Grayscale Investments CEO on investing in crypto

Grayscale Investments CEO Michael Sonnenshein sat down with Yahoo Finance Editor-in-Chief Andy Serwer to discuss what being the world’s largest digital asset manager is like, including the current climate of cryptocurrencies, different methods for investing in crypto and diversifying a portfolio, and what impact government regulations has on the digital asset market.

Video transcript

ANDY SERWER: Michael Sonnenshein, CEO of Grayscale, welcome. Great to see you.

MICHAEL SONNENSHEIN: Thanks, Andy. Great to be here.

ANDY SERWER: Why don't we start off by you telling us, for those who aren't familiar with your company, what exactly Grayscale does.

MICHAEL SONNENSHEIN: So Grayscale Investments is the world's largest digital currency asset manager. We've been in business since late 2013. And we were early to recognize that digital currencies were going to become a bona fide asset class. And when we look at the way a lot of asset managers have grown their businesses, it's really been about providing access to a certain part of the market, stocks, bonds, you name it.

In the case of Grayscale, we've developed a whole family of investment products that allow investors to access digital currencies, like Bitcoin, Ethereum, et cetera, and now have a family of 15 investment products and over $40 billion of assets under management.

ANDY SERWER: And what about the number of customers? Do you guys talk about that and number of accounts, that kind of thing?

MICHAEL SONNENSHEIN: Well, it's a little bit hard to quantify sometimes. So customers sometimes directly participate in any one of the 15 Grayscale products directly with us. And then six of our products are also publicly traded on the stock market. So we are fortunate to call hundreds of thousands of investors as Grayscale clients across those products as well.

ANDY SERWER: Great. So you were an original gangster here with crypto, an OG, going back, I know, Michael. And so talk to us about how the business has changed over the years.

MICHAEL SONNENSHEIN: Well, I really started my career in more traditional banking kind of mode. And that was a formative experience. But in the middle of my career, I realized I was ready to take on a new challenge. And I wasn't necessarily looking for crypto. But have, through a series of random events, got into it.

And when I joined in early 2014, the only people that would return a phone call or think about crypto were Silicon Valley CEOs and family offices. Many people had kind of balked at the idea of digital currency. They thought that only governments should create currency. They didn't really understand the potential of decentralized networks, the power of the underlying blockchain technology.

And over the last eight years, it has been such a humbling experience to have a front row seat to see the evolution of this asset class, which today-- Andy, if you'd asked me eight years ago, I would never have believed that we would see Fortune 500 companies holding Bitcoin on their balance sheet, some of the world's most experienced investors investing in Bitcoin and very publicly talking about digital currencies, or even seeing entire countries adopting Bitcoin as legal tender.

So the transformation has been unbelievable. And I'd say that more than ever now, investors really believe in the staying power of this asset class and are really trying to understand how and where this may fit into their portfolios.

ANDY SERWER: Let's talk about the present. What defines the market today, Michael? And what should investors be looking for?

MICHAEL SONNENSHEIN: Well, I think there is a challenge for investors. There are now hundreds, if not thousands, of digital currencies out there. And many investors, I think, first have to understand the underlying technology as well as the use cases around various digital cryptocurrencies to decide what may make sense for them.

Things like Bitcoin are inherently built to be a digital form of money or a store of value, whereas things like Ethereum are meant to be more of a gas to power decentralized applications. And the list goes on and on. But the truth of the digital currency ecosystem is that it's not necessarily going to be appropriate for every investor.

We tend to find that those who want to allocate to digital currencies are those that have a higher risk tolerance, a longer time horizon for their investment, and also have found that, especially over the last few years, there's an appreciation now that there's in fact, a whole asset class. It's not just about Bitcoin or just about Ethereum. But we're starting to see new use cases emerge, whether it's around file storage or gaming or privacy, that is also inherently tied back to many of the digital currency protocols that have been created.

And with that, we've seen a trend amongst investors to ensure that, if they do invest, they're also doing it through a diversified lens, investing beyond just assets like Bitcoin and Ethereum, where much of the market cap is concentrated today.

ANDY SERWER: For investors who want to get started and don't know much about this asset class, Michael, what's the best way for them to think about this? And how should they proceed?

MICHAEL SONNENSHEIN: Well, I think, number one, I'd circle back to what I just shared, which is that it's not appropriate for everybody. The same way that every investment under the sun is not something that every investor is going to action, it's generally something that I would tell people to, again, have that longer-term time horizon, be able to stomach the volatility, and ensure that it meets your lesson objectives.

When sized appropriately in a portfolio, whether it's 50 basis points, so half of a percent or sometimes as much as 3% or 4%, it actually can help investors achieve higher risk-adjusted returns. And so I tell people to start small. And whether they're buying assets like Bitcoin and Ethereum directly, whether they engage with a digital currency wallet provider or an order book or exchange, or it simply is going into their brokerage account or retirement accounts and buying shares of GBTC or ETHE, these are really simple ways to just start getting involved.

And I think once you make that first leap of faith into this and start to understand the asset class a little more, that's the comfort that folks need to really get started.

ANDY SERWER: Michael, one big question with this asset class is correlation with legacy financial instruments. And I'm really curious to get your take on that. There are some indications that it's not correlated. There are some indications that it is correlated. Where do you come out?

MICHAEL SONNENSHEIN: I think that my general feeling is that it would probably be uncorrelated. I think what we typically see is investors thinking about this as occupying a new part of their portfolio. I would certainly think most investors characterize it as being at the high-risk end of the spectrum for them but not necessarily something that's tied to many of their other investments.

And so we've seen a rotation out of things like gold or other stores of value and into assets like Bitcoin. And even some investors starting to believe that they now have this entirely new asset class at their disposal that can actually help them weather market volatility. So I think it depends on the investor. But generally speaking, with only 10 or maybe even now 12 years of a track record, it's hard to really establish that correlation or lack thereof.

ANDY SERWER: Michael, you were talking about this asset class, digital currency, being both a store of value and, as you said, a gas to help power the new economy. And I'm wondering if there is a distinction there, from an investing standpoint, whether you want to go into one sort of digital currency or another and if that really matters.

MICHAEL SONNENSHEIN: Well, again, I think many investors are taking, as much as ever, a diversified approach to their digital currency allocation. So that's twofold, one, that they're diversifying their overall portfolio by investing in digital currencies in general. But also when they think about that allocation, diversifying within which digital currencies they're investing in.

And so I think it depends on where investors historically have allocated capital. So some investors are finding more correlations for what historically has given them comfort as an investor to things like Bitcoin because they've historically invested in currencies or have invested in gold or bonds or other things that may act as an inflation hedge in their portfolios, whereas other investors may also be interested in assets like Ethereum, which are now powering decentralized finance or DeFi applications and countless other ecosystems within the digital currency ecosystem that are continuing to pop up.

But I think now more than ever, it's really about having that diversified approach, because it is difficult as an investor to choose winners and avoid losers, particularly because the space is evolving quite quickly.

ANDY SERWER: Yeah. I want to talk about some of the new things you guys are working on in particular. You have the Grayscale DeFi Fund. How does that work?

MICHAEL SONNENSHEIN: So the Grayscale DeFi Fund is an investment vehicle that allows investors to make a singular investment but, in doing so, gain broad-based exposure to DeFi-focused protocols. So that is an entirely new subset of digital currencies. And DeFi, or decentralized finance, really starts to play on protocols that are disrupting things like exchange, lending, borrowing, the centralized services that we typically get from financial services firms but instead building that into decentralized protocols where users can tap a massive base of other participants to achieve the best rates or the best counterparties.

And so this is a new and emerging area of the market. And so taking the diversified approach is inherently something that many investors have chosen to do. And the Grayscale DeFi Fund is a pretty simple way for investors to, again, get that broad-based exposure to this part of digital assets.

ANDY SERWER: Let's talk about the future a little bit, Michael, and what's on your radar? What do investors need to know going forward? How will the space evolve? I know that you're interested in futures, Bitcoin spot, those kinds of things. Tell us what's up there.

MICHAEL SONNENSHEIN: Well, I think one of the most important things that I'm looking at as a catalyst on the horizon, it's not just seeing Fortune 500 companies allocating to Bitcoin or seeing it recognized by countries as legal tender. The interesting thing indeed is, with the seat that I've had over the last eight years, I've never been, at this moment, more impressed by the talent and the tools that are being built around digital currencies and digital assets today.

That's order management tools, that's indexes, that's tax lot reporting, that's settlement systems. All of these types of infrastructure being built in a really robust way. But where there's still a lack of connectivity is from those assets and those tools into the legacy financial system.

So as an investor, I would be very, very focused on when that plumbing is going to be built. And I say plumbing because the legacy financial system is well-oiled and has very tried and true ways in which assets and value moves around. And one would suspect that when the digital asset ecosystem's plumbing connects to the legacy system, you're going to see a much, much larger pool of investors and capital be able to flow into the digital asset ecosystem. And I think that that's going to be really, really exciting.

ANDY SERWER: I have to ask you about the regulatory environment, Michael. And it's such a vast question, really. But what is the most critical regulatory issue that crypto and Bitcoin and digital currencies face?

MICHAEL SONNENSHEIN: Well, it's really a patchwork between what we're seeing here in the US and other parts of the world. Varying temperatures of accommodative and prohibitive stances towards digital assets.

I think here in the US, what's really important is continued regulation. But we need to see regulation beyond enforcement. A lot of what we've seen from the SEC and other regulators here in the US has really been calling out bad actors and ensuring that they're brought to justice, which we certainly support. But unfortunately, our industry can't solely use those examples as the guideposts on how to offer products and services around digital assets.

So we certainly need more regulation here in the US and only believe that that'll lend to the validity of the asset class. I think in other parts of the world, places like China, where they've already developed and started to distribute a digital renminbi or digital yuan, is really interesting. And it's starting to show other use cases of how even central banks and governments are adopting this technology and moving to blockchain-based protocols.

ANDY SERWER: Fascinating stuff. Michael Sonnenshein, CEO of Grayscale, thank you so much for joining us.

MICHAEL SONNENSHEIN: Thank you.