Is Crypto Winter Creating Opportunities for Traditional Investors?
Investors – including crypto-wary ones – may have paths to capture upside in the massive space, including a new vehicle that focuses on advancing infrastructure and doesn’t require holding digital currency.
The current “crypto winter,” or a prolonged period of steep contraction and low prices in digital currencies, began in Q2 of this year. It’s the fifth one the market has seen since 2017 and it’s already produced some novel – and quite dramatic – developments. But every bear brings new opportunities, often from elements that don’t regularly appear in headline news, and the same is true for cryptocurrency. Pivotal tech innovations and other milestone advances in the massive space are presenting new compelling ideas for investors, including those in the institutional community who prefer traditional asset classes, says Michael Sonnenshein, CEO of Grayscale Investments. We spoke with him about ways prudent investors may be capturing the upsides of the current crypto winter.
How have you seen investors navigating this latest downturn in digital currency?
Michael Sonnenshein: A lot of investors have experienced crypto winters before, though naturally there’s a subset for whom this is their first. Overall, behavior shows that they are not shying away from crypto based on a sustained period lower pricing – even one that’s occurring during a highly challenging macro environment that’s impacting all types of investments. What we’ve been seeing during this crypto winter is that investors have remained steadfast in their conviction around cryptocurrency and its staying power and its future. Many have been using this period to buy the asset at a cheaper value and average down on their investments, while others have been diversifying, really taking stock of their portfolios, and searching for opportunities that they didn’t have in other environments.
There’s a lot happening in crypto right now following the FTX bankruptcy and follow-on contagion. What are you hearing from investors about this situation?
Though this has been a difficult moment for many in crypto, I am deeply optimistic about the future of this industry, Grayscale’s business, and the opportunity for investors. We know our investors hold a deep conviction about the future of crypto. In light of recent market conditions, investors have shared a refreshed appreciation for Grayscale’s established, regulated, and transparent business operations and a belief that Grayscale’s product suite offers an optimal choice for gaining secure, long-term exposure to digital assets.
And there’s been a lot of positive progress in 2022…
Yes. It’s important to note that we’ve had a lot of successful milestones during this crypto winter, such as upgrading Ethereum from proof-of-work to proof-of-stake, continuing to see tremendous activity and development around different digital asset protocols, and other critical advances. I think the many developments taking place in and around the ecosystem have been lending to the validity of the asset class – whether they’re based on what’s being built, new use cases, mining innovations, or new entities getting involved in the space, such as financial services, incumbents, and other institutions. Many investors are aware of the key achievements and the significant long-term benefits they’ll deliver, and this has given them confidence to continue to broaden their participation in the asset class. They recognize that just because Bitcoin prices are lower doesn’t mean that there aren’t new and interesting opportunities to deploy capital.
Speaking of that, Grayscale launched a new product in October – Grayscale Digital Infrastructure Opportunities LLC, or GDIO. What is its primary objective?
GDIO is a new operating company that brings a pioneering offering to the investment community. It aims to allow investors to generate income from Bitcoin infrastructure and mining without having do the mining themselves. Investors can buy units of the LLC, and the capital it raises goes into purchasing hardware that will, among other functions, actually mine Bitcoin and programmatically sell it for US dollars aiming to distribute a portion of the proceeds back to shareholders. So GDIO is an income-oriented investment that offers digital-asset exposure to investors. It enables them to build a more well-rounded digital asset portfolio. And the reception from investors has been really positive.
What inspired GDIO?
We found that many investors have already made their core allocation to Bitcoin or Ethereum, but haven’t had an opportunity to invest in cryptocurrency’s underlying infrastructure, and, in particular, mining – which is a complicated process that requires expensive, cumbersome hardware and takes quite a bit of technological know-how. So we designed GDIO as a mechanism to give them this investment opportunity without needing to buy costly equipment or perform heavy computing – which, again, is a first for the investment community.
Additionally, we were seeing many other investors – especially on the institutional side – who’d like to have access to digital currency but don’t want to hold it directly. These folks have been avoiding crypto, but they typically do look at infrastructure. GDIO allows them to participate in cryptocurrency infrastructure.
Essentially, GDIO is distressed infrastructure investing, which isn’t foreign to investors who commonly make those types of investments in traditional infrastructure. It’s really lowering the barrier to gain access to cryptocurrency for these investors, much in the same way that Grayscale was innovative in lowering the barrier to access digital assets in the form of a security. We feel like it’s an opportunity to invest counter-cyclically, and an exciting one at that.
In regard to mining infrastructure, the crypto winter has forced Bitcoin miners to run much more efficiently. Are investors also playing a role in this evolution?
Definitely. We’re at a phase of digital asset investment adoption where there’s never been a greater understanding and appreciation of what Bitcoin mining is. Not only is it the process by which new Bitcoins come into circulation, but it’s also the element that allows transactions on the Bitcoin network to be verified and confirmed. A large number of investors now recognize that mining is mechanism that both secures and provides value to the assets that investors hold, like Bitcoin, and one can’t work without the other; they’re inextricably tied.
With so many investors now mindful of this, they’re giving miners far more scrutiny to determine if they can financially weather a lower-price environment. In the last price run-up on Bitcoin, we definitely saw some miners take on too many obligations – whether it was too much debt, too many orders, or too much real estate or facility space. That has obviously become a lot less sustainable in a lower pricing environment. So investors are paying much more attention to the financial health of Bitcoin miners.
This is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal, nor shall there be any sale of any security in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of that jurisdiction.
Grayscale Digital Infrastructure Opportunities LLC (“GDIO”) is an operating business and is not a registered investment company under the Investment Company Act, and Grayscale believes that GDIO is not required to register under such act. Consequently, investors do not have the regulatory protections provided to investors in investment companies. Further, GDIO is not a registered investment adviser or broker-dealer. GDIO does not provide investment, legal or tax advice.
GDIO will not hold or trade in commodity interests regulated by the CEA, as administered by the CFTC. Furthermore, Grayscale believes that GDIO is not a commodity pool for purposes of the CEA, and that Grayscale is not subject to regulation by the CFTC as a commodity pool operator or a commodity trading adviser in connection with the operations of GDIO. Consequently, investors will not have the regulatory protections provided to investors in CEA-regulated instruments or commodity pools.