Making Crypto Accessible to the Masses with Michael Sonnenshein of Grayscale Investments

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June 23, 2022

On this week’s episode I sit down with the CEO of Grayscale Investments, Michael Sonnenshein.

Grayscale is one of the biggest heavyweights in the world of crypto investing. They offer investors direct access to crypto. Their premier product, the Grayscale Bitcoin Trust, is a long-bitcoin offering that anyone can access like they would a normal stock. You can simply buy the ticker. This is big, especially for folks looking to invest their money that exists in certain portfolios, like retirement savings accounts. With over 20b of assets across 17 investment vehicles they facilitate many people’s first interaction with crypto and Michael is at the center of it.

Crypto is currently down, the market is taking a hit seemingly in-line with the state of the broader stock markets so it was great to hear Michael’s perspective on the market and the future of crypto applications. Enjoy.

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‍Transcript (this is an automated transcript):

MPD: Michael. Welcome!Thanks for being here.

Michael Sonnenshein: Itis great to be here. Thank you for having me.

MPD: Cool. Do youwanna start off by giving us a little overview of grayscale?

Michael Sonnenshein:Sure where to begin. So we're eight years into the gray scale story. We go backto 2013. When our founder, a gentleman named Barry silver had the foresight andreally the vision.

To realize that, Bitcoin was going to transform the world thatBitcoin and digital currencies more broadly were gonna become a bonafide assetclass and thought that we should set out on a path to create an asset managerthat would make investing in Bitcoin and other digital currencies, accessible,familiar, and safe and insecure for the investment community.

And we haven't wavered in that mission over the last eightyears. Today gray scale is the largest digital currency asset manager in theworld. We manage about 20 billion of assets across a family of 17 differentinvestment vehicles. And I think really when you take a big step back and youexamine gray scale you've seen so many other asset managers be that entry pointor that family of access products, right?

Whether it's Fixed income products, whether it's, could besector specific products like healthcare or tech or energy or in some instancesit's certain geographies around the world kind of borrowing from that model.The gray scale business really is predicated on. Realizing that digitalcurrencies aren't that easy from the average investor to access, where do youbuy 'em?

How do you T them, how do you store them? How do you safe keepthem? And so born out of those challenges has been this ever expanding suite ofinvestment vehicles. And we've really thankfully had the good fortune of beingmany investors for, first experience with investing in crypto. So that's us.

That's

MPD: awesome. Thankyou. And you mentioned the 17 vehicles. What are those each holding a differenttype of asset? When you say that, what does that

Michael Sonnenshein:mean? So I think the earlier days of gray scale were characterized by,providing direct access to individual digital assets. So we have a long, onlyBitcoin fund that many people know us for the gray scale Bitcoin trust ittrades under ticker, G B TC.

We have an Ethereum product. We have a light coin product, soon and so forth. And over time we not only continue to build out a productfamily where there. Singular digital asset underpinning each product, but wealso started to develop thematic or basket products where multiple digitalassets would underpin a given product.

So today we have a large cap vehicle, large cap, digitalassets. We have a defi fund. That holds a basket of defi protocols. We have asmart contract platform fund that holds all the smart contract protocols. Sothese are, some of the other types of vehicles. We've also been building atgray scale, and really now investors have this ever expanding menu.

If you will, to figure out how to build a crypto portfolio inwhat weights and what sizes.

MPD: Okay. That'shelpful is one of the 17 kind of far and away the marquee product for you guys.I know the Bitcoin trust is pretty famous. Is that kinda represents the

Michael Sonnenshein:majority of the assets or is it. Yeah.

And, it's tough to really put them all on an equal footing.They've all come to market at different times in different market cycles. Andhave obviously had different, track records in front of investors. So theflagship fund is in fact what you guess. The gray scale Bitcoin trust G BTCthat is now the world's largest Bitcoin investment vehicle.

It holds about 3.4% of all Bitcoin outstanding and is the, notjust the flagship product, but is one of the largest areas of focus for thegray scale team these days. And how are the

MPD: fees structuredfor something like this? Are investors paying a typical fund structure of a twoand 20, which we see in venture capital?

Or is it. More of a mutual fund type fee construct. How does itwork?

Michael Sonnenshein:So there's definitely no performance fees like a two and 20 model, like youwould see for a hedge fund. Instead all of the funds have management fees thatare all encompassing of our cost to run and operate the vehicles.

So whether it's. Custodianship or auditing or accounting oradvertising. All of the expenses that go into them are all in, in wrapped in,in management fees that underpin each product some products like the grayscaleBitcoin trust have a 2% annual fee. Other products carry a two and a halfpercent fee.

Got it.

MPD: That makessense. So what's the motivation for someone to invest in one of these trustsversus buying the underlying assets directly? Why not just go on an exchange,like a coin base or a Kraken and buy Bitcoin. A

Michael Sonnenshein:and listen, Marco, a lot of people do that. A lot of people actually do both.

What we often find though, is that investors typically if theyare in fact already an investor have a brokerage account, they may have aretirement account. They may have a 401k. And if in those accounts they alreadyhave exposure to. Google or apple or Netflix or ETFs or municipal bonds,whatever it may be.

The grayscale product family lets you punch in a ticker symboland add Bitcoin exposure, right alongside those investments or punch in aticker symbol and add Ethereum exposure. Alongside those other investments youalready have. So there's certainly an ease of. That I think comes with the grayscale products and then just belaboring the point on retirement funds or taxadvantage funds.

Those counts, IRAs, 401ks, Roth, IRAs. Those are reallydifficult if not, almost entirely prohibitive to buy digital currencies insideof which a lot of people want to. They have a long term conviction. For theseinvestments. And so to be able to do that because the gray scale products carrya ticker symbol also has allowed a lot of people to invest in these assets forthe long term for retirement.

That

MPD: makes totalsense in particular the retirement argument, right? The the retirement vehiclesare very difficult to navigate and get any type of alternative assets in there.That's very helpful. Is the, who's the customer base for this? Is it typicallyretail investors, folks like ourselves with brokerage accounts and other, or Iwas under the impression earlier on you guys were selling more into largeinstitutions.

Michael Sonnenshein:So it actually really runs the gamut today I would say it's increasingly moreand more difficult to figure out who the end customers are in products. Whenthey're trading on a national, when they're trading on public markets, youcertainly can get data as to which firms hold shares and how many shareholders.

Are, but the actual demographics on the investors themselvesget harder and harder to get ahold of. So grayscale products today are investedin by retail investors. These can be folks that buy as little as one share.They may hold the investment for one day or they may hold the investment inperpetuity.

Grayscale investors are also ETF funds. That want Bitcoin orwant Ethereum exposure and thus, they can buy a grayscale product inside oftheir ETF alongside the other investments they're managing same goes for mutualfunds. Grayscale investors are also hedge funds. They're also registeredinvestment advisors.

They're also pensions and endowments. Everywhere you cut acrossthe investment landscape. You are going to find gray scale investors and youare going to see the value proposition to owning crypto exposure in the form ofa security with the comfort that comes from an offering memorandum and auditedfinancial statements and tax reporting.

All of that is going to have varying degrees of value todifferent investor. And that's why our investor base is so varied and not justin the us, globally as well. This

MPD: is fascinating.I've known Barry silver, the founder of grayscale for a long time. Hisbackground is a natural trajectory to grayscale, right?

He's been one of the pioneers in the FinTech space beforecrypto even became a mainstream thing on the scene. He's been out innovatingand tinkering. It did second market before this. So when he got into thedigital currency group and eventually launched gray six grade scale, it justseemed like the natural next step for him.

What was your journey? How did there's no real path fromcollege to crypto these days. It's too new. No,

Michael Sonnenshein:there is. There is.

MPD: Yeah. Tell

Michael Sonnenshein:me. So these days there is a natural path from college to crypto. That is, iscertainly happening. I think a lot of folks that are studying economics,finance, marketing, comms, you name it are rethinking whether or not investmentbanking or wall street careers are the first place that they should be goingafter they.

Receive an undergraduate education. And some of them arejoining companies like gray scale and others. My path was a little differentand a lot earlier than I guess the more established nature of crypto today thanit was back then. So for me, I started my career on wall street. I worked atthree different.

Bulge bracket banks. And with each successive move just learnedso so much. How to deal with customers, understanding rules and regulations, theentire underpinnings of the financial system and the way that value moves,looking at everything from equities to fixed income, to ETFs. To mutual fundsto structured notes, to options, to commodities, to credit default swabs,wires, journals.

The list goes on and on. And I think for me, I was at the timeback in business school and I realized, I think based on my classmates, that. Ithink we're all pursuing their MBAs for different reasons. They wereentrepreneurs starting new businesses. They were getting an MBA to further armthemselves to get ready to take over a family business.

All kinds of reasons, but I was the odd man out. If you will,someone that had more of this kind of traditional path on wall street and had avery narrow, Idea of what success meant or what success looked like. And it wasat that time that I think I realized that I should look for somethingdifferent, something where my output was going to have a lot more meaningfulimpact on the business that I was a part of.

I could be at JP Morgan and I. Have a fantastic day. I couldgenerate a ton of commissions and do a ton of trades, et cetera, but I had noreal impact on what that actually did for the overall JP Morgan enterpriseversus deciding to go to a smaller shop where that level of attribution wouldbe much more lively.

For better or for worse. And I think what I decided I was gonnaleave and look at other opportunities. I'll be honest. I wasn't looking forcrypto. Crypto was something that was, I think, flashing on CNBC from time totime and just to contextualize it, like this was the winter of 2013 Bitcoinhad.

Crashed. And I say crashed somewhat jokingly from 1200 usdollars, a coin to about 800 and good opportunities came my way. Familyoffices, hedge funds, things like that. And somewhere through LinkedInactually, and this is not like a LinkedIn advertisement or anything like that,but somewhere along the way through LinkedIn, I got connected to an opportunityat second market.

Barry's old firm and I came in, I actually almost skipped theinterview cuz I'd never heard of them to be honest, but I went, had a good chatwith everyone. I then was asked to meet Barry. Knew nothing about the man orall the accolades and awards that had been bestowed upon him as a successfulentrepreneur.

And I will never forget. He told me that Bitcoin was gonnachange the world. And honestly, I cannot think of another time in my life,personal professional settings, where any adult ever used that word choice,that something was gonna change. The world. I had never been the recipient ofthat word choice before, and it was so impactful that as Barry and I.

Continued talking. He asked me really to come in and lead thesales effort for our one product then, which was the Bitcoin trust. And it hadabout 60 million of assets at the time. It had been running for about threemonths or so. And it was just such a wonderful immediate kind of, connectivitybetween the two of us that he said, Michael, come help me build something.

And I promise you, you won't regret. And if it ever feels likeit's going off the rails, like you'll leave and you'll go back to a bank or you'llgo to a hedge fund or you'll go do something else. Those opportunities will bethere for you. And eight plus years later Bitcoin's gone through all kinds ofcycles.

Crypto's gone through all kinds of cycles. I haven't wavered inmy commitment to Barry in building out the gray scale business and have justcontinued to take on more responsibility. Never really looking back once overthe last eight and a half years. And then was blessed with the Good fortune totake over grayscale as CEO about a year and a half ago.

And truthfully, I think we're just getting started. That'sexciting. And a half years later, I we're just getting started.

MPD: Did you knowBarry before I noticed you guys are both Emory folks, did you go to collegetogether at all or overlap there?

Michael Sonnenshein:No, we did not overlap, but interestingly, my naivete and lack of preparednessin meeting Barry that fortunate day I did back in, in the winter of 2013, as Iwas being brought into his office to meet with him.

His chief of staff said, looked at my resume and said, oh,Michael. You went to Emory. So it did vary and and then handed me off to him.And so that certainly was a a kind of common point that we were able to, bondover, but no. Prior knowledge of each other.

MPD: Very helpful.Thanks to a little bit of background there. Just wanna flip back over to cryptofor a bit. Sure. What's the case for buying crypto long term? I've seen a lotof fund managers come through. Everyone's there's lots of different ways todivine the business case for why it should exist, why people should own it andhold.

Yeah. What story kind of narrative sings with you guys? How doyou, what, how do you get comfortable that this is. Gonna continue to create

Michael Sonnenshein:value and sustain. Yeah, I think it's relatively simple. Bitcoin is going tochange the world. There's a lot of impatience around that today that perhaps ithasn't fulfilled a world changing kind of proposition.

That being said, I think that Bitcoin is ultimately thespringboard to financial inclusion and going to help much of the world leap,frog the traditional. Banking system today, Bitcoin though is mostly being usedeither as a speculative and diversifying investment. And or as a digital goal,digital store of value and And even if Bitcoin doesn't move to ultimatelybecome something more killer than that that even of itself, I would say is avery successful case for Bitcoin.

Bitcoin has such interesting attributes, the finite supply thepredictable supply rate it's the visibility it's portability. I. It has allowedus as a society really for the first time to glom onto something that is a one,a global consensus mechanism unlike we've ever had before.

And so there's value to attribute to that in and of itself. Buttwo, I think it's caused us to realize more than ever that money and value iswhat society dictates it is. And so the fact that, for the past, however many,decades or centuries, we've relied on our governments to tell us what money is.

That's not always been the case. And I think as we're movinginto this global, digitally connected world the time has come. Probably passedalready. Why it is that information moves seamlessly around the worldinstantaneously and for free, but somehow the movement of value has not kept apace with that.

And and that's one of the, I think the biggest reasons whyyou're seeing so much excitement, so much development here. Can you talk

MPD: about thefinancial inclusion piece? We're starting to see countries pick upcryptocurrencies estate currencies. And I think this is being done in a fewdifferent ways it's being done where states are creating their own digitalcurrency, which I don't know how different that fundamentally is fromtraditional currency.

And we're seeing it. States are adopting these

Michael Sonnenshein:shared currencies. It's too early to say. I've never been a bigger believer inthe idea that Bitcoin is here to stay. Whether or not Bitcoin continues to getadopted by nation states like El Salvador and others that are, I think when ElSalvador did that earlier, I guess this year you saw within a matter of weeks,there were more.

Citizens in El Salvador that had Bitcoin wallets then had bankaccounts in a matter of weeks. The, I, the idea of drawing people into aconnected financial system is very powerful. It allows people to, spend money,save money, finance businesses, finance educations, pass money to the nextgeneration, The list goes on and on.

I think in the developed world, we sometimes take for grantedhow much financial services access we actually have at our disposal. And whenyou look around the world, it's certainly too early to say whether it will beBitcoin or it will be something else or some evolved version of Bitcoin overtime.

But I think certainly the idea of non sovereign money assomething people want to own, whether it's because it's diversifying. Or it'sbecause they're living in a world where they're purchasing powers rapidly beingeroded by inflation or government, poor oversight of Fiat currency.

The idea of non sovereign value, the non sovereign asset ideais an idea that's here to stay. And I don't think that's gonna get put back inthe bottle. The genie is out.

MPD: Why do a lot ofwhy are bank accounts and financial inclusion? Why is that not more ubiquitous?I think to the executive.

Class of business folks in the us who are probably the folkswho are gonna listen to this, we just assume everyone has a bank account, butthe reality is the data doesn't support that. Why is it less accessible? Why isthis a problem to begin with?

Michael Sonnenshein:So it depends what part of the world you're looking at?

I believe the latest statistic is that about half the world's adultpopulation does not have access to basic financial services. Meaning there's nobank branch on their corner. There is no, snapping a photo on. Smartphone of acheck and having it, automatically deposited into their bank account.

There is no financing, the purchase of a home or taking out aloan to finance an education, et cetera. And that's simply because. Some partsof the world from a profitability standpoint, just don't make sense for a lotof financial institutions to set up shop in a digital format or in a brick andmortar format.

Some of that is also born by the lack of not justinfrastructure, but a very important piece of infrastructure, which is stilleven lacking in the us in many spots, which. Is also not a conversation we talkabout often, but the internet is not accessible everywhere in the UnitedStates, which is wild.

And so what you've started to see is that, whereas in the, ifyou wanna analogize that mark in the developed world, landlines came along andsuddenly everyone. The ability to connect and talk and communicate and theinfrastructure and the capital was never there to set up landlines in thedeveloping world.

And when cell phone technology came along, it took off muchmore rapidly in the developing world than it did in the develop world. Cause wehad already had communications, but in the developing world, we popped up cellphone tower. We handed out a piece of plastic to everybody and suddenlyeverybody was communicating for the first time.

And so I think in a similar fashion, because the tools you needto move value like Bitcoin are as simple as a feature phone. SMSing from one,recipient to another. You could see a scenario where the advent of cell phonetechnology and its adoption, could somewhat, create a similar roadmap for theway in which Bitcoin and non sovereign assets get adopted and used in otherparts of the world before they really cross a chasm in the developed world asbeing something other than a digital goal, digital store of value, or, anythingbeyond that or a speculative asset.

MPD: Yeah, and rightnow we all understand the case. It's a store of value and speculative asset.And I think we were all hoping it didn't correlate with the public markets, butit seems to but the idea that people are being able to use a currency withlimited technology and limited resources is pretty powerful.

What do you think the next generation of use case is gonna beit and outside of the store of. Do you think this will be more integrated inthe way we transact? Or do you think that's TBD or far fetched at this point?

Michael Sonnenshein:What's your take. I don't know that I'm gonna go buy a, a beverage at my local,corner store with Bitcoin because what I have to available to me today to do soworks pretty well.

I don't necessarily know that it's gonna replace or displacethat anytime soon. I think a lot of the additional use cases are gonna start.Seeing are gonna be the movements of value and movements of other assets inscenarios where perhaps sender and receiver might not even know that Bitcoin isthe rails on which that asset is moved.

A lot of that's gonna be abstracted away. And so I'm ex. Citedfor us to only grow further attach to this global consensus mechanism we havethat we've never had before. And what that can do to the movement of assetsglobally. I think that's a killer use case for crypto and Bitcoin.

Specifically, a lot of people have

MPD: talked about howBitcoin's actual underlying technology. Isn't efficient enough to support highvolume of transactions fast, rapidly. Yeah. And that's been the case made forEthereum or these other alt coins that have come out. What's your take on theunderlying technology?

Are we on trajectory where Bitcoin could become the rails asyou put it, or is Bitcoin displaced when you get to that level?

Michael Sonnenshein:I think there's a lot of smart people working on scaling solutions that makethe transactional throughput on the Bitcoin network a lot higher than it istoday. Arguably the fact that there are so many transactions transpiring todayI look at it as a sign of Bitcoin success, right?

If there's so much activity that the network's getting cloggedthen that means Bitcoin's. Much more successful than it was ever evenoriginally conceived to be over time, I think we will find ways to make thenetwork more efficient. So there are, new solutions out there like lightningand others that are looking to, increase.

Transactional throughput in the efficiency of the network, butwe also have to make sure we again have patience, right? The Bitcoin as anasset has only been around, a little over a decade. And so the fact that thisis where we are, we have developed markets, healthy markets, derivatives, youname it.

And we haven't yet cracked that nut. I think smells more likeopportunity than it does. A ultimately prohibitive aspect of Bitcoin, as weknow it. Some managers

MPD: I've seen comethrough the doors have talked about the underlying technologies as signal forthe potential value. And I think what their arguments are is like, Hey, if thiscrypto asset is really functioning as a form of rails, it means applicationswill be built on it.

It'll get more integrated into the ecosystem. Therefore it'lltransact more, there'll be more demand and you'll see the price of the asset goup. Ultimately. Is there a target allocation that you think makes sense, givenwhere technologies are in the various crypto sectors?

Michael Sonnenshein:Do you think it's just two Bitcoin athere for the

MPD: lead or wherewould you

Michael Sonnenshein:have people place money?

I think there's two pieces to that. I think number one, thesame way that there are myriad of investment opportunities available under thesun today, we don't all touch or invest in every single one of them because.Not every single one of them's appropriate for us. And I think along those samelines, that also means that just because crypto is now an investment opportunityavailable doesn't mean it's appropriate for everybody, right?

The people we tend to see allocating to crypto have a, strongerstomach for volatility tend to have to longer time horizon. For theirinvestments, they don't have needs for income or things like that in the nearterm. And we tend to tell people that you should think about this akin toinvesting in an early stage technology.

It hasn't been around that long. There's a lot of unensuredquestions as the ecosystem continues to grow and mature, smaller allocations,probably look. 40 to 50 basis points, more aggressive allocations, look morelike four to 500 basis points. And people usually scale into those over time. Ithink diversification within crypto is something that has been gaining momentumas well.

Whereas most people were probably only investing in Bitcoin andEthereum. I think nowadays there's an appreciation for different subsets ordifferent subcategories of crypto. And so people like the idea of investing indefi and broadly investing in defi or investing in, privacy tokens.

And I think what's been fascinating about the investor behavioris. The fact that there's now appreciation for these subcategories or subthemesthe same way we might slice and dice the equity universe against, energy,healthcare, commod, technology, financials, you name it. Investors are nowstarting to do that with crypto as well.

And thinking about that in the context of building a cryptoallocation,

MPD: What's your viewon, your next wall street guy what's wall street missing about this? It seemslike they've got one toe in it, but haven't even put a foot in yet. What arethey not seeing? What's the opportunity for wall street.

Michael Sonnenshein:I think that, my, my assumption that is over time, if there is an asset thatcan be traded and spreads can be made on it, if there's an asset that can becud and there's fees that can be charged on it, if there's products that can bebuilt on it, which the answer is yes, to all of what I just mentioned, thenwall street is only gonna get further involved.

The issue is that many of the banks and financial servicesfirms, whether they're insurance companies credit card processors, you name it.They are all one focused on their legacy businesses. That's their bread and butter.These tend to be organizations. And now I'm generalizing that are not terriblyinnovative.

They don't move that quickly. Their risk appetite usually isn'tthat large. And unfortunately, many of the people that work on these types ofprojects within these types of firms tend to get frustrated with the lack ofinnovation and agility and tend to leave. And. Come to companies like grayscale and others.

And so when you think about the confluence of factors, I justmentioned wall street is in wall street is, trading crypto derivatives, likeBitcoin futures and Ethereum futures. And they're making investments in cryptocustodians and, paying attention to crypto exchanges and licensing data and,wanting to stay, plugged in because ultimately their clients are allocatingcapital to this asset.

And if they're not providing the products and services to allowtheir clients to participate in this asset class, then someone else is gettingthat capital and someone else is getting those fees. So over time you will seemore and more of these firms playing catch up. But they will just have nowherenear the agility or the speed that you're seeing in crypto native companies interms of building out products and services.

MPD: Got it. And thisparticular moment in time might be an interesting opportunity for people toentrench and prepare feels like we're entering another crypto, winter. What isyour take on the current state of the crypto market and where we're headed?

Michael Sonnenshein:Yeah, I think a lot of people have been calling for a crypto winter.

We may in fact be, in a crypto winter It's a little early tosay. I think what we're seeing now is a, pretty healthy pullback in cryptoprices. A lot of that is not just specific to crypto. Yes. We've had some, oneoff events the collapse of Tara and certainly seeing some folks employ toomuch, leverage grow too quickly, things of that nature.

But we were. In many ways do for a correction, do for apullback. There was too much kind of irrational exuberance in some pockets ofthe crypto ecosystem. And so resetting that and seeing some consolidation overthe long term will be good for crypto. I've seen this a couple times in thelast eight years.

It. Didn't present itself in the form of a stable coincollapsing or, a broad base selloff of all risk assets against rising rates orinflation. Like we're seeing now at other times it was regulation or,announcements from a state actor or a hack or a theft at a major crypto player,things of that nature.

And so each time we've seen the ecosystem get challenged thisway. We have seen it, or I've seen it grow stronger. Lessons get learned, itbuilds it, rebuilds. It doesn't repeat mistakes of the past. And as a whole,the ecosystem just continues to get stronger. And I expect the exact same thingwith where we are today.

What

MPD: do you is this amarket opportunity to be buying more because it's low or do you think this isa, Hey, something might be going on that's fuzzy in the industry and we shouldall take a minute and

Michael Sonnenshein:breathe. I, I think what we hear from investors is that truthfully, anypullback in prices is somet