Grayscale Investments: Bitcoin a Hedge Against US-China Tensions

Michael Sonnenshein, managing director of Grayscale Investments, spoke with the Investing News Network (INN) about Grayscale’s research in applying bitcoin as a hedge while also discussing the rules-based methodology in its Digital Large Cap Fund.

Grayscale operates the Grayscale Bitcoin Trust (OTCQX:GBTC), the highest performing blockchain-based stock according to Barchart, with over 145 percent returns year-to-date.

Along with the Grayscale Bitcoin Trust, it runs a Digital Large Cap Fund, with US$15.7 million assets under management and a wider cross-section of digital currencies. Over the past nine months, it has seen returns in excess of 75 percent.

Speaking with the Investing News Network (INN) at the Ethereum Classic Summit in Vancouver, British Columbia, Sonnenshein discussed how Grayscale Investments manages its more diversified fund and how greater interest from legacy financial and institutional actors is impacting the digital asset space.

The interview has been edited for clarity and brevity. Continue reading for more on what Sonnenshein had to say.

INN: Can you tell me more about your Digital Large Cap Fund?

MS: So the idea for that fund really was born out of a couple of things. One, we were starting to encounter investors that were interested in allocating into this space, but they maybe thought that they had missed bitcoin or maybe they thought they missed ethereum, or if they missed bitcoin, maybe they should just invest in ethereum. And a lot of folks kind of just said, “You know what, I know I want to put money into the space, but I don’t think I know how to choose winners and avoid losers.” And they said if there was a singular investment that I could make that would allow me to get broad-based exposure to the space… that would be really attractive.

The Digital Large Cap Fund was launched to address some of those challenges. The fund has a rules-based methodology on what it seeks to cover as it’s holding the assets that constitute the upper 70 percent of the digital currency universe. Then hold those assets on a market cap-weighted basis.

What we do is every quarter we see which assets would qualify or disqualify to be included in the fund. What that means at the moment is that the fund is composed of bitcoin, ethereum, bitcoin cash, litecoin and XRP.

The fund has performed quite a bit better than some other index-like funds and has really given a lot of investors that broad-based exposure that they’ve been looking for. I think one of the other things that kind of differentiates the fund from some other index-like products is that we have a bunch of other overlays in addition to the rules-based methodology.

So, for example, if a token makes its way into that upper 70 percent universe for us, we’re not going to include it in the fund if, you know, there isn’t a sound custodial solution for it, or an addressable market that we can access or fair and transparent pricing for it. So that fund has really started to resonate, probably most so with institutional allocators. So yes, folks that have maybe invested in bitcoin or used our Grayscale Bitcoin Trust, but are also looking for that more broad-based exposure.

INN: I noticed that you published a paper talking about bitcoin as a hedge against US-China trade relations and how it corresponds with the VIX. Can you talk more about that?

MS: Sure. So this is something we’ve been looking at for a while, which is can bitcoin or other digital currencies act as a hedge when there is an economic dislocation. And so we looked at it initially, I think in the wake of things like Brexit, tightening financial conditions around the 2016 election in the US, we looked at it around the devaluation of the renminbi.

In all of those instances, what we saw was that bitcoin actually outperformed. I think as we looked at the US-China trade tensions that started to fuel up again as recently as this summer, we started to once again see bitcoin as a place where investors were going, and that was creating out-performance.

It’s been our view that investors are increasingly — and should be increasingly — thinking about using bitcoin as a hedge in their portfolios against these types of dislocations that they won’t necessarily be able to otherwise hedge using traditional assets.

INN: You spoke about institutional interest in your fund. How are you seeing demand within the past quarter?

MS: What we do is each quarter we actually publish an asset raising report that looks back at the prior quarter and gives a breakdown of what percentage of assets were institutional, what percent were individuals and which of our 10 products did the assets kind of go into. So we’re due to release the Q3 three asset raising report.

INN: You spoke about Fidelity’s custody service in your talk today. I’m curious about learning more about it and why it’s important?

MS: So again, we’re not a Fidelity customer, and this is only what we know from being seen in the public domain. Fidelity, as a legacy financial institution and a very large custodian for traditional assets, has developed a separate arm called Fidelity Digital Assets.

They have developed their own digital currency solution that, at the moment, is only servicing bitcoin, and I believe is only servicing so far a select group of institutions that want to custody bitcoin with them. I would assume that the plan is to roll it out to more and more customers and eventually to retail investors as well.

INN: What would you say is the importance of liquidity in this market, especially with more legacy partners coming in and expressing interest in the market?

MS: If you look at the digital currency landscape as a whole, now being US$100 to $200 billion in total as an asset class, that’s pretty small when you compare it to the market cap of of other asset classes.

More capital in the space and more liquidity in this space, I think, is going to raise more awareness of it and cause more legacy players to get involved with it, which is super, super important to its overall success.

INN: So my last question is about ethereum, since we’re at this conference. I was wondering what your outlook is for this asset going forward?

MS: We now operate investment products for both ethereum and ethereum classic. We’ve actually seen quite a bit of demand for both of those products.

We have long been believers in the idea and of the applications that can be developed on top of the ethereum technology. And I think from our perspective, it’s great to see that those two communities — the ethereum and ethereum classic communities — are probably working as collaboratively as ever. And also seeing development work for similar applications, being able to be deployed on both protocols.

So I think we’re in the early days of how we’ll be using ethereum and ethereum-based technologies for different applications and are excited to kind of see what applications are developed over time.

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Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.