Richard Rosenblum, CEO and co-founder at GSR, talks to Base Layer about how he got started in the crypto space, the rebranding of crypto currency as “digital assets”, and what he thinks about the future of the industry.
David: This is David. This is your new episode of Base Layer. I have Richard Rosenblum with us, the co-founder and member of the board at GSR. Rich, how are you doing?
Richard: Great. Good afternoon, David.
David: Good afternoon. And this is going to be a great one. As many people know who listened to my show, I love the intersection of people who were in traditional finance who crossed the chasm into digital assets. And Rich is definitely someone who has done that. He began his career at Goldman Sachs spent many years there in New York and London in commodities trading as a managing director and Global Head of oil derivatives. And what they’re doing now at GSR is quite interesting, GSR was founded in 2013, is one of the oldest established institutional crypto market makers for digital assets. And so for people who are learning about this world, from the family office world and the institutional investor, we’re gonna have a great conversation, because Rich can talk about everything that’s happening from digital assets to everything that’s happening on the macro side. To start, what we would like to know is that if there was a specific point in time throughout your career, sometime, probably years ago, that digital assets became a thing and you said, Wow, this is something that I want to pursue, this is something that I see a lot of opportunity and would love to get to know, not necessarily when that was that in terms of the quote unquote, ‘Bitcoin moment’, but what about the technology? What about the assets? What about blockchains really inspired you to go out there and form GSR?
Richard: That’s a great question. I’d say, as far as the genesis of forming GSR, I think it was more about the fact that I had seen asset classes go from the immature state to being highly mature. And I think to me, it’s a lot more exciting, and you add a lot more value being a market maker in a newer product. I’d made one career switch from trading fixed income, just for a couple of years in 2003 to 2005 and then switched over to oil. And part of it was that there’s a lot more volatility and a lot more new product creation. And that aspect of using more outside the box thinking and more of both sides of the brain instead of just sort of the mathematical elements, I thought was fascinating.
So I think that having been an oil for a decade, going into a new product that seemed more about being in the future, rather than oil seems like it’s gonna continue to be important, but more a thing of the past. I think I found it fascinating. But the formation of GSR was based on the notion that, we’ve seen programmatic trading developed over many years in oil where initially you had to call someone up to find out where back end oil was trading. And then all of a sudden, there’s listed products and usual host names trading programmatically in the space, compared to starting from square one and being a leader.
And I think we might have been the first algorithmic trader in the space to be fully focused on it. But in terms of learning about the technology, despite being a rather technical guy when it comes to derivatives or when it comes to, you know, studies in school, it’s more in the past couple years where I’ve really dug into the full potential of crypto. So, as opposed to having bought early and saying that I was a crypto fanatic in 2012, I think despite being in early, I’m really just breaking the seal in the past year or two of all the different possibilities of digital assets.
David: I’m curious, and you’ve listened to a few other shows, and this is something I’ve been kind of thinking about in the last month or two, during the summer months, the move from calling things crypto to digital assets. Now, there is a case to be made that Bitcoin is obviously a medium of exchange and a store of value. It is marrying those pieces of what we would consider a currency. And then what we’re seeing is the evolution of all these other things that are happening that are not necessarily currency, per se, but they are digital assets that are powering different protocols and different systems and different applications. Would you say that it’s time to move away from crypto to something else?
Richard: I could get into all the technicalities of why there’s overlap as well as non-overlapping. One can be a subset of the other and areas like options are a form of derivatives, but all derivatives are our not options. But I’d say a lot of it is a branding exercise as is much of life in businesses.
Being a true insider and a crypto native, we really want to call it crypto. And that’s what it is. But I can see from speaking to larger institutions, there still might be the sense the crypto side has a bad name.
It’s like saying the crypto market is the digital asset market. It gives it a bit more of a neutral flair by taking away the name that they might have heard about and heard about on exchanges or schemes similar to the crypto scam that happened on Twitter a couple weeks ago. But I think a lot of it is because they’re both such loaded phrases. And there’s absolutely some areas of overlap and non-overlap.
For the most part, it’s more of a branding exercise in today’s day and age, I would prefer to call it digital assets when I’m more in an institutional setting. But today when dealing with exchanges, minors, issuers? The insiders really do call it crypto.
David: Yeah, I would say that I have some experience with this because back in the days of work in more mission driven investing, especially focusing on the planet, that the idea of calling it global warming, really wasn’t that well taken by all sides of the parties there. And then the switch to climate change kind of started to focus in on there. And then all the different things and all the different nuances.
But again, to your point, there is purpose and discussion that is worthwhile, and what we’re calling all these because, you know, it does resonate, there are certain things that will resonate with a larger population than others. And so, if we truly want to grow the sandbox, I think we do have to have honest conversations as a community about what we’re calling these things now. So well, that’s why I wanted your opinion on that. But let’s get back to GSR. So what you all are doing, there are a multitude of different things. There’s market making. There’s OTC trading, and there’s programmatic execution. For somebody who is on the outside looking in and I’ve been speaking to lots of people over the last three or four months, it is going to be a very interesting time, especially after the Paul Tudor Jones letter. And what’s happening with the unprecedented amount of printing that the government is making in response to COVID.
Lots of people are starting to really perk up and take a look at this. So for those that are not necessarily still versed in this, but are starting to learn, tell us the different components that GSR is doing and how it facilitates the capital markets and digital assets.
Richard: Sure, I’d like to start with the last few words. You said facilitating markets. I think that on a holistic view, we see ourselves in a role of reducing the friction between capital and innovation. And whether we’re doing something on the microstructure side and programmatic trading, or we’re looking to make strategic investments in this space. We certainly feel like our core mission is to bring capital to the true innovators in the space engineering new products, to some degree giving strategic advice to leaders in the space. But we’re not creating our own protocols. I think there’s some really prolific interesting things that are happening. And I think that’s the part where we take the most pride in that we’re having a hand in and really helping the space develop and have been doing for the better part of 10 years. And getting into more specifics, because the first thing we did in this space was programmatic market making on behalf of issuers, that’s still very much in our DNA. But as opposed to running software, that helps keep these communities liquid, and helps draw attention to their products by making sure that there’s always a buyer and seller of last resort 24/7 on global exchanges.
We also take an active part in helping them grow their community in other ways through bringing forth partners, marketing, tax, legal, PR, and helping them draw important connections to the space. We came into the space as a programmatic player. But we noticed that other competitors came in. And they were fulfilling similar roles as programmatic traders. And it makes sense because we skipped that layer of brick and mortar, and everything was interacting via exchanges. So it was a very non-human oriented business for many years. But I saw that there wasn’t really a derivatives market. And without investment banks in the space, there weren’t any clear goal groups to fill this role.
So we built a platform starting two and a half years ago to be able to trade derivatives, specifically options. And I think that’s in the last six months, the place where we’ve really differentiated ourselves and that we traded more option volumes than the CME this year. So I think that puts us in a pretty unique standpoint, since a lot of the other groups, they might have prowess and trading prowess and even options trading for the usual listed instruments, it’s a bit of a different expertise to be able to look at the credit and understand the collateral and margining and do it at scale. So I think that in addition to the market making for token issuers and exchanges, we offer risk management solutions to groups using derivatives and using options. And it might sound like something that’s highly speculative, taking a high vol instrument, and trading options on it. But that’s absolutely not what we’ve been doing. Usually, it’s more overwrite strategies where you’re harnessing that high vol, and reducing the volatility by selling some calls against it. And I’m sure the family office audience is aware of the strategy that’s been one of the oldest option strategies, many more than decades old. And also, there’s groups like miners that are looking to manage risk, buy by buying puts, if they have the shareholders and CFO, they can’t just spend $30, $50 million on a mining farm, they have to make sure they have a return on it. It’s not just a grand bet, it’s more of an operating company.
So we work with them to isolate and reduce these exogenous risks that they don’t necessarily want to keep in their portfolios. And in addition to that, we have some businesses along the remittance corridors, we’re working with payment operators, and some investment management. But the core businesses, I’d say around derivatives and programmatic trading.
David: So I would love to get your opinion, one of the areas that has exploded is in DeFi and in terms of derivatives, you’ve started to see all these new synthetics, I would call them asset backed or collateralized type of synthetic derivatives out there, are using Ethereum, or you have some that are multi collateral, and you’re creating all of these new type of instruments, and a lot of them are derivatives of derivatives. I’d be curious with your experience from the traditional markets, and then obviously, lending to digital assets. What are you thinking about what’s happening there?
Richard: So yeah, back up a decade and speaking to other senior members of Goldman, I’d say, what do you think about this FinTech space? Don’t you think that we’re going to see the same type of disruption that we’re seeing across other areas? Like isn’t, tech and software going to have a big impact in our space? And, the most senior members, were saying, it’s going to take forever because you need legal precedent. And there’s a lot of reasons why you’re going to see very slow change from a regulatory perspective. Anything that relates to money, you’re going to need only accredited investors to be involved. There’s really not much benefit to make any quick changes.
So I thought that was smart analysis at the time, but then boom Bitcoin hits, and you have this totally new parallel ecosystem that’s coming from the retail framework. And I think that just the concept of Bitcoin, everything it brings, whether it’s a peer to peer marketplace or whether digital gold, it’s a way where you could disrupt the system by banking yourself and having a system of value transfer. And whether it’s the best one or even a good one, it’s ended up being the fuel for the rest of this ecosystem. Each percent Bitcoin goes up, that’s another couple billion dollars, that can go towards fueling the digital asset ecosystem.
And instead of needing institutions to enter, there’s no longer the dog wagging the tail, the tail is wagging the dog, since you have 10 plus billion dollar institutions within the space, that they’re not just evangelists reinvesting it, because there’s something crazy about them, it just continues to work that this is how they made their money in a space they know. So whether it’s the team at Bitmex, or Binance, they put their money where their mouth is, and they’re investing in a space and to answer your question bit more succinctly when it comes to DeFi.
As Bitcoin goes up, we see more fuel enter that space. And I think that it’s going to be a lot more all encompassing. But we’re in a sort of a step function where the first step has been banking yourself and exchanging value. The second step has been lending and trading in a decentralized framework.
So I think DeFi people were looking at ways where it’s going to get more game like and have low fees, and it’s going to have no brick and mortar. So we could talk about RobinHood, we could talk about peer to peer lending businesses, DeFi is more that you take the company completely out of it, and you’re just having it be essentially software, where it could be no one works at the software company. It’s essentially Bitcoin. But as a corollary to the business of lending the act of lending, not even sure you’d call it a business, if it’s a no one’s making money off the lending. And it’s purely a bilateral function with software in between.
And same with trading. And what’s been most exciting this past month is that when the volumes go from hundreds of thousands a day to millions per day, especially for large family offices, it’s like, okay, it’s cute, but you’re not going to be excited. But in the past couple of weeks, those amounts have gone up to the hundreds of millions per day.
And, yeah, that’s starting to be a little bit interesting. It’s still not the trillions of dollars per day, like in traditional finance, but if we do experience those kind of gains, going from single digit millions to hundreds of millions within a span of weeks, you can extrapolate that out, and we’ll get to material numbers at some point, even if it takes a couple of years. So there’s a lot of other things that you could do in finance. And, you know, it’s all up to your imagination, but being able to bank yourself being able to trade without having an intermediary, being able to borrow and lend and having credit be issued without any humans involved. That’s already a lot of money to play with.
David: So I would love to get your opinion on this too. MicroStrategy NASDAQ (ticker mstr) adopted Bitcoin as a primary Treasury reserve asset. Apparently, they acquired 21,454 Bitcoin at the tune of about 250 million USD.
And so they addressed their capital allocation strategy with this. And it said that they are seeking to maximize long term value for their shareholders. And this investment reflects their belief that Bitcoin as the world’s most widely adopted cryptocurrency is a dependable store of value and an attractive investment asset with more long-term appreciation potential and then holding cash.
Now, as someone who’s on the other side, who was talking to investors who was talking to other counterparties, who are executing trades, and you just alluded to the volumes, do you think we’re at a very special point in time right now where we’re starting to see larger institutions larger capital allocators like this starting to really tilt into bitcoin and other digital assets?
Richard: The short answer is yes. But I would say that it’s a bit more of a complicated question and answer because you still have the capital asset pricing model, and there should not be an asset that completely breaks that mold where, yes, it’s a store of value, you’re not going to lose your principal. But it’s supposed to go up 50 X or more versus gold, because it’s digital gold. And we have a generational aspect where, the older generations don’t believe that Bitcoin is the next big thing. But you have the JPMorgan survey recently came out saying, millennials and Generation Z believe in Bitcoin, more than gold, this thing’s got to give. And I think that those two things can’t be true that it’s a great store of value, you’re not going to lose your principal, but it’s severely undervalued and it’s going to go up many multiples.
So, I’d say that it’s still a highly risky investment. And I would certainly advocate apportioning a small percentage of one’s assets towards Bitcoin. But I think for a company to say that they believe it’s better value than dollars, and they’re going to put their entire portfolio, that’s certainly a huge bet they’re making, and it’s a risk to not have any Bitcoin in your portfolio. But I think it’s a bigger risk to put your entire portfolio into bitcoin.
So I think that it’s their judgment to make as fiduciaries over the business. But I’d say unless your business that for some reason has liabilities in spacers, highly connected to it, probably better not to go over 10%. I think something like 5% is already pretty extreme. So that’s news to me. It’s pretty exciting news. And it’s the kind of news I’d like to see. But I’m still not the type of evangelists that would recommend someone’s going levered long Bitcoin, I think it’s, it’s earned its place as a to have a few percent in a large portfolio.
But in terms of what I’m hearing, for other investors, I’m still deeply in touch with the traditional asset space. And there was a lot of speculation when we were in the so-called prototype phase, still, in 2017, there was no infrastructure in place for institutions to get involved.
Now finally we have a lot of infrastructure, it’s just new and fresh, and it takes a couple of years for groups to vet it. Instead of pensions, putting in 10 million here and there, this is, this is the first time and these last three months, were speaking to groups at the top largest, three to five banks saying that they’re having conversations at the CEO level, the CFO, CIO level of some larger ticket sizes. So, I don’t think it’s Simmons and Paul Tudor Jones, that alone are making these moves. I think everyone is sniffing at it. But we’re still in early days. I think that we are certainly in the early innings.
David: Interesting like that insight and commentary. I’m curious, your old firm Goldman was on record about a week or two ago debating that the US dollar had potentially or was going to potentially lose its reserve status, and GSR produces monthly commentary on a blend of digital assets and the traditional markets.
So we’d love to hear what you guys are thinking there as a firm, about US dollar as a reserve, and also gold. Gold busted through $2,000 to retrace back a little bit, but those that are looking at Bitcoin also have spent and I’d say this predominantly, I think this is pretty, fairly unequivocal, that anyone who’s been looking at Bitcoin also looks at gold. Although if you’re, you know, obviously in Bitcoin, or you probably don’t even want to think about gold, but for those family offices and other institutional investors that have looked at gold, they’ve allocated to gold, and now they’re looking at Bitcoin as a potential salvage, something that is outside the traditional world.
And so any thoughts as a firm or what you guys are thinking about in August right now, you know, in terms of US dollar, in terms of gold in terms of some of the more macro mathematics that are happening out there?
Richard: Yeah, so that’s a lot to take in, I’d say that, in making investment decisions. As a family office, whether you have 30 million AUM or you have 30 billion AUM, I think that it’s hard to be as on the pulse as whether it’s a bank or a hedge fund that is laser focused on one product. I think that it makes sense to get into a product slowly. For instance, you see a run up like 2017 at the end of the year. I’m sure that some groups bought the identical top, I know, a tech investor who spent 100 million and paid roughly $19,000, all in one go.
And the way to not do that is to, it’s harder to say don’t buy by the highs, the way to do that is to buy in pieces. So if the ethos is that this is going to be a good place to invest, you know, buy bitcoin over the next two years, don’t buy it over the next two weeks. Because whether it’s what you said Microstrategy, the group that made that large investment, I think that, let’s say they had that same view in 2017, they’d could still be right. But they’d spend the next two years eating their words. But if they spent the past two years acquiring gradually, this was part of a plan.
I think that’s usually a better way to trade, you’ll get scaled in buying, as well as scaled and selling, you end up paying less, you end up learning more, and you’re not trading off of some gut feel, because the age old saying is best performance is not indicative of future performance. But when it’s something in tech, the higher the price goes, it’s more of a proving ground that, okay, the fact that we’re seeing higher volumes and higher prices, means that the adoption is driving the price higher.
So I want to buy into this, this asset, now that it’s been proven, when still, it isn’t an asset, and like all assets, it’s higher, because people are buying it. And it makes sense to be taking a measured pace, measured approach and buy over time, so that you can average in at a rate that is not gonna be as susceptible to one market move, or one person’s opinion.
David: And so as we’re wrapping up any thoughts on the next, three, four or five, six months, we have an election coming up, as it relates to traditional markets as it relates to digital asset markets, anything that you guys are thinking of?
Rich: Yeah, I think my main kind of advice to the audience is look behind Bitcoin, and consider the ecosystem more of a force to be reckoned with than the one bellwether and what the family office space can do is do a bit more due diligence and learn about the teams that are in the space. Because, three, to five years ago, yes, it was more the web developers that had an idea. And it was a bit of a funding exercise. But what we’re seeing in the past year is more, early, Facebook, early Google type creators, and they’re building real businesses that are meant to be on the blockchain and meant to have this sort of user participation element, which just doesn’t exist.
And you look at Ethereum, with $11 million, they created this tremendous smart platform, smart contract platform, and sort of the pedestal that Defi is climbing up the ladder on and you could buy Ethereum, within its first few weeks of creation, versus if that was a Facebook or Google, you could have to wait a decade before you could invest.
And I think that that’s the model, while it’s not perfect, and, it still has some proving, in terms of the regulatory side, it is a very nice model that’s democratizing investing today, and just making everything a lot more transparent than typical private investing.
And so I’d say, even if it doesn’t seem like it has the scale for pensions or dominance, get involved with our family office today. I think it’s a good place to really dig in and find a couple projects that you understand and make some investments, because this industry is certainly here to stay. And I think we’re going to see some big growth, especially in the next six months.
David: Amen to that. Well said, Rich, where can people find out more about GSR get in touch with you guys if they’re trying to get into this market and they’re trying to participate?
Richard: Happy for people to reach out direct, we have some information on our website. www.gsr.io Certainly happy to engage with any enthusiasts in the market, doesn’t have to be about our services exactly. And really appreciate having me on your podcast and look forward to keeping in touch.
David: Sounds good Rich Rosenblum, co-founder and member of the board at GSR. This has been a great conversation about the market about everything that you guys are seeing and doing there. We appreciate you coming on and hopefully we can catch up and again in six months and see how things are going and we’ll see you soon take care of it.
Richard: Likewise. Thank you
