#141 - Peter Mintzberg: The Case for Digital Assets

0:00Peter Mintzberg:Welcome to the Insightful Investor podcast, a weekly series that seeks to share industry, investment, and market insights. Learn more about our show at insightfulinvestor.org.

0:15Peter Mintzberg:Today's guest is Peter Mintzberg. Peter is CEO of Grayscale Investments, one of the largest digital asset-focused investment platforms in the U.S. Prior to joining Grayscale in 2024, he held senior strategy and leadership roles at Goldman Sachs, Apollo, Oppenheimer Funds, and BlackRock. Today, we're going to discuss the evolution of digital assets, institutional adoption, tokenization, AI, and what the future of investing may look like as blockchain-based technologies continue to mature. Thank you for joining us, Peter. It's a pleasure to be here, Alex. It's good to talk to you. Thank you for having me.

0:50Peter Mintzberg:What ultimately convinced you that digital assets were important enough to leave traditional finance and lead Grayscale? Yeah, so as you said, Alex, I have about 20 years of experience in traditional finance. My job has been mostly head of M &A or chief strategy officer in the organizations I was in before. And in that job, you're primarily looking for growth. Where growth is going to come from so you can position the asset and wealth manager. and hopefully surf the tailwinds in the marketplace. And what brought me to digital assets was my view that the next wave of growth in asset and wealth management was going to be crypto and more broadly defined digital assets.

1:35That's why I came and there was no better place for me to be than Grayscale. I have a lot of respect for what they built and I decided to come over. I'm originally from Brazil. That's where the accent is from. And my formative years in Brazil were essentially going to the supermarket in the morning because the prices were cheaper than in the afternoon. So the concept of currency debasement is a memory for me. It's not some sort of a vague word. And how fun it is to, like many years later now, to be working on an asset class that aims to protect people from some of the things I experienced myself firsthand in the early innings of my career.

2:17So if I were to connect the dots backwards, I think that's why I ended up in asset management for the first place.

2:23Peter Mintzberg:For listeners who may be less familiar with the firm, how would you describe Grayscale's role in the digital asset ecosystem? So we're very proud of this DNA of innovation at Grayscale. We have today, I believe, the largest product platform in this space, offering more choice to clients than any other provider. So we plan on building on that DNA of innovation to continue pushing the firm and the asset class forward. Are there specific economic, technological, and market developments? that made it possible for digital assets to emerge as a legitimate asset class? I would say more recently, over the last 24 to 30 months, two big things happened that I think is worth highlighting.

3:05One was the launch of ETFs or ETPs with digital assets that, by the way, Grayscale Spirit had it. And that brought a number of very large, well-known institutional investors into the asset class, helping to risk the asset class for all clients. And the second one was the change in the regulatory outlook. We had a 180 degrees change in regulatory outlook about a couple of years ago. It's been transformational in terms of the perception of risk of the asset class and the appetite of investors to get into digital assets. These were the two big turning factors over the last kind of recent past, last couple of years that I would highlight.

3:50Peter Mintzberg:And I guess if you go back even further, you basically had the convergence of the technology as well as the beginning of money printing when you go back to 2008, 2009. We also have a situation where, you know, returns on public equities started to be expected to be in kind of the mid single percentage points, in fixed income, low single percentage points, if you're lucky. And there's no combination of 5 % and 1 % that gives you the 7 % that most institutional investors are targeting. That has led them to look for higher risk, higher return investments, whether it's private equity, private credit, and now as an alternative digital assets as well to try to increase their risk adjusted returns in their portfolios.

4:40Peter Mintzberg:So when you sit down with an investor who may know very little about crypto, where do you begin the conversation? That conversation is becoming less and less common. Most people we talk to nowadays have at least heard of or have invested a little bit or have a family member that invested. They're not completely new to crypto. But since you asked the question, when that happens, the conversation tends to be primarily focused on Bitcoin. And rather than asking, should they buy it or not? The conversation tends to be more around how to incorporate that into their existing portfolio in a way that is responsible, done in a risk managed or risk aware way, and at the same time, enhanced risk adjusted returns for them.

5:24And that's typically where the conversation starts with completely new clients.

5:28Peter Mintzberg:What role do you think that digital assets play within a diversified portfolio? Different clients, different objectives, different roles. But generally speaking, we tend to tell people that one, the asset class is not for everybody. So you have to make sure that your risk profile matches the type of investments that we're talking about here. For the ones that it does, there is no question that there is a fair amount of volatility in this asset class. We believe that it has returns commensurable with the volatility for people that can hold it over the long term. And because of that volatility, we say a little goes a long way, most of the clients we talk to have been investing in the single percentage points range, 2%, maybe 7 % or somewhere in between.

6:18And when you run the number in analytics for many clients, that usually is enough to create a creative risk adjusted returns in their portfolio without too much volatility across the board.

6:30Peter Mintzberg:Do you believe we're still in the early innings of institutional crypto adoption, or do you feel the industry has entered a more mature phase? I think we're somewhere in between. I wouldn't call it early innings. I think that, you know, if I go back over the two years I was at Grayscale early on, there was an enormous amount of effort on access, providing access to investments and the wrappers that clients want to consume the investments. So the launch of ETPs or ETFs can solve that problem to a large extent, not completely, but to a large extent. And after that, we shift our focus more towards education.

7:11And I'll give you an example. For the last year and a half, we've been on the road in the US doing roadshows with hundreds and hundreds of financial advisors with Grayscale events, helping them with, you know, what is the asset class about? How do you think about this asset class? How do we talk to clients about it? Giving them product marketing that can use of their clients, providing them analytical, quantitative, and macro research that can help inform their views on the asset class itself. That is the current effort that we have going on in the marketplace. And I think that as the education becomes more and more prevalent, as people become more and more comfortable with digital assets, we'll see more and more clients investing in the asset class.

8:00But many have come, I'll give you another example, until about two years ago, if I were to pick up the phone and call a large wealth platform, my phone number would be immediately blocked as spam or something like this. You fast forward just like 20 months and we have thousands of inbound calls from platforms and financial advisors on platforms every 12 months or so that want to engage with us, want to learn more about the asset class, want our research, want our consultative services. So I think it's a very fast adoption comparing to other asset classes, but still, there's some ways to go.

8:39Peter Mintzberg:And it sounds like the conversations with investors has changed over the last five years and has evolved. It has changed dramatically. I think that you went from, tell me how this is not a scam to, you know, I invested in Bitcoin and now I'm going to look at other digital assets that represent different economics or different business models. Help me understand what's the opportunity for the next big thing. Obviously, there's also a gap between long-term potential and short-term market performance. What do you say to investors who may be concerned about the volatility? And how should they distinguish between volatility and investment risk when evaluating this asset class?

9:23Because of the volatility, this is a long-term play. It's not something you buy and expect to sell in three months at a profit necessarily. It's something you want to hold for years. And how do you manage that volatility? How do you manage that risk? Going back to our conversation is really around portfolio construction. and ensuring that you're not allocating more than what you can stomach through cycles. There'll be up cycles. We're now in a down cycle. Very often, we talk to clients and say, look, if you liked, for instance, Bitcoin at 100 ,000, you should like it today even more because it's on sale.

9:59Either you believe in it and today you have a buying opportunity or you don't. We investors should focus on the long term and should manage volatility by constructing the portfolio according to the risk profile. That's my answer.

10:12Peter Mintzberg:What are some common misconceptions you hear about digital assets and blockchain technology? One of the common misconceptions is that they're all the same. And people decide I bought Bitcoin or I bought Ethereum, and that's my exposure. And the conversation we typically have with clients tends to be along the lines of, you do not want to own just a sector of the S &P. You want to have some type of diversification there. The same is the case for digital assets. They're not all the same. They represent different technologies, different ecosystems. The economics of a specific token tend to be very different between blockchain one to blockchain two and so forth.

10:57So we talk to clients about building a diversified portfolio as a way of diversifying risk, idiosyncratic risk in a specific token or blockchain. That's a conversation that we have with clients very often.

11:11Peter Mintzberg:For investors who hear the term often but don't fully understand it, how would you explain what a token is? Look, at the highest level, I can go in excruciating details, but at the highest level, a token is a digital record. Think about it as a record of ownership or a record of stake on a database or blockchain that you have. And its economics, they are usually associated with the utilization of that blockchain. That's more often than not the case. The more successful that blockchain becomes, let's call it success in terms of use, the more that token tends to appreciate. Now, again, there are a lot of nuances and details depending on each blockchain, each token you're talking about.

11:58But generally speaking, it's simply a record of your ownership of an asset or participation in a blockchain online.

12:07Peter Mintzberg:And the value creation is in its use? The more that token gets utilized, in some cases, there are buybacks of tokens. There are different tools and techniques that different blockchains use. But generally speaking, the more accepted the blockchain, the more utilized the blockchain, the more useful it becomes for a certain application, that token tends, generally speaking, to appreciate the value as well. Beyond Bitcoin and Ethereum, which you mentioned earlier, what areas of the digital asset market seem to be generating the most interest from investors today? Most recently, we saw a lot of interest for Hyperliquid.

12:45Hyperliquid represents a token from an on-chain exchange. Think about NASDAQ, but on the blockchain. That has grown incredibly fast. In a few months, it grew to have a similar transaction volume than NASDAQ itself, actually a little higher, with a dozen employees. So that caught everybody's attention. As a matter of fact, Grayscale launched a Hyperliquid ETF recently. and it grew very fast to over$100 million of AUM. That's, I'll probably call that out as the most recent token that got the investor's attention.

13:23Peter Mintzberg:Why might an investor choose to gain exposure through an ETF rather than owning digital assets directly like they used to do? So we find investors like ETFs for multiple reasons. And again, each investor is a different situation. But if I were to, at the highest level, I'd say they're familiar with the wrapper, or generally speaking, the mainstream investor. It shows up on their brokerage account next to the other investments. They don't have to go and log in in a different system or exchange or custody or support system. And it allows them to have, or the financial advisor to have a complete view of the portfolio, run analytics on that portfolio in a unified way, risk management, understand, do financial planning more easily.

14:07They don't have to log in in multiple different places. It's generally more user-friendly than either having it on an exchange separately from the other investments you have or have it as self-custody, which is an entire different level of complication and headaches for most average investor. And we saw the pickup over the last couple of years or so.

14:30Peter Mintzberg:As more traditional asset managers enter the space, how do you think about differentiation and building a durable, competitive advantage? So Alex, Grayscale is a specialist. All we do is digital assets, wake up every day in the morning to work on digital assets, and that's all we do all day. And my experience has been the clients appreciate that. We spend as much time with them as they need to help educate on the asset class, to work with them, providing marketing materials and other research they need to speak to their clients. And we're deeply embedded in the ecosystem. One feedback that we get often from clients is that we have this unique combination, which is we have from one side the DNA of digital assets having been, as we said earlier, one of the first in the asset class with over 13 years in it.

15:22We have institutional caliber, infrastructure, risk management, compliance, and operating integrity. The feedback from clients have been great so far based on that.

15:34Peter Mintzberg:AI has become one of the dominant investment themes globally. Obviously, this is what we've all experienced. How do you see AI and blockchain intersecting over the next decade? I think AI and crypto or digital assets are a match made in heaven. And it's fascinating how they developed reasonably independently over many years. And now they are converging. As you think about the type of rails that AI agents will transact, It's not going to be in fiat or bank accounts. It's going to be on the blockchain. As you think about ways of building portfolios of digital assets, which will be all available on-chain in a transparent way, AI will be an enormously good technology to do that.

16:21So I see them converging and two secular themes that will feed in each other and amplify each other more than not.

16:31Peter Mintzberg:We talked about tokens earlier, and obviously tokenization has become one of the most discussed trends in finance. What problem is tokenization solving that existing financial infrastructure cannot solve as effectively? Tokenization is a huge theme also for the next five to 10 years. We will allow people to invest in assets and other opportunities that today are only available to a few because of the minimum size of the investment or the liquidity of it or any other factor. So the word democratizing is used a lot nowadays, but this is true in this topic. So anyone will be able to access investments that today are generally hard to access.

17:18And the seventh thing will be the creation of investment opportunities that simply do not exist today for different reasons. And once you can tokenize an asset or a revenue stream or any type of cash flow, they become investable very easily. And I think that would be transformative. Just to give an idea, we see today the TAM for us at great scale around$2 to$3 trillion. That's basically a crypto today. On an extreme scenario where all financial assets get tokenized, that$2 or$3 trillion becomes$700 trillion. So an enormous amount of potential for growth still in digital assets. And I'm not sure in where we're going to be between the$300 and$700, but I'm pretty sure that there will be several trillion dollars of opportunity for growth in this space.

18:10Peter Mintzberg:Obviously, we've experienced democratization over time, but it seems like this could supercharge that continued evolution. I think it will be supercharged. And I think that will bring to fore the asset and wealth managers of the future, the ones that can actually create that bridge between AI agents building portfolios, supporting financial advisors, and finding the best investments for their clients, and this massive expansion of the investable universe with tokenization. it's going to be a whole new world of investments in the next five to ten years and I find it incredibly exciting and intellectually stimulating as well.

18:53Peter Mintzberg:Is there an example you can share to help people get a better feel for what you mean by this? On the tokenization side for instance imagine that I think the easiest example would be a building. The building I'm in today is completely liquidy, can't invest in it, it's owned by a company and If you were to tokenize it, then, you know, if you're interested in prime commercial real estate and Stanford, Connecticut, now you can be a partial owner of that building. So it just opens up a wealth of opportunities in terms of what you can invest on. I think anyone that claims where this is going to go is probably not evaluating the opportunity completely right yet.

19:38I think there's a lot of ifs and buts and unknowns. All we know, it's going to be a lot of transformation and change over the next five and 10 years. And I think that's what makes this business so exciting.

19:51Peter Mintzberg:I guess a simple way to think about it is it's almost like you take a company that's private and you go public and you have shares that people can buy and they get a piece of that ownership. It's similar to that. It raises the question on some of the things we've been operating for a long time, like will there be a distinction between public and private in the future? Will there be a distinction between liquid and illiquid in the future? So there are also, I think we have more questions than answers right now, but the only real answer we have is things will change. I know regulation remains a critical issue for the industry.

20:23Peter Mintzberg:What do investors need to understand about market structure, legislation, regulatory clarity, and the role thoughtful regulation plays in accelerating institutional adoption? We live today in the most favorable regulatory outlook for disaster class ever. And the direction of travel is very positive. I don't think we're done yet, but it's important to recognize that that regulatory framework and outlook has changed 180 degrees versus a couple years ago. Whether it is the Genius Act we saw with stable coins or the Clarity Act that is making its way through Congress. And importantly, the constructive and positive engagement between the SEC, the CFTC, and market participants, which didn't exist before, is incredibly positive.

21:16We welcome more regulation in the asset class. All we want here at Grayscale is more rules, more clear rules, so we can follow them and help differentiate the firm. As I said earlier, We're very focused on institutional-grade compliance risk management, and having clear rules of the game helps us build on that even further.

21:37Peter Mintzberg:And what if the industry fails to achieve meaningful market structure reform over the next few years? How much does that slow adoption? Adoption has gone mainstream. I don't think adoption is slowing down. I think we need regulation to ensure that it continues to grow. We will continue to see very large institutional players coming to the asset class. Some of them are not only buying products, but actually launching products themselves, as you've seen in the marketplace. But I think having regulation will allow us to bring all of the client types online into the asset class and give them the confidence they need to be able to deploy resources at scale in this asset class and ensure that innovation continues thriving here in the U.S., where we have the best intellectual capital today, and we want to have the clarity of that regulatory framework to be able to execute with intensity on our ideas.

22:34Peter Mintzberg:What milestones over the next three to five years would convince you that digital assets are truly becoming a permanent and foundational part of the investment landscape? I would say having complete adoption of digital assets by all client types will be important. Today, we see self-directed investors. We see wealth platforms, as I said. Sovereign wealth funds are in as well. We don't yet see pension plans as much. As you know, they tend to move more carefully than all of the other client segments. But I think they are coming. Retirement is another angle that I think is still to be explored. And back to the previous question, clarity on the rules of the game.