and they're coming. Because they see that this may well be the way by which assets move in a future and is much bigger than a couple assets that are a little bit volatile in your portfolio.


caeol I want to get in to regulate the regulatory environment because that's certainly a big piece of this. Let me just ask you because you talked about Bitcoin you talked about etheruem. Those are two that we talked about a lot here. At Bloomberg. Is it going to be a smattering of different currencies that stay with us? I mean, we pull up our Monitor and the list is rather long and we know that there's a ton out there. Is it Bitcoin that continues to be the dominant cryptocurrency? Is it etherium? There were some stories that I was reading this morning that the flows are moving out of Bitcoin and into ethereum?


Michael  I don't think we know at this point. I think that the digital The currency ecosystem is continuing to allow for new, use cases and new protocols to come into the fold. We've recently looked very substantially at protocols that are part of the decentralized Finance ecosystem. We've started to see the Confluence of digital assets and gaming, digital assets and privacy, digital assets, and file storage, digital assets and video streaming, right? We're starting to start moving into these new use cases that were not yet.


 the barrier to entry the launching new assets is relatively low. We would suspect that over time. The hundreds, if not thousands of digital currencies will ultimately get Consolidated. We often think about, you know, maybe analogizing digital assets to the precious metals family and we look at things like gold, silver, Platinum, Palladium, Etc. All being part of a Singular family of precious stones or precious metals, however, each of them have an addressable market and addressable use case and a different price. And through that lens. You may find that there's a cohort of digital assets, that grow, and Thrive and coexist in each of them do in fact, occupy their own addressable Market have their own use cases and their own prices, whether or not that's Bitcoin. The theory of other assets its early days. So it's hard to say what that'll look like. But if there's any telling how this ecosystem of Love's certainly going to see the emergence of more protocols before we see consolidation before? Bring you back Sebastian?

. 18 months ago at Fortune, 500 companies would be holding Bitcoin on their balance sheet. I would have told you that it would be premature to think that that would be the case.


 We're talking about the potential for cryptocurrency to remake Finance, which is a very large portion of the S&P 500. We're talking about cryptocurrency remaking gaming, right? And media and art we were talking earlier in our conversation. You know, about the brain drain. That's now happening from traditional investment categories into crypto.


And what we see from the investment perspective is that cryptocurrencies become increasingly important because the Innovation that's occurring in these assets, these new assets are bringing some of the brightest and most creative minds in our country to solve problems. And so, from an investment perspective. It's really hard to think that this will continue to be an arrow. Our asset class when we see the level and importance of talent and the creativity in terms of assets that's happening. Every day. And then you also have the FED may be releasing its long-awaited paper on Central Bank. Digital currencies as early as next week. There is so much going on. Let's talk about the regulatory, oversight legitimisation a keyword. When you talk about this space and institutions and ETFs you Jay Powell last week, up on Capitol Hill, saying, is no intention to ban cryptocurrencies. Yeah. The Wall Street Journal reporting. Last week about the bite Administration, considering ways to impose Bank, like regulation, on cryptocurrency companies that issue stable coins. According to those in the know, feels like Michael big steps forward in terms of that legitimisation. How do you see it? What are your anticipation in terms of the regulatory oversight? When we get it and what it means for this really industry and really true, widespread institutional adoption of cryptocurrencies.

Well, it's think if you rewind the clock maybe two or three years ago, investors would often cite regulatory uncertainty as perhaps one of the elements of thinking about digital currency exposure. That might give them pause today. I don't think that that's the case at all. And certainly not what we're hearing from investors.

It is a patchwork though, when you zoom out when you look at the u.s. Versus other parts of the world, certainly here in the US, you've seen guidance around digital assets like Bitcoin and etherium from SEC from the cftc, from the IRS, from the treasury, from the fed, from the office of the controller of the currency and these are all meaningful steps for that. From our view, really validate the asset class and investors . These are topics that are being discussed on the senate floor.


We just saw this. When we have the infrastructure Bill come through DC it just a few weeks ago and the you have never seen an industry galvanized so quickly to educate policymakers and Regulators about the merits of these Technologies. And so I think you're only going See further adoption and validation of crypto from policymakers and Regulators. However, policy policy makers and Regulators have a tough job. The crypto ecosystem has a lot of momentum. It moves very quickly devolves very quickly. And so as we continue to unlock new use cases seeing you attributes become developed around digital assets. It will be important that we continue to serve as an educational resource to those folks and that they do approach regulation in a fully informed way. And not just regulate by enforcement but actually create new regulatory Frameworks for these assets themselves.


s, Michaels, absolutely, right. We've seen a lot of regulatory progress, right? IRS had cetera over youth over the last few years, but there's so much progress that's yet to occur. Just backing up. If Global Financial assets are approximately 220 trillion, right? Krypto is approximately 2 trillion. That's 1% right there. Is it is so small what crypto is today? And Context of what it could become, right? As part of the reason. Why?


When we start, when we set up on River digital, we started an advisory Council. There was chaired by the former chair of the SE c-- J Clayton. He's joined by Courtney Elwood who it was the former general counsel of the CIA, as well, as well as heck Harold for junior. We think that there is much more regulatory progress to come. There's much more education to Michael's point that we are doing. As well and there's much more engagement than that needs to continue to happen. Their various projects that were working on with various Partners within within the United States. That we think could help to retain us has position of leadership and finance and candidly. That's what's at risk, right?

Cryptocurrency is a significant source of innovation and it is pointed squarely at the financial services sector and we view our role to be part of that. Engagement to be part of that that educational process to ensure that the US continues to be a leader in global Finance. Let's talk about timing. We did a poll we asked, when will we see widespread institutional adoption of crypto and maybe we can bring up the numbers for everybody who's watching right now in terms of less than 5 years, people said about 50% less than 10 years was roughly about 23%. Never was roughly about 27%, 

when I look at the companies and businesses that are creating products and services around digital assets, today. They are developing world class solutions natively for crypto. So we're talking about the development of indices. We're talking about order to manage. And systems, we're talking about tax lot reporting. We're talking about apis. These are all being built around digital assets today. However, that infrastructure is not connected to the Legacy Financial system, which is why investors see such an opportunity within digital assets themselves. Digital assets are still not being accessed the same way that institutions are accessing stocks bonds ETFs any instrument for that matter. And when you see that connectivity come into play.


You know, whether that takes six months a year, five years it will see you're going to in fact see a tremendous amount of capital that can flow into this ecosystem. Not to mention a lot more involvement from many more parties both in the US and abroad and that we feel is honestly going to be one of the biggest Catalyst for this asset class in the near term Michael. You've been pushing to convert grayscale into an ETF. I mean any thoughts on when you said that that would be you've told us before that that would really change the Relation just quickly any update when you think that can possibly happen for you.


Yes, so our Flagship fund grayscale. Bitcoin trust is ticker gbtc. It's the world's largest Bitcoin fund and we are a hundred percent committed to seeing a convert to an ETF. We are encouraged by recent commentary from the SEC that suggests that perhaps their previous concerns with the underlying Bitcoin Market have maybe in fact, been resolved, in which case, C could convert to an ETF format. We do think that'll be a watershed moment. Not just for gbtc holders, but crypto overall.


There are a lot of investors who have obviously gotten involved in digital assets like Bitcoin today through gbtc and other means but there are also a lot of investors waiting on the sidelines waiting for the, you know, familiarity and the protections that come with an ETF wrapper. So it's going to be an important moment when the SEC is ready to approve, those kinds of products.


So I think the key thing and the when we speak to our institutional clients, these large Pension funds endowments Sovereign wealth funds, it is to abstract from just talking about two assets to talking about the transformative power of this technology and people say that they believe in blockchain, but they really need to engage with how these assets could change. How all of their assets are eventually traded. If you understand what an mft is buying a For a price and securely being able to transact that right and to be able to move it without constraint that starts to inform.


How you might think about the rest of your of your of the Assets in your planning. And it really is to understand how much change is coming to Asset Management finance and to not be focused on the volatile, the unit price of two assets but to be focused on the on how assets may change, how they move around the world.