The Bitcoin ETF: What Everyone Missed | Michael Sonnenshein, Grayscale CEO

Transcript

this is really the beginning of really seeing this asset class firmly being woven into the fabric of the financial system in a way that would be exceedingly difficult if not impossible to undo um and I don't think we're all spending enough time having that conversation and what that means for the broader implications of crypto what's up everyone before we jump into the episode little plug for digital asset Summit coming up in London March 18th to 20th tickets are pacing so far ahead of schedule that we have to decrease the discount codes so instead of Empire 20 it is now Empire 10 head over to the website digital asset Summit D London March 18th to 20th use code Empire 10 and get 10% off your ticket see you in London hey everyone if you

have been listening to Empire you know that Santi and I are fed up with unaffordable fees and frustrating transaction speeds that make the onchain experience basically unusable so the arbitrum team reached out and they showed us the platform they showed us what you can do on arbitrum whatever you're doing you you can experience frictionless transactions at lightning speed on arbitrum so head over to portal. arbitrum doio and check it out what's up everyone before we jump into today's episode I'm excited to share Empire's first ever security partner Harpy is the best tool to prevent your wallet from theft in real time Harpy is not just a security solution they are a peace of mind solution but don't just take our word for it Harpy is the only

wallet security solution that protected 100% of its users from attacks like The Ledger 1 and Q4 which was an offchain signature attack to learn more about Harpy click the link in the show notes or visit har.com back to Empire today we have a special episode with Michael sonen shine CEO of grayscale uh Michael welcome to Empire my friend good to be here thanks for having me yeah first and foremost this is a win for two buckets I would say this week was a big win for uh Bitcoin ETFs and and and just crypto in general big win for Emory alumni as well so wait wait a way a rep for Emory we love to see it thank you yeah I couldn't agree more with you so all right tell me

man I think my first question I know we don't have you for too long is um you start you joined grecale I think in 2014 so you've been at this game for about 10 years um everyone was obviously paying super close attention to bitcoin ETF and we were you know as plugged in as we could be what were some of the things from this week that maybe folks on Twitter didn't see uh what were the things happening behind the scenes that you thought were either difficult or interesting or that maybe folks didn't see the challenges um I mean for my team specifically um I can't really think of anything that was a specific challenge for us you know coming uh along this journey over the last I don't even know 10 years that we've been at this uh it's all for us always been about getting

ever more prepared for this scenario uh so whether it was the guts and plumbing and operations and doing days of tabletop exercises and test trading and making sure that everything was going to be you know really ticked and tied um we've been ready for a long time um which is why not only we proud of kind of getting to this historic Milestone and seeing gbtc actually upli as an ETF but also seeing you know operationally the trading the transition from the OTC markets uh to the NYC ARCA was a smooth transition as well smooth for our investors um so from our our standpoint you know no no hiccups no surprises along the way um although I'm sure you're also you know not too quickly

going to forget um you know misleading tweets coming out of the SEC or you know were the approvals really there were they not um that's all kind of been a blur quite frankly over the last 24 48 hours but I keep saying to folks as we're talking about it and reflecting on it you know it wouldn't be crypto if there wasn't some volatility uh so so that's kind of how what I Chuck it up too yeah very much so did you know did you have a sense that this was inevitable once you guys won the lawsuit did you was this did this feel inevitable I think that we were always optimistic about it I think when we really really dug into our legal arguments we really dug into the facts and circumstances being on our side the

way that they were ultimately got that unanimous Court Victory um there started to be I think some speculation with in the investment Community the crypto Community as to whether or not the SEC might come up with another reason why they might deny these products from coming to Market um but again throughout this whole process we have not lost conviction in what we were doing what we were chasing after we've quite frankly had too many investors counting on us to deliver on this um so it was always going to be a matter of when not a matter of if um and then I think certainly knowing the statutory timelines associated with approving 19 v4s and that January 10th date being the first of those that the SEC had to

contend with um I think all eyes were really on that over the last couple months nice so I'm gonna pull up our Bitcoin ETF tracker here so the I want to talk about the fees actually for a second so this was a really interesting kind of uh battle that ensued I would say over the last two weeks I haven't seen this this is cool you guys built this we built uh yeah we built a Bitcoin ETF tracker uh actually a couple months ago um actually internally first and then we realized externally folks would would want this so um yeah it's been it went pretty viral this week had like you know 100,000 views pretty cool um to see to see folks uh actually paying attention to this stuff so but anyways we uh the fees were interesting H very interesting to actually keep this

product updated because I feel like the fees were changing like every single day but so we we thought the fees were going to come out at like maybe 50 B bip 60 bips I think it was Fidelity who came out at 39 bips and once that happened uh the the race to the bottom basically ensued with everybody except for you guys so what did the take us maybe inside of grayscale like what were the conversations like and did you know this fee battle was probably going to ensue and you were just like we're keeping it at 1.5 or what how how did this actually happen yeah so I think all along I was very public you know as the main spokesperson for the company in sharing with all of our investors that we were committed to lowering fees when gptc uplisted um I'm proud to say that we

made good on that promise we did reduce our fees by 25% uh upon the uplisting itself uh but gbtc was really going to come to Market in a very differentiated way than all the other ETFs that you know have now since debuted uh so I think there's a couple things to keep in mind as we kind of talk about fees right um number one we always knew even all the way back when gbtc first started trading we've seen other firms pop up and model their businesses after gbtc and the rest of the grayscale family of products so we always have been prepared for a world in which there are multiple products um including you know multiple spot Bitcoin products and we've always thought that that's generally a good thing right we

should ensure that investors have choice and different things are going to mean and have different weight and different value with different investors so for a lot of investors um they may look to a firm like a grayscale because we're a crypto specialist we've done this for 10 years we have a 10year track record we've navigated forks and airdrops and M Pools being clogged and all kinds of things that you know have been speed bumps along the way that you know I'm not sure traditional asset managers have ever really had the experience before with operating a Bitcoin investment vehicle we certainly have um you know gbtc coming to Market with 28 billion dollars of AUM on its debut it was the

second largest commodity ETF in the world right and so when you ask a lot of investors what resonates well for a lot of them size liquidity track record you know those are things that you can't take away from us or from gbtc or gbtc investors other investors may be more fee sensitive right and there is going to be a cohort of them for which gbtc may not be the best choice for them and that's okay right there should be investor Choice here there should be multiple products and you know we even advocated for this before the approvals came through over the last few months really saying to the SEC if you're going to approve this you need to create a fair playing field you need to approve

all of these products at once and so it's been interesting and and it kind of has been playing out the way that we predicted where all of the new entrance starting from zero no assets no clients no investor base Etc would be competing in a fee war in an effort to lure investors into their products and inherently there's nothing wrong with that um and so you've been seeing a lot of those folks decide to offer fee waivers or you know even continue to slash their fees as more and more um you know updates are being made amongst the different issuers yeah so at first when I saw you guys holding fees at I think it was5 I was like they're they're nuts that that obviously has to come down my

but then my second thought is when you kind of do some t uh you know scratch math here it's like okay if you have 20 it's if your outflows are less than uh let's say let's you know let's say 50% or something and you don't decrease fees by less than 50% you're actually you know that's a net positive for the business uh so then that gets into the next question of like well but at some point you probably have to compete with other fee products so if I were you guys maybe I'd be doing what um who runs GLD like maybe what GLD did which is they've got the the the gold ETF with the high fees and then the you know because it it was very early and then they've got the gold ETF with the low fees is that kind of how you guys are thinking about this

yeah I mean we certainly are continuing to think about launching all different types of products and you know I was telling you um you know this is this is one of the areas that I don't think people are focusing on enough right the approval of spot Bitcoin ETFs now lend itself to a lot of other product Innovation right it won't be long before you see probably the players that are very focused on leveraged and inverse for a lot of asset classes or themes of investing probably move into Bitcoin uh just yesterday we actually filed for uh greats scale Bitcoin trust covered call ETF so you will probably continue to see more permutations and you know the way that I really digest all of this having been in crypto as long as I have in in

really chasing after spot Bitcoin ETFs to come to Market is that this is really the beginning of really seeing this asset class firmly being woven into the fabric of the financial system in a way that would be exceedingly difficult if not impossible to undo um and I don't think we're all spending enough time having that conversation and what that means for the broader implications of crypto I mean maybe let's have that conversation like what what what does it what does it mean for the what what are the broader implications of this ET well I think let's let's all reflect on it ourselves like for instance what was the first you know crypto asset you bought when you first became aware of crypto in general I mean it was bit it was Bitcoin a while ago and then and is is Bitcoin

the only thing that that you now own or at some point did you begin to get you know interested in the other use cases for other digital assets you buy Bitcoin then you might buy some eth if you were like me in 2017 you bought the the cheap Bitcoin which was Litecoin uh yeah right and so I think along that very same you know continue on what we're hearing from investors is that this gives them an amazing ability to own Bitcoin you know directly in their brokerage accounts they can talk to their financial advisor about it um they may own it in a retirement account and you know want to hold it for the long term which is another strategy we've seen from a lot of folks but then as as with other Investments they think about well what else is out there and they want to start

thinking about diversifying their crypto Holdings um and I think that's where we can play a really important role at Great scale we we launched a new framework um late in 2023 called the Great scale crypto sectors and it was really to help investors have a guide to really look at the different areas of crypto be able to par back from fiction why different crypto assets exist what their use cases are do they compete with each other do they not and maybe we can actually start changing the narrative and helping investors to develop the right vocabulary the right vernacular so they can speak about crypto intelligently Beyond just looking at Bitcoin and ethereum because they're the largest assets by market cap yeah it's actually been kind of crazy to see uh

Larry fin on I think it was on CNBC this morning talking about tokenization and you know I mean it sounds like he woke up and the world's biggest Bitcoin bull now so it's kind of funny to see um what is the the so the path to an eth ETF when we talk about other grayscale products the path to an eth ETF feels semidirect I would call it maybe you know we're looking five six months out it seems like but obviously you know 10 times better than I do but when you push past that whether it's you know you have your link product or salana or what Ripple or what whatever it may be next um the path seems a little less clear so maybe you can walk us through what that actually looks like well you know I think we've seen comments from our Regulators as recently as you know I

think yesterday and today continued agreement that Bitcoin is a commodity and it is not a security um and I think a lot of the legislation you're seeing passing through Washington at the moment should be legislation that really does help us as an industry parse out crypto Securities from crypto Commodities and that will have pretty broad implications for the assets that are you know traded on various digital asset exchanges that go into Financial products Etc I think importantly at the moment as an investor though if you're looking at diversifying your crypto Holdings or even just looking broadly what else for instance is in the grayscale family um this is not just important for gbtc having made

its way from a private placement all the way back in 2013 to now you know a NYC listed ETF um but it actually also paves the way for other great scale products to continue along that four-phase life cycle that we have and so we have started to see quite a bit of an uptick in demand for other products as well believing for a lot of these investors that as the market matures as there's more regulatory Clarity there will be you know the the advancement of more of these products closer and closer towards ETFs especially also as investors get more knowledgeable on them and want to diversify you know the basket of crypto assets they have does an e uh if I had to put the

prediction on you does an e ETF by end of Q2 seem realistic you know I'm not a I'm not a price prediction or or time prediction kind of guy been around for too long um in 10 years you've you've learned your lesson Michael yeah I mean listen I'm always happy to take a look and see what you know other esteemed colleagues working in the space are happy to say that Bitcoin will be worth X by 2030 or 2040 and you know I hope they're right um you know we're really just focused on building um and we're really focused on bridging that that knowledge Gap that I think a lot of the investing Community still has around crypto um we are certainly going to work hard when I talk about building to ensure we can get a spot ethereum

product um you know into Market as an ETF you know working proactively with Regulators but from a time frame perspective that's that that's tough to that's tough fair fair all right I mentioned them in the pre-roll now I'm going to bring them up again it's arbitrum Santi and I are really fed up with these high fees and we're really excited to have teamed up with arbitrum for the next couple of months on Empire as the leading ethereum scaling solution arbitrum now Powers hundreds of decentralized apps across defi perss nfts gaming and a whole lot more the team has showed us everything in the ecosystem both now and what's to come and we're really really excited about it arbitrum allows both daily users and developers to interact with

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iempire if you want it to be even easier just click the link in the show notes all right so if we go back to this Bitcoin tracker now I'm sorting by AUM uh so you I mean you guys are obviously far ahead of everyone else than you have Fidelity in second then actually bitwise in third and then Black Rock in fourth does this and then as you go down vanc Franklin Templeton Arc 21 Invesco Galaxy Wisdom Tree Valkyrie does this list in like the order here if I I actually I'm going to put another prediction on you like when you look maybe five years out in the future do you think that this is kind of what the leaderboard looks like or is it very different um I don't know who will be on this leaderboard um besides grayscale um

but there I will predict that there will be likely you know let's call it three maybe four ETFs that hold spot Bitcoin that will have a massed you know uh a subjective number of significant size um and perhaps many of these other products either won't exist um or their relevance or trading volumes or investor demand um will have trailed off because so much of the size and liquidity um will really be concentrated in let's call it three four of these ETFs gotcha what is uh I'm I'm uh I'm learning that you have a good uh media and compliance team here but maybe they will let me ask

you this one which is or maybe they'll let you answer this one which is um around just like AUM and volumes um what did the AUM in terms of like a and volumes and what you saw in the flows was that did that exceed your expectations um I mean there's both a short-term question and a long-term question here which is short-term like did that exceed your expectations or did it fall under it and then longterm like what do you think are some realistic like numbers to put in our head in terms of like what we can really expect this year yeah well I'll say day one was a blowout um and far exceeded our expectations I think um as I saw the numbers transpiring in real time yesterday on the first a trading uh gbtc I think was the most heavily traded ETF

you know debut first day ever wow uh gbtc I think was the n9th most actively traded ETF in total in the United States yesterday um alone right and and you know people are familiar with a lot of other very heavily traded ETFs SP Q Etc DTC was the ninth most actively traded product on day one like that's just blew our mind and I think it did about $2.3 billion dollars of notional trading volume um and so I predict that over time assets like gbtc and some of the other products will continue to be um you know hopefully increasing in AUM

will continue to be large and liquid and tools that investors use but depending on how this Market shakes out you may ultimately see that you know Bitcoin if you know investors really resonate with a store of value concept or it really resonates that it's more of a transformational technology however it may be you might start to see that a lot of the flows in these products end up kind of staying there because they end up you know being core positions for investors to have over longer periods of time so I think we're in the earliest days of this of course there's going to be a lot of frenzy a lot of excitement a lot of um investors who been so patiently waiting for ETFs to come to Market um that I think eventually some

of that will kind of settle down in the coming days and weeks um I saw something in our slack Channel our um that you guys only had $95 million of outflows in day one which is I saw some people on Twitter predicting you know a billion dollars of outflows on day one or two Bill and there's only 95 billion which or 95 million which I would take as a huge win for grayscale why do you think that the outflows were so small when the when you know your fees are higher than other folks why why is that yeah I mean I think you know part of that is evidence that you know fees are not going to be the only driver of how investors make you know product choices right it's an important component but it's not the only component um again going back to size liquidity track

record tight spreads I believe gbtc traded an average of a two cent widespread between the bid and the ask so um you know that's that's important uh to a lot of investors and so a $95 Million worth of redemptions for a $28 billion fund to your point you know is quite small yeah um in terms of risk management I was reading about you know the APS and the authorized participants and how this all works and how you actually create share like you know kind of getting into the nuts and bolts of an ETF how do you think about risk management um for example if uh let's say Bitcoin were to or the overall Market was to you know maybe dump 40% over the course of a few weeks you know which in cryptand has has has happened

many times in the past how do you handle and think about the risk management of this yeah um I mean these are the types of scenarios and tabletops um that we as an organization have had to go through um over the months leading up to ultimately getting approval um it really comes down to communication um tight communication with our authorized participants and our liquidity providers um and making sure that everybody is aligned as well as you know with the market makers themselves um of which I believe now there's almost two market makers um in the name every single day um so I think from that perspective that's that's one of the best ways we can mitigate um against those types of things of course we as an asset manager as with you and anyone else in the

crypto Community we don't have control over the price of Bitcoin so if there are large movements you are going to end up seeing that I believe reflected in how the ETF is trading and that won't be unique to gbtc that'll be true of all the spot Bitcoin ETFs right it should be as closely as possible possible tracking the underlying value of the Bitcoin that these ETFs hold yeah um I guess as we think about wrapping this up Michael what are the you know as CEO of gray skill you're probably not living in today land you're probably living in you know six to 12 months out land or maybe even further than that what's on your mind right now as you start to think about 202 like end of 2024 and maybe even you're thinking about 2025 what what's on your mind right now yeah so I

think there's a couple things that we're really paying attention to um one we're just I'm really focused certainly as a CEO on continuing to grow the great scale business in a very responsible and sustainable manner um a shamless plug that we are hiring um and so if uh you're looking for for a new job we're always looking for you know high quality talented high integrity uh thoughtful people to join our team so there's a lot of growth you're going to see at graay scale um over the next couple months uh number two we have a US presidential election uh 202 before um and this is something that we've been very focused on we've really watched closely how some of the um candidates going into some of

the primaries have been focused on making sure that they're making statements on emerging Technologies like Bitcoin crypto AI Etc um I think because the youngest demographic of Voters that will be going to the polls in the 2024 election is the largest size that's ever been in a US presidential election um and we know obviously that that youngest demographic really is the one that is most you know inclined or most involved in these new technologies like crypto um it's going to be really important to watch how that develops and how important that is to the platforms that some of these candidates are running on um and then I think one of the other things we're also of course paying

attention to and I know you guys are as well is we are going to have a habit uh we're just a couple months away um and historically that that has had a material impact act on prices um you know I think the landscape of the crypto mining ecosystem um looks very different than it has in other you know having Cycles um I think the the base of users and investors and now Financial products involved in Bitcoin is going to be very different than it has in other having Cycles um as well as the derivatives market and a whole bunch of other dynamics that surround Bitcoin um and so it's going to be very interesting to see how that plays out in the back half of this year um and I think even looking past that into 2025 and Beyond you know

we're really looking at some new intersections around crypto I know one area for us is really looking at the intersection of AI and crypto specifically um AI is a really exciting technology and um as much as it's advancing a lot of parts of how we live and how we work um there's also some shortcomings you know deep fakes and all kinds of other things coming from it crypto We Believe can actually be a really important a meaningful antidote to some of the problems that AI has created and so I think in my seat having been in crypto for 10 years seeing new use cases for crypto come up over the course of the last decade ordinals and nfts and the metaverse ETC um we're starting to see how AI can be an

important part of crypto and I'm sure a whole bunch of other use cases that we're not even thinking of yet so I think the future is very bright um and I'm very optimistic about it nice it's a good place to end it Michael congrats on everything thing 10 years uh coming up towards uh feel like this was kind of your Super Bowl of a week so congrat congrats on everything and uh yeah excited to see where you guys go this year awesome thanks for having me hey everyone Jason here thank you so much for watching today's episode wanted to take a quick second to thank today's title sponsor arbitrum we know you are tired of onchain experiences that have unaffordable fees and frustrating transaction speeds and that's why we partnered with arbitrum you can experience frictionless trades lightning speed and LA flf free transactions all

for pennies per transaction explore arbitrum expanding ecosystem at portal. arbitrum doio that's portal. arbitrum doio see you for the next episode hey everyone thank you so much for watching today's episode really hope you enjoyed it we wanted to take a second to just remind you about our upcoming digital assets Summit in London March 18th to 20th Santi and I got your back seats are limited if you heard it earlier in the podcast there's a little competition running at blockworks to see who can drive the most number of tickets so when you register for the digital asset Summit make sure you use our code see you in [Music] London