Episode Transcript
Kristen Mierzwa:
Welcome to FTSE Russell Convenes. I'm Kristen Mierzwa, Head of Digital Assets. Today we're going to be talking about the exciting world of digital assets in that asset class. Inkoo Kang, welcome. Thanks for joining us.
Inkoo Kang:
Thanks for having me. I'm excited.
Kristen Mierzwa:
So your role at Grayscale, you're in product development, but that can mean so many things, so maybe you could walk us through what that means in your job at Grayscale.
Inkoo Kang:
It might be best to start at the highest level. Like Grayscale, what we're about, what we're hoping to achieve, and being the crypto specialist asset manager for our clients. We have a wide variety of clients that are on different parts of their journey as it pertains to crypto, Bitcoin, Ethereum, going beyond those and into other assets they're in, but it's for us wanting to deliver best-in-class solutions, best-in-class investment vehicles for our clients.
So to that, my seat and my role, I sit on the ETF team. I have a lean-in product in product development, and our firm, that really is about the full cycle of product from the very early stages of the ideation process into developing those and making sure that we can implement it systematically over time, but that they will work, bringing them to market and actually supporting them in market, making sure that they're performing properly, doing as designed, and all those sorts of things.
And for me, my day-to-day, it can be episodic at times, especially with crypto. 2024 is a great example because so much has been about the emergence of these exposures in the US ETF market place. A lot of my job has been related to the in-market support of those products from a capital markets lens, the primary market function creates and redeems. Is it working properly? It's what we spent twelve, fifteen, eighteen months in the lab kind of designing and thinking through, is it working? What's not? Who are the counterparties that are entering the fold? And how is that whole ecosystem growing for these products?
So which is less product developed, certainly, you know, making sure that the success of our products, from the context of are they best-in-class? Are they working as designed? Are they being really efficient vehicles for people who are using them? That's been a big part of it today. But that development side is where it gets a lot of fun.
Crypto is really interesting because there's a ton of white space and there's a ton of data sets and there's a ton of factors and metrics around these assets that are different and unique to what you might find in the equity landscape, or in the fixed income landscape. And a lot of that's new for me and it's a constant learning curve of what works, what can I borrow from what I've learned, what works well, what doesn't. And being able to kind of focus on different investment outcomes for investors that are approaching this asset class, again, to varying degrees of where they are on their journey. But it's really fun designing portfolios, thinking about investment outcomes, and kind of thinking about what it looks like for bringing these types of products to market.
Kristen Mierzwa:
So to pick up on the investment outcomes, how can pension plans and plan sponsors get access to crypto products? Do you guys have solutions in that space?
Inkoo Kang:
Yes, so it's a great question. It’s very topical for us right now, especially since, again, I'll go back to the emergence of the ETF landscape and what we're starting to see. I think that idea of adoption and the user base and the expansion of is one of the biggest things that we've seen over the first, and it's only been five months, but the magnitude and sort of the velocity of institutions that have been long been on the sidelines when it comes to this asset class are starting to have a way to implement and gain exposure in a real easy way.
So for us, our flagship product being an ETF and now sort of being part of that cohort of products, it's been really fun and really interesting talking to existing clients, but also clients that have never really been involved and really starting to say, okay, we've been tracking, we've been educating ourselves. There's really now a way for us to officially implement, particularly Bitcoin exposure.
How do we think about this? How do we approach this? How do we actually actionalize this? And then by the way, there's a lot more under the hood here. What else is going on? What is Grayscale working on the private fund side?
One of the things sort of overall, sort of over the last five, seven years that Grayscale has been focused on is really building our platform as a whole, our capabilities as a whole, and what we're able to deliver and how we can meet clients like a pension fund, or an independent RIA who might actually be looking for a lot more than just a Bitcoin ETF. And it's a lot of fun working with them to, again, design different investment outcomes, or, hey, we have a certain need where we need to service a bunch of clients behind us in slightly different ways. So what are ways that Grayscale can help do that for them? It's really cool to see the evolution of and different client needs. And sitting at Grayscale on the product development side, I tend to most get involved in terms of thinking through some of those investment outcomes and thinking through product design, but certainly different clients and their different needs of how to implement in this asset class is really interesting.
Kristen Mierzwa
So it seems like there's a lot of acronyms in the digital asset world. And I feel like another part of your job is doing some translation from a traditional finance or trad-fi world. There's an acronym right there. How do you approach that in the digital asset asset class? So maybe you could share some of your experience in how Grayscale has been leading the way in education and kind of connecting those dots between the two worlds.
Inkoo Kang:
Sure, okay. Anytime there's any sort of nascent technology or an emerging asset class or something that just hasn't been around that long and is moving very quickly. There's certainly new terminology. There's certainly ways to measure activity and or progress that just isn't relevant to what someone might be used to, again, if their background is in equities or fixed income.
At Grayscale, we're really focused on that education piece. So that's part of that platform build for us. Since I've been there for almost three years now, three years now, we've spent the entirety of the time there thinking about how do we deliver research to our investors, to the varying degrees and ranges of investors that we have, and the importance of meeting our clients at their level.
Maybe I'll share a quick anecdote there. Recently, we've had some advisors reach out to us who are, again, sort of in that journey where they are really trying to understand how Bitcoin exposure fits in their portfolio. Where I have a lot of fun is when you get to, sort of, get an insight into existing portfolios sort of in their practices today. And it really becomes like a problem solving or a solutions-based process where you get to, you get an opportunity to look under the hood, what an advisor has for their clients and spend time with data, spend time figuring out what their risk appetite is for adding an exposure like Bitcoin, sort of showing them how it behaves over different cycles, over different sort of periods in the market, understanding what's too much for them, what might not be enough.
Certainly throughout that there's a lot of things that may come up as it pertains to things that are unique to something like Bitcoin, where again, you get to come, you get to go back, and say, hey, you know what, like, I'd love to get some of our research guys on a quick call for you and let's, let's go through something around, the tokenomics related to Bitcoin, what it means for the store value qualities that we're talking about and why it pertains to the alternative sleeve relative to sort of that, the growth equity sleeve and let’s, let's like spend time with that. Because that’s important.
Kristen Mierzwa:
Sounds like Grayscale takes a very high touch consultative approach when working with clients. Or does Grayscale have a house view on, you know, hey, you should have zero to five percent allocation to digital assets in your portfolio?
Inkoo Kang:
We certainly have a house view. And I would say, again, it's really important because I think this conversation gets really interesting really quickly, because I've had different clients that we've spoken to where they just haven't developed a clear and concise view of what Bitcoin means to them and for, and then ultimately for their clients. So depending on, on sort of that question, like what, what is Bitcoin almost, you can get varying degrees of like where it fits and how much to allocate. But generally speaking, just based on the numbers and the data that we've kind of tracked and looked at, we've been talking about this two to, sort of, two to five percent allocation as being really meaningful from two points.
Delivering returns without overly altering the overall risk, risk profile of the portfolio as constructed today. Now, that's a generalised statement because the starting base portfolio does matter in that context. But generally speaking, if you kind of look at an acqui and a sort of all bond as a 60/40, two to five percent has done a really good job of sort of raising that portfolio as it pertains to the efficient frontier.
The other piece there is that is sort of that denominator of that equation, which is the risk profile at that level really doesn't change a whole lot. So you can get meaningful contribution over rolling one, three, five years introducing exposure like Bitcoin without really changing the overall construct from a risk perspective to the portfolio and we think that's really, really powerful.
Kristen Mierzwa:
So everyone hears about Bitcoin. I think if anyone's working with digital assets for the first time that's where you start, that's the logical first step. And then probably you're going to get into Ethereum. So I'd love to talk to you a little bit more about Ethereum. And then I'd also like to hear your views on what is that story beyond Bitcoin and what else is out there. I mean, there's so many digital assets and I think it's one of those things that you guys have done a great job on trying to organise that asset class and make it a little bit more approachable through the work you've been doing in sectors. So let's start with Ethereum and then move into sectors.
Inkoo Kang:
Ethereum is also a very interesting asset, both in absolute terms, but also relative to Bitcoin. I think in general, it's really awesome to see people have now even gone beyond Bitcoin and they're starting to think about ETH, Ethereum.
I sort of look at Ethereum as this tech stack built for the modern world. There's another going back to terms. I hear a lot of people say, sort of, a tech stack built for Web3. We can get into what that means, but essentially, there's still lots of room to remove frictions, to add speed, to lower costs, et cetera, that a tech stack, like in a platform like Ethereum is sort of aimed to solve for. So from an investor's point of view, there's a lot of opportunity in terms of what the future holds and sort of structurally what the, sort of, next steps of a digital world looks like. And a lot of that, there's a lot of opportunity to build on a tech stack like Ethereum, which I think is a little different than how a lot of people are thinking about Bitcoin and how I tend to approach it, which is, we've heard the term “digital gold.” I think it's a good way to kind of describe some of the characteristics we're starting to see Bitcoin develop. When you look at what makes for a really good store of value, fungibility, storability, immutability, divisibility, Bitcoin has it in spades. It really checks all those boxes.
So again, it's a new asset, and it's still starting to develop some of these traits and characteristics. But, we're already starting to see that it does everything that you need a store of value to do really well. But those are two different things. Bitcoin is sort of still at the stage with investors at times where they're like, "Oh, I've got my crypto exposure. I've got Bitcoin." But that's starting to evolve right before our eyes a little bit when they're starting to understand like, wait a second, Ethereum is really different. This is a different investment opportunity.
And you raised the point of some of the work we're doing in sectors. So I'd love to touch on that really briefly. We’re sort of hyper-focused on our breadth and our coverage for the entirety of the asset class. Now, it's hard to systematically sort of really cover thousands of assets, so certainly there's still a bit of a group that we are focused on, but internally we are tracking hundreds of these assets, and what we've worked on over the last year or so is to really develop a through-and-through, systematic way to classify these assets. So their true sort of functionality or value add as it pertains to the use case that these projects, assets, protocols, however you want to think about them, are really set out to do. That's what the Grayscale Crypto Sectors sort of idea was all about and that's progressed and it continues to grow, so that has manifested itself in the form of indices today that are available to investors. And we have investors sort of looking at them today, on two sides, I'd say. A big part of that is benchmarking. So data, performance, attribution, being able to have different segments of the asset class sort of on your screen alongside your traditional sectors, financials, industrials, utilities, and the like. And really being able to sort of go under the hood with the asset class. And the other side of that is the investment opportunities that sort of lie within the sectors. So we are actively looking to build, again, making sure that they are being brought out to market with high usability, high function, and that we are comfortable sort of accessing all those tokens, trading them, that we have things set up on our side to be able to custody them through-and-through. We're building that out in real time now so that when we're ready to deliver them into market, that they are absolutely the best solutions for accessing the sectors. So those are things we're really focused on right now.
Kristen Mierzwa: What I think has been so interesting about this conversation with you is you've never used the word “cryptocurrency” to describe any of the assets that we've been talking about. And I think that's a perfect way to, kind of, close what we've been talking about today. Because so many people think of it as like, “It's all cryptocurrencies, why do I need ten of them?” And really what you've highlighted today is that the protocols have very different use cases. Yes, and I think that that message is starting to get out there. But yes, that was so interesting that you just didn’t go there. Thank you so much for being with us today. We really appreciate your time.
Inkoo Kang: Of course. Thank you for having me. This has been great.
