Grayscale Bitcoin Trust (BTC) (GBTC) Management Presents at Crypto/Digital Currency Virtual Investor Conference (Transcript)

Grayscale Bitcoin Trust (BTC) (OTC:GBTC) Crypto/Digital Currency Virtual Investor Conference May 19, 2022 9:45 AM ET

Company Participants

Craig Salm – Chief Legal Officer

Conference Call Participants

Unidentified Analyst

[Call Starts Abruptly] — of today’s conference with a fireside chat with Craig Salm, Chief Legal Officer at Grayscale Investments.

Craig, thanks for joining us at our office here.

Craig Salm

Thank you so much for having me, Bob.

Unidentified Analyst

Good to have you. Before we start the fireside chat, I would like to present you with these four OTCQX best 50 [technical difficulty], which recognize the four Grayscale issuers that were named to the 2022 OTCQX Best 50 list. The annual list of best 50 companies recognizes the top-performing issuers as measured equally in both total return and growth in average daily dollar volume.

The four Grayscale issuers recognized this year are Grayscale Bitcoin Trust, symbol GBTC; Grayscale Ethereum Trust, symbol ETHE; Grayscale Ethereum Classic Trust, symbol ETCG; and Grayscale Digital Large Cap Fund, symbol GDLC. I’d like to present you with the plaque, and again —

Craig Salm

All right, thank you so much, Bob, it’s a pleasure.

Unidentified Analyst

Got it.

Craig Salm

Shows to the audience. So, we moved our headquarters from New York City to Stanford during the pandemic, and a lot of that reasoning was for more space for all the employees you were hiring. But also we’re well-spaced for all these plaques that you’ve given us, Bob. So, we appreciate it.

Unidentified Analyst

Well, that’s perfect. So, we’re glad to see that. We’re glad to be profiled that way. So, again, congratulations to you and the Grayscale team for being — having four issues named.

Craig Salm

Yes.

Unidentified Analyst

That’s tremendous.

Craig Salm

Yes, I mean OTC Markets has been such a great partner for us over the years. So, we really appreciate it.

Unidentified Analyst

Yes, we feel the same way. Okay, before we get started, for the audience, just a few points to note. Please submit your questions in the question box to the left of the slides. If you’re interested in scheduling a meeting with company management, please click on the Meetings tab found on the left navigation bar. You’ll be able to view the company’s availability and submit a meeting request. On a final note, all of today’s presentations will be recorded and available for 24/7 replay. At this point, I’m very pleased to, once again, welcome Craig Salm, Chief Legal Officer at Grayscale Investments, which owns and operates 14 different securities trading across OTC Markets.

Craig, welcome.

Craig Salm

Thank you. All right, so, kickoff with the presentations to the audience, and then we’ll jump into the fireside chat.

So, hello, everyone. As Bob mentioned, I am the Chief Legal Officer at Grayscale Investments. So, starting up with the next slide, so who is Grayscale? We are the world’s largest digital currency asset management firm. We manage about $20 billion today across a family of 17 digital asset products. As Bob mentioned, 14 of those are currently trading on OTC Markets today. And what our mission really is, is to bring access and exposure to the digital currency asset class in the form of a familiar [rather] [Ph] a security for investors that want access to digital assets, but for a host of reasons related to comfort, familiarity, regulatory reasons cannot access the coins directly. But what they can do is invest in an investment vehicle that holds those assets.

So, these are products that can be accessed through your brokerage account, their compliant investment vehicles come with audited financial statements, tax reporting; really just making digital assets very accessible. We started in 2013. You know, normally, when you have an asset class that investors want exposure to you would invest in a very familiar investment vehicle called, an exchange traded fund or an ETF. But today, at least in the U.S., that type of investment vehicle has not yet been approved by our regulators. And so, what Grayscale has designed is a four-stage product lifecycle, with the ultimate stage being an ETF, but with each preliminary stage making the products more accessible to more types of investors.

So, as you can see in this slide, our first phase is that we’ve launched a private placement for our investment vehicles. And that offering is only available to accredited investors at first. And those investors have a one-year lock-up period. So, it’s the most restrictive type of offering that we can offer, at least initially. Following that initial private placement offering, we’ve done something really innovative, along with OTC Markets, in that knowing that shares that are originally created in the private placement can be freely traded after one year, we developed a public market on the over-the-counter markets for those investors in the private placement to then either continue holding their share or sell them to, not just accredited investors, but other retail investors.

And importantly, those purchasers do not have a holding period, so, again, just thinking more accessible to more types of investors. And we can talk about the five new products that recently became publicly quoted earlier this week. Importantly on OTC Markets, you’ve designed very robust reporting standards called, the Alternative Reporting Standards, but there’s another level of reporting, called SEC Reporting Standards. And so, this third phase is we seek to make our products that are public on OTC Markets SEC Reporting, and what that does is meaning the products will then file 10-Ks, 10-Qs, 8-Ks to the SEC.

And these reports very similar to what we’re already doing in OTC Markets, but they’re being reviewed by the SEC. So, that’s really important for a lot of our more regulated and institutional investors that need that type of robust and transparent reporting standards for them to access these products. The other thing that become SEC Reporting does is it reduces that original one-year holding period in the private placement up to the public quotation to six months, so, again, more accessible to more types of investors. And then here, the fourth and final stage is conversion into an ETF. What that would do is up-list the products from OTC Markets to a national securities exchange.

So that’s a great event for OTC Markets because it’s showing that these funds can have a place to live while they’re becoming more regulated, ultimately graduating up to a national securities exchange. And importantly, as an ETF, these products will be able to better track their underlying assets because you would have something, called the arbitrage mechanism, activated, which today as an OT-listed security, it does not. And so what that results in is, the products historically trading at both premiums and discounts to underlying an asset value. So, it’s just something that important for anyone accessing these products to be aware of.

Going on to the next slide, so what we see here is that among our 14 digital asset investment vehicles, they’re each in various stages of their four-stage lifecycle. So, we have three funds today that are still only private placement offerings. That’s because they were only launched within the last year, and so they don’t have shares that are eligible to be freely traded on OTC Markets. But you can imagine the same would be done for nine of our product — or sorry, 14 of our other products, we would be looking to the same thing with those at some point in the future. Seeing in this public quotation column, these are nine of the 14 public products we have that are trading on OTC Markets but not yet SEC reporting.

Moving into the third column, we see that we have six products today that are both publicly traded on OTC Markets but also SEC reporting. And then in this fourth column, this is what we’re thinking to do today with our flagship product, Grayscale Bitcoin Trust, ticker symbol GBTC, in shepherding it into that fourth and final stage.

Moving on to the next slide, so, one of the things that has been really interesting over the years is a lot of Grayscale and other digital currency asset managers out there really started in explaining how digital assets, as a whole, allow investors to diversify their portfolio of stocks, bonds, commodities, currencies, and so on. But what we’ve been seeing over the years are investors diversifying even within the digital currency asset class as more sectors are starting to arise. So, what this slide here is showing is among our 11 single-asset investment vehicles we have different themes that each of those products give investors exposure to.

So, one category is privacy. Thinking of assets, like Bitcoin, which is really a form of digital gold, and assets like Ethereum, which allows for more complex types of transactions, neither one of those has inherent privacy-preserving features. And what that results in is transactions being publicly viewable. And that can create issues for different types of users and market participants. So, other protocols have started to develop that layer on more confidentiality in transactions. So, we, for instance, we have a product called, Grayscale Zcash Trust, which layers on privacy-preserving technology on top of Bitcoin technology to allow private transactions.

We have another product called Grayscale Horizen Trust which is similar to Ethereum, in that it allows for more complex general-purpose types of transactions. But like Zcash layers on some of those privacy-preserving features. One of our more recently publicly quoted products as of this week, Grayscale Basic Attention Token Trust allows for web browsing and media usage, but again really preserving that importance of privacy. Some of the other sectors we’re seeing are Smart Contract Platforms. I mentioned Ethereum, that was really the first smart contract platform laying — enabling all these decentralized applications to develop.

But we’ve seen competitors come along. And so, we call that sector, broadly, Smart Contract Platforms. And we recently launched, in our private placement phase, a Smart Contract Platform fund ex Ethereum, so allowing investors to get that diversification across different types of Ethereum competitors. Some of the other themes we’re seeing are data. So, it’s important that you have a lot of the backend infrastructure that people might not think about when they’re using digital assets or these applications. But the same way you need computing and cloud and file storage. Well, that has to exist in decentralized world as well. So, we have tokens like Filecoin and Chainlink and Livepeer that are really enabling that type of important build out of infrastructure.

Some other categories are payments. So, I mentioned that Bitcoin has really established itself as modern digital gold. But, you are not using gold to buy a cup of coffee. So, you’ve other assets like Bitcoin Cash and like when may be used more minimum exchange use case. Store value for Bitcoin I mentioned and then the Metaverse. So, that’s the sector that began really exciting within the last year. We have companies like Facebook, now Meta really going all in on that. And so, there are several protocols that have developed in virtual worlds. One of which is Decentraland which we had a product for. That also this week became publicly quoted. So, that’s our single asset products.

Moving on to the next slide, so, here is a list of our diversified products. So, these are investment vehicles that don’t hold a single digital currency but rather a basket of digital currencies that highlight these sectors that I have mentioned. So, for instance, a couple of years ago we launched our Grayscale Digital Large Cap Fund that’s really like in essence an S&P 500 of sorts of the digital asset ecosystem. So, it’s holding the top rank coins on a market cap weighted basis. That’s publicly quoted in OTC markets as GDLC. The other sectors we are seeing I mentioned Smart Contract, so that’s this third product that you see listed here. And then in the middle, Decentralized Finance that is very much another sector we are seeing develop in this space, otherwise known as D5. And what that is doing is layering on traditional financial services on top of Smart Contract protocols. So that’s things like decentralized exchanging, lending, borrowing, asset management, insurance. Some of these more traditional use cases in finances that are being quoted over into the digital world.

Moving on to the next slide, yes, so that’s really a summary of Grayscale as an asset management firm, a summary of our product offerings. What we are really doing as a business is seeking to enable investors to be a part of this future that we think is really important within the asset ecosystem.

So that’s the presentation. Should we start the fireside chat, Bob?

Unidentified Analyst

Yes, we should. Let’s do that.

Craig Salm

Right.

Question-and-Answer Session

Q – Unidentified Analyst

Well, thank you for that great overview. We’ve seen several questions come in. So, why don’t we just start with the questions? I see the first question is can you tell us about recent announcements around Grayscale products?

Craig Salm

Yes. So, I mentioned that we have this four-stage product life cycle where each stage makes the products more accessible to more types of investors. A couple of weeks ago, we started seeking to bring our Grayscale Horizon Trust which is HZEN, H-Z-E-N on OTC markets. Our Grayscale Stellar Lumen Trust which is GXLM on OTC markets. And our Grayscale Zcash Trust which is ZCSH on OTC markets from that publicly quoted phase but not SEC reporting into that publicly quoted and SEC reporting phase.

So, what that entails is we filed something called a Form 10 with the SEC that’s the registration statement that registers the securities under the Exchange Act and makes them subject to SEC reporting standards. So, that’s things like 10-Ks, 10-Qs, 8-Ks, and so on. It’s important to know that’s a step that we voluntarily take with the SEC because we think it’s important to our investors that they see we are doing everything we can to make our products more regulated subjecting them to more heightened reporting standards which is very important for the average investor that wants access to digital assets, but in that very familiar transparent investment vehicle wrapper. So, that’s what we accomplished seeking to make our products into that third stage. The other really important announcement is that we got publicly quotation for five of our products that previously were just in that private placement stage. So, not available to public markets on OTC markets.

Unidentified Analyst

Congratulations on that.

Craig Salm

Thank you very much. [Multiple speakers]

No, this fireside chat was very well-timed. So that includes our Basic Attention Token Trust which ticker symbol is G-B-A-T G-BAT, our Grayscale Chainlink Trust with ticker symbol G-L-N-K, our Grayscale Decentraland Trust which has a ticker symbol M-A-N-A or MANA, our Grayscale Firecoin Trust which has the ticker symbol G-F-I-L GFIL. And then, our Grayscale Livepeer Trust which has the G-L-I-V GLIV. So, that’s really important because again it makes those products more available to the retail investor which is an important milestone for us. So, that’s filing Form 10s, third phase obtaining public quotations in that second stage which OTC market is a key lynchpin there. And so, as I mentioned has been a great partner to us over these many years.

Unidentified Analyst

Great. Okay, let’s go to the next question. Let’s see. How does OTC market fit within the Grayscale product lifecycle?

Craig Salm

Yes. So, it keeps coming up. But it’s really important how critical OTC market is for that second stage which is the first time that you have not just credit investors who can only invest in private placement but also retail investors who can access these products on the public markets through their brokerage accounts. So, you can go to Schwab, E*TRADE, Fidelity what have you and type in these ticker symbols and see the products there to go buy and sell. But it’s important to note that because none of these products today are exchange traded funds, they won’t necessarily trade in line with our net asset value. And in fact, historically we have seen the products trade at both premiums to the net asset value as well as discounts. And so, it’s important for anyone to know as they are accessing these products to keep track of where are those premiums and discounts trading at and just be aware of that if you’re making any investment in the products.

Unidentified Analyst

Right, okay.

Craig Salm

And it’s one of the reasons why for us as a business obtaining that fourth and final stage of conversion into an ETF is so important because it would enable market participants called authorized participants to both create shares when there is premiums to add supply and bring that premium down, or conversely redeem share as when there is discounts to take shares off supply and bring that discount up. And so, we think that’s really important for investors because it will further make the products more optimized to invest in digital currencies through these structure investment vehicles.

Unidentified Analyst

Got it, okay. Next questions, what kind of licenses and designations do you need at Grayscale? Is there anything unique here relative to traditional finance or to other crypto companies?

Craig Salm

Yes. So, one of the unique things beyond the entire digital asset component of this which is a very new and exciting technology and industry, is the fact that these products go through this lifecycle that is utilizing various types of SEC rules and regulations. So, starting off in that first private placement phase, that offering is not registered with the SEC which would allow it to be available to retail investors at the outset with no lockup periods. Instead, it’s an exemption from registration which is Rule 506© of Reg D. And so, that’s an important rule to be mindful of. And it’s what causes the shares to be only initially be available to credit investors. And those investors have that one-year lockup period. Following that lockup period under something called Rule 144 shares are originally purchased in the private placement and then be really sold by those investors through Rule 144.

But importantly, just because you can sell a security doesn’t mean you will be able to find somebody to buy it from you. And so that’s where OTC markets come in of creating that marketplace for those shares. And something called Rule 15c2-11 is what allows brokers in OTC markets to actually show quotations in these securities so that buyers and sellers can trade amongst each other. So, that’s Rule 15C-211.

Unidentified Analyst

Right.

Craig Salm

Importantly, just as of over a little year ago or FINRA was allowed to verify compliance with that rule and thus allow the public quotations. But, that rule was amended by FINRA last year. Now OTC market has this really important responsibility of also being able to verify compliance. So, I think that was a really big milestone for you all. So, that’s Rule 15c2-11. That third stage of becoming SEC reporting is filing a Form 10 as mentioned. And what that does is register the securities under the Exchange Act which subjects them to the 10-Ks and 10-Qs as I mentioned. And then, that fourth and final stage there is a couple of different filings that need to be made. There is something called 19b-4 which is up this a security to a National Securities Exchange. It’s also the rule allows any new security to also trade on the National Securities Exchange. So that’s, 19b-4.

There is an S1 or an S3 depending on how well-known obviously the security is. What that does is register the securities under the Securities Act. And so, that means any newly created shares can be freely traded immediately amongst any type of investor. And then the third document is something called a Reg M Relief Letter that’s what allows for both simultaneous creations under an S1 or an S3 as well as redemptions. And that’s really important because that allows that arbitrage mechanism by authorized participants to be used of creating when there is premiums or giving when there is discounts and allowing any security to really trade at that tight NAV.

Unidentified Analyst

Got it. Okay. Let’s go to the next question. Where are you with the GBTC conversion efforts? What have recent conversations with the SEC looked like?

Craig Salm

Right. So, GBTC conversion into an ETF is at fourth stage. Last year in October, we filed that 19 before document that I mentioned, which is you can think of the application to obtain approval for an ETF with the SEC. What that did was kick off a now 240-day review period, where the SEC invites common letters from the public, expressing why they believe or don’t believe the SEC should approve, in our case, this GBTC ETF conversion. And so, knowing that this is a really important process for our regulators, we’ve launched a campaign to really activate our investor base, letting them know that they can be a part of this process. And so, GBTC today represents about $20 billion of AUM. And that’s about 850,000 investors across all 50 states.

Unidentified Analyst

That’s one of our most actively traded securities.

Craig Salm

Right. It’s trading hundreds of millions of dollars in daily trading volume on OTCQX. And it was really important to us that our investors knew they could be a part of this process. So, we created a Web site, grayscale.com/comment, that lays out what the application process looks like, what the issues are, it’s importance, and makes it really easy for anybody who goes there to click a button, there’s a little template letter that they can add to or submit as is. And that goes to the SEC, and it’s one of the letters that they’re reviewing as a part of this process. And so, as of today, if you go to the SEC Web site, there’s a little over 5,000 letters that have been submitted. And as far as open common letter periods go, that’s quite remarkable. And if you go through these letters, there’s really three common themes that we’ve seen arise. One is really common for our existing investors, which is that they’re already in this product GBTC.

But today, because it’s trading at a discount, there’s dollar value that is being kept from those investors, because it hasn’t been allowed to convert into an ETF. And so, these investors are saying, hey, SEC, one of your missions is to protect me the investor, how are you accomplishing that by not allowing this product, which I’m already in to be converted into an ETF, knowing that it would reduce that discount and give value back to investors.

So, that’s a really clear and coherent argument from the existing investor base. Another argument that we’re seeing is really about America competitiveness. And that’s important, especially off the heels of this White House executive order from a couple of months ago about responsible innovation within the Digital Asset ecosystem. And so, the point there is that, what better way, then to further keep America competitive within the Digital Asset ecosystem, and bring more regulation than by approving a Bitcoin ETF, which would really just bring Bitcoin further into the regulatory perimeter.

So, you have GBTC today, trading on OTC Markets is SEC reporting. We’re just trying to make it more regulated. And that’s really important from an America competitive standpoint. And then the third argument that we’re seeing is, last October, the SEC actually approved the first not spot Bitcoin ETF that holds actual Bitcoin, like what GBTC does, but a Bitcoin futures ETF. And that was an important milestone because it’s bringing more access and exposure to Bitcoin for investors. But importantly, if you go back through the history of these Bitcoin ETF applications, and see what the SEC’s concerns have been, it’s really been around the underlying Bitcoin markets and the fear of things like fraud or manipulation. But that’s a concern that would affect both the spot based Bitcoin ETF, as well as a futures based Bitcoin ETF.

So how can you be okay with one and not the other? And so that’s really the sort of logical argument that a lot of these letters are expressing. And we’ve also been making that argument through with our lawyers at Davis Polk and send a couple of letters to the SEC about this. And the crux of that legal argument is under something called the Administrative Procedure Act, and the Exchange Act, the Administrative Procedure Act, or APA is really what you know governs, how regulators govern. And one of the things that says in there is that if you have to like situations, in this case, a spot based Bitcoin ETF and a futures based Bitcoin ETF and they are similarly situated, you have to treat them alike.

Otherwise, you’re acting arbitrarily and capriciously. So, we’re making the argument that, approving futures not spot is being arbitrary. And then under the Exchange Act, you can’t discriminate against issuers. So, these are the two main arguments that are being made, something that’s also coming out in these common letters. Yes, so it’s an open common letter period, July 6, is our final date. In the meantime, just continuing to see the letters come in, engage with the SEC and just working through the issues with them.

Unidentified Analyst

Got it. Thanks. Hey, let’s go to the next question. Zooming out, how would you paint the picture of the regulatory landscape? And who are the major actors to be aware of, what are the primary — what are the primary risks from a regulator perspective?

Craig Salm

Yes, so this is really important. It’s important question. I mentioned a lot of these rules and regulations that are important to Grayscale’s business as we’re navigating the regulatory landscape in the absence of having an approved ETF product. It’s also important because within digital assets, it’s a global industry, by nature, you have these assets that can be used by anyone who has connection to the Internet. And unlike other asset classes, they don’t just trade on one exchange or marketplace. They’re trading on many exchanges and marketplaces with many different trading pairs.

And so, thinking about how regulation works is really important, both at the local level as well as the global level. The other reason why it’s a good question is and this is not a question [indiscernible] it’s everyone knows. But the other reason why it’s an important question is because the U.S. is unique in that, it doesn’t have one single financial regulator, it has many, depending on what the particular use case or assets are.

So, we have the SEC, which regulates securities. And so, from our perspective, they’re regulating our investment vehicles, because although we’re holding digital assets that we believe are not securities, the shares that we’re offering to our investors certainly are securities, you have the CFTC that regulates Commodities Futures. And so, that’s regulating a lot of these assets that we believe are commodities. Today, there’s a couple of CFTC regulated exchanges that have both Bitcoin futures and Ethereum futures. And so, those are the assets that that regulator currently clearly is regulating, you have the OCC, which is a banking regulator, you have treasury, which is regulating money. And so, thinking about money laundering and sanctions evasion and things like that, you have the IRS, which cares about people paying their taxes on the gains from digital assets, which are property.

So, all of that is to say that it’s important to stay abreast of what different regulators are saying about the asset class. And also ensuring that we’re getting in front of those people at those regulatory agencies and making sure that they understand how the asset class works. Where are the benefits? Where are the risks? And how should they be thinking about that. I also mentioned that White House executive order from earlier this year, which was a huge milestone for our industry, because you have the President of the United States saying that he wants a cohesive policy around this asset class so that we can stay competitive and remain the leader, the way that the U.S. had with the previous iterations of the Internet, Web 2.0 and Web 1.0 and it was also important, because since you have all these different agencies, having that cohesion amongst each other, and coming up with a single policy is really important.

So, right now they’re conducting various studies and going to come back and report to the White House about their findings and how they can both balance, enabling the benefits of crypto to live within the U.S., while also protecting against risks so that investors, consumers and so on are adequately protected.

Unidentified Analyst

Got it, okay. Let’s see the next question. Why would it benefit me to buy these coins in an ETF rather than just buying them on a crypto platform?

Craig Salm

Yes, so I think it really depends on investor choice. That’s the most important thing here. On one end of the spectrum, you’re going to have a person who is very tech savvy, maybe doesn’t have a brokerage account, doesn’t intend to have one, is totally comfortable going to a trading platform, whether it’s in the U.S. or somewhere else, depositing their cash there, buying a coin, maybe they have their own self custody wallet, that they’re comfortable then withdrawing onto and holding it themselves and being their own bank. And that’s really important, because that’s one of the promises of digital assets, that self sovereign ability to be the custodian of your own assets.

On the other end of the spectrum, you’re going to have somebody who wants nothing to do with any of that, because it’s not familiar, it’s scary. Maybe they’re an institution and they are governing documents or the regulators don’t allow them to access any asset that way, whether it’s coins or stocks or something else. And so, they really want that ETF wrapper that would include things like pensions, or endowments or retirement accounts. So there’s a huge spectrum there. And from our perspective, it’s really about choice. It’s good that investing in coins directly is becoming more accessible. But we think it’s also good to have these more regulated vehicles also available to investors, just depending on what your demographic is.

Unidentified Analyst

Got it. Okay. Okay, next question comes in. Historically GBTC traded at a discount to underlying assets. Is that still the case and what are the catalysts to narrow that discount?

Craig Salm

Right, so as I mentioned, because these products are not ETFs, they tend to trade more like a closed end fund when they’re trading on OTC Markets because when there’s premiums on like, with an ETF where you have market participants that can create shares and trade and sell them on the marketplace and reduce that supply. There’s that lag between the private placement and the public rotation. It’s a six month lag for products that are SEC reporting. And so, one year lag for products that are not SEC reporting.

So even if you want to create more shares, when there’s a premium, it won’t necessarily line up, you have that disconnect. Conversely, since we’re not an ETF today, for any of our products, we don’t have redemptions. And so, when there’re discounts, you don’t have market participants that can go and redeem shares. And importantly, all of these products were designed to eventually convert into ETFs when permitted by the regulatory environment. And so, from our perspective, the best way that you can eliminate or reduce the discount, same thing with the premiums if they exist is by converting into an ETF.

Unidentified Analyst

Got it, okay. It makes sense. Next question. Does Grayscale own the actual Bitcoin, and other coins included in the future ETF?

Craig Salm

So in our products, all of the coins are held in cold storage with our custodian. And these products are pass throughs. So, the investor that holds shares in these products owns the coin by way of their shares, it’s not, it’s not something that Grayscale owns is what our shareholders own.

In the futures products, so to be clear, Grayscale does not operate any products that hold any futures or derivatives of these assets, we’re holding the actual coins. So, our custodian has the private keys that directly correlate to those underlying assets. But with the futures based products, they are, my understanding is they are held in these funds and do represent the ownership of their shareholders, but it’s not a product that we have today, we think the more efficient way to invest in this asset class is directly in the coins, because you don’t have additional costs that come with futures.

There’s something called roll costs, which is that these futures are not indefinite. So, unlike holding a coin, where you can just put it in cold storage and have it sit there and represent your investment into perpetuity. With futures they are only for a certain time period. So, each month, you have to sell the future that you have and buy the next month. And if that next month future is valued more than your current month, then you’re essentially buying low and selling high. And that’s something called a roll costs. And within crypto historically speaking, there has been a roll cost in that the next month futures are valued higher. So, that accrues over time is essentially just like vaporizing your investment, which you wouldn’t have within a spot based ETF like what GBTC would be.

Unidentified Analyst

Got it, okay. Great questions coming in. Next one, are you deploying any hedging in any of your trusts?

Craig Salm

Yes, so these trusts are purely passive, long only exposure, there’s no hedging, no lending, no rehypothecation. They’re just sitting safely in cold storage with our custodian. And then the shares that you hold are always representing that, those coins. The only expenses that we have are the sponsor’s fee that we accrue. But other than that, it’s just coins sitting in with our custodian representing the private keys that are these assets.

Unidentified Analyst

Got it, okay. Okay, next question comes in. What has been the value proposition of GBTC over the years?

Craig Salm

Yes, so I really think it’s the cost effective and convenience of investing in the case of GBTC Bitcoin through a security wrapper, so you can access it from your brokerage account. We’re producing audited financial statements, tax information statements, we believe to be best-in-class service providers, and that allows you to invest in digital assets alongside the rest of your portfolio. So, we think that’s really important for a lot of investors, be them regulated, institutional, retirement accounts, really anyone’s seeking that that comfort and convenience.

Unidentified Analyst

Right and GBTC was one of the four issues that made the OTCQX Best 50 this year?

Craig Salm

Yes, and GBTC is regularly the most liquid security in all of OTC Markets on a daily basis, along with ETHE or Ethereum Trust, Ethereum Classic, or ETCG or Ethereum Classic Trust and then GDLC which is our large cap fund, which is a good way for investors that want access to digital assets, but don’t necessarily know if it’s going to be Bitcoin or Ethereum or something else, that is the winner. They don’t want to pick winners, they just want that more diversified exposure. And so, GDLC is a really great way to express that view through a singular investment.

Unidentified Analyst

Got it, yes, makes sense. The next question comes in. Do you have any securities that invest in a basket of crypto securities versus single currencies?

Craig Salm

Absolutely, yes. So, I mentioned GDLC, our large cap fund. We also have two others that offer exposure to different sectors within the Digital Asset Ecosystem. So, we have a Smart Contract Platform Fund Ex Ethereum, so that’s these protocols that are like Ethereum but choosing different tradeoffs to enable either more scalability or more speed, or more security, or more ease of development. So, that’s holding tokens like Solana or Avalanche or Cardano. And then we have a decentralized finance or DeFi Fund that again is allowing for the existence of these more traditional financial services on top of these Smart Contract Protocols.

So, things like decentralized exchanging. That enables users to exchange assets without intermediary, like an OTC Markets, for instance. And we think that’s really important because it’s — one of the promises of digital assets is to eliminate some of the intermediaries that investors are comfortable doing without. But again, the same way that investors or users are comfortable getting directly or those who want that intermediary and traditional structure, the same thing exists within crypto, where investors might want to do decentralized exchange or go to an OTC Markets, for instance.

Importantly, those two funds I mentioned, the Smart Contract Fund Ex Ethereum and the decentralized finance, or DeFi Fund, those were only launched within the last year, so they’re not yet on OTC Markets. So, they’re only available to accreted investors. But we certainly would, at some point in time, be seeking to obtain public quotations for those, the way we have our 14 other products.

Unidentified Analyst

Right.

Craig Salm

Yes.

Unidentified Analyst

Makes sense. Okay, next question, when or what is a mechanism trigger for when your trust purchases additional shares?

Craig Salm

Yes, so that’s a good question. Additional shares currently, since these products are not ETFs, are only offered in that private placement.

Unidentified Analyst

Okay.

Craig Salm

So, for instance, if an investors to, say, invest a million dollars into our Bitcoin Trust, what they would do is wire a million dollars to us, we would then go out and by a million dollars of actual Bitcoin, send those Bitcoin to our custodian, and then issue shares to the investor representing that $1 million of the Bitcoin Trust. So, that’s the only point in time when new shares would be created.

Unidentified Analyst

Got it.

Craig Salm

And for every share there’s actual Bitcoin backing that share, just as there is actual coins backing shares of all of our products.

Unidentified Analyst

Right, okay. Okay, next question, how would you handle a coin that crashes 100%, like LUNA, what if this happened to AVAX, how would the ETF protect against this?

Craig Salm

So, I think it’s, for anyone in the audience who doesn’t know what Terra is, I mentioned that there’s sectors within crypto. There is currencies, there is decentralized finance, there are smart contracts, there is gaming and Metaverse. Another sector within that is something called stablecoins. What stablecoins seek to do is track an underlying reference rate. For a lot of them what they’re seeking to do is track the U.S. dollar. And within that sector of stablecoins, you also have a spectrum of different ways to accomplish that. Within that spectrum there is more experimental ones, and therefore more risky ones.

On one end, you have stablecoins, where for every unit of the stablecoin there is a dollar or a money-like or cash equivalent instrument sitting in an account somewhere that’s backing that token. So, you have stablecoins, like USDC, which for every token there is a dollar or a similar in an account somewhere.

Unidentified Analyst

Right.

Craig Salm

Moving further down the spectrum, you have token, like Tether, which may not have dollars, but other instruments that are relatively safe backing those tokens. Moving further down, you have tokens that track the dollar but aren’t backed by dollar or cash-like instruments, but instead are backed by other digital assets. So, it might be Bitcoin or Ethereum. And usually, those are Over-collateralized to mitigate against the volatility that has been inherent in the digital asset ecosystem. So, there is tokens, like DIE, which are on the MakerDAO Protocol, that’s an example of that crypto-collateralized stablecoin.

Unidentified Analyst

Right.

Craig Salm

Moving further down, you have stablecoins that might not be backed by anything, and instead are using algorithmic adjustments to create more coins when there’s coins trading above a dollar, you know, like a premium, like I mentioned, or destroy tokens when they’re trading below a dollar. And this is definitely the most experimental end of the spectrum, and therefore the most risky. This token that is mentioned in the question is a protocol, called Terra that had a token, called UST, which was intended to be the stablecoin. And then another coin, called Terra, which was involved in the algorithmic adjustments that essentially failed last week, and caused a collapse in price. So, first, I would say it’s important for any investor to know that within the asset class there’s a whole spectrum of different types of use cases.

Unidentified Analyst

Right.

Craig Salm

And there’s some that are relatively safer, and then those that are a lot riskier. And that’s just really important for investors to know. With any investment vehicle that Grayscale would ever offer, we are always very clear to investors to that this asset class does come with risks. It should be viewed as a new technology, and therefore it can go through this volatility. A lot of our investors are very much in it for the long-term, and therefore able to weather that day-to-day or week-to-week volatility. So, I’m forgetting the rest of the question, but how would the ETF.

Yes, so, these products —

Unidentified Analyst

Protecting.

Craig Salm

They’re not doing anything to protect against the price. All they’re doing is tracking the underlying asset.

Unidentified Analyst

Right.

Craig Salm

So, if you’re invested in an ETF that’s holding a coin that crashes 100% that ETF is going to crash 100%. So, investors should know what they’re getting into with any of these investments.

Unidentified Analyst

Right, okay. I think we have time for one more question, maybe two. On the note of stablecoins, can you explain what happened to LUNA? What happened to LUNA?

Craig Salm

Yes, so, I started off by mentioning how the stablecoin token within this protocol, UST, if it ever trades at $1.00 you would have market participants that would go out and create more UST, and therefore add more to the supply to reduce that premium.

Unidentified Analyst

Right.

Craig Salm

Inversely, if it were trading below $1.00 you would have market participants that would go out and buy the UST and redeem it. Question is, well, what are you using to create UST, and what you’re getting when you destroy a UST. That’s where the LUNA token came into play.

Unidentified Analyst

Okay.

Craig Salm

And for that underlying token to have value there needs to be some use for it. For a long time, there was use for it. You know, you were able to get leverage on it, and people were trading it, and really seeing that this might be a really great way to create a stablecoin. But in certain situations you might have a lot of pressure applied on these types of use cases where their value gets tested. We’re in an environment today where, on a global macro level, you have a lot of assets that are really dropping in value because of inflation, and interest rates going up, and things like that. So, all of crypto is experiencing this.

So too was this Terra Protocol, and I think a lot of that put pressure on this mechanism, and ultimately resulted in that mechanism of creating UST or redeeming UST to ultimately fail.

Unidentified Analyst

Got it, okay. Okay, I think we have time for one that’s — well, we’re wrapping up. I see what time it is. And again, thank you for visiting with us here.

Craig Salm

Yes, it’s always great to come down here.

Unidentified Analyst

We really enjoyed the presentation.

Craig Salm

Yes, thank you.

Unidentified Analyst

And enjoy our relationship with Grayscale very much.

Craig Salm

Yes, as I said, OTC Markets has been such a great partner to us over the years. So, we really appreciate everything.

Unidentified Analyst

Fantastic, thanks.

Craig Salm

All right.

Unidentified Analyst

Good to have you.


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