Three years ago, the founders of the $ 10 billion Stone Ridge Asset Management were in trouble. Some founders and senior staff of the consulting firm buy Bitcoin at a rate so fast that the purchase is scrutinized by the company’s auditors. When it became known that Stone Ridge employees were making a personal investment in Bitcoin at a large scale, the company’s customers shared the same point. As Stone Ridge co-founder Robert Gutmann put it, that argument is belief in “the long-term growth of an open source monetary system – Bitcoin, for example”.
The problem is that Stone Ridge needs a way to turn the dollars they want to invest in Bitcoin and store it securely when they have it. And since they have personally invested in Bitcoin, they need to do all of that in a way that not only satisfies customers, auditors and regulators, but also themselves. So instead of just setting up some custom funds for clients like they want to do, Stone Ridge has taken a special step of building lots of execution, custody tools from scratch, and start-up the stream. brand-new revenue, make cryptocurrency purchases and then hold assets for their customers.
By 2017, that vision had grown into the New York Digital Investment Group (NYDIG), the first Stone Ridge subsidiary that was not wholly owned by the parent company. That year, the company quietly raised $ 50 million in investment money without prior notice and began building a spinoff (subprogram) aimed at serving new institutional investors seeking its services. surname. Last Friday, NYDIG raised an additional $ 50 million in growth capital led by Fintech Collective and joined by Bessemer Ventures, Ribbit Capital, bringing the total raised to $ 100 million. As part of the announcement, Stone Ridge Holdings Group revealed NYDIG is holding 10,000 Bitcoins of the parent company, worth $ 115 million at today’s prices. The main cause of the sudden delay in all activities is the Covid-19 pandemic. When businesses around the world shut down for quarantine or seek government help, the central bank tried to offset the operational slowdown by pumping billions of dollars into the economy. While the unemployment rate rose, markets remained surprisingly stable, leading to a sense of imminent collapse. Gutmann said in his first interview since assuming the position of co-founder and CEO of NYDIG:
“We have seen a significant increase in the number of institutional investors wanting to enter the market since March of this year. The macro context versus the state of the community makes many people rethink the composition of their portfolios ”.
Based in New York, NYDIG spent $ 50 million raised in 2017 to build the enforcement and custody services they need to manage a bunch of custom Bitcoin funds and to obtain two licenses. dedicated to cryptocurrencies. The first license BitLicense from the state of New York was used by its subsidiary NYDIG Execution to convert dollars into cryptocurrencies and vice versa. Another subsidiary, the NYDIG Trust, allows them to buy and hold Bitcoin, other cryptocurrencies, for investors. Very few NYDIG clients are made public, though company representatives say Stone Ridge’s $ 115 million location is not the largest the company manages. Last month, Ripple chairman Chris Larsen revealed he moved one of his XRP wallets to NYDIG for custody.
Currently, the majority of NYDIG’s revenue comes from banks, investment advisors registered to extremely high net worth individuals and institutional allocators. These products are built on a single platform that integrates enforcement, custody, anti-money laundering, and customer understanding. Specifically, NYDIG builds custom funds, privately managed accounts (SMA) for middle-income investors, and other services for extremely high net worth individuals. Gutmann says:
“Institutional allocators are used to using fund management services, so that’s what we offer. Hedge funds are accustomed to buying top brokerage services. So that’s what we sell. RIA funds are accustomed to purchasing an extremely high net worth of consulting solutions. And that’s what we sell. ”
The two largest funds currently managed by NYDIG are the $ 190 million Institutional Bitcoin Fund LP, disclosed in regulatory documents in June, and the $ 140 million Bitcoin Yield Enhancement Fund LP announced in May. Gutmann also mentioned “some” smaller funds, of which the NYDIG Basket Fund has a total value of $ 2.4 million, including BTC, ETH, XRP, LTC and BCH. Although NYDIG does not share the total assets under management, the company now has more than $ 1 billion in custody, accordingly, their number of clients has quadrupled in the past 10 months.
The second source of revenue comes from integrating NYDIG’s basic custody and enforcement platform into banks, funds, and university grants. In September, the Office of Monetary Control (OCC), an arm of the U.S. Treasury Department, said banks and other financial institutions may hold reserves in U.S. dollar-backed stablecoins. Gutmann replied:
“We are having a lot of discussions with the bank, about a wide variety of partnerships ranging from basic sub custody solutions to the end consumer products the bank is offering and we be a support person ”.
As part of the preparation for the public launch, Gutmann and other NYDIG and NYDIG executives published a long analysis in February 2019, titled “Buy Bitcoin”. The article points out the difficulties that money managers face when looking for substantial Bitcoin liquidity. Currently, the 22-page report concludes that the Bitcoin market today is dominated by retail investors and speculators. According to the report:
“Since agents (fund managers, trustees and other subsidiaries) control the vast majority of trillions of dollars of investable assets in the world, we anticipate more institutions to buy Bitcoin. as agents work to overcome the challenge of this growing asset. ”
So far, the conclusion of the article seems to be coming. Last week, payments giant Square invested about $ 50 million in Bitcoin, or 2.5% of the most recently reported cash. Troubled business intelligence firm MicroStrategy converts a whopping $ 425 million in assets into Bitcoin, and at least 20 institutional investors report their investment in the Grayscale Bitcoin Trust (GBTC) to the SEC. Newly launched Canadian digital asset manager 3iQ has $ 91.2 million in Bitcoin Fund traded on the Toronto Stock Exchange, and New York-based institutional investor Cathie Woods of Ark Invest says she considers Bitcoin as a “preventive policy” against inflation.
To help bring NYDIG’s internal execution tools to customers, last Friday the company also purchased New York-based Etale, which specializes in order management software and is integrated with Coinbase Pro, Gemini. and itBit. Over the next few months, NYDIG plans to further integrate its own internal execution engine with Etale, making it available to customers for the first time. As part of the agreement, NYDIG also acquired data including price data, quotes and other in-depth data to further refine its own services. Companies do not share purchasing terms but all 4 employees will join NYDIG.
To demonstrate the organization’s interest in this asset, NYDIG last month hired former Goldman Sachs partners Ronnie Wexler and Tejas Shah to help run the company. Other notable NYDIG employees are former New York financial services chief Ben Lawsky, former Goldman Sachs CEO Eric Kramer, Rodney Miller, and Stone Ridge CEO and co-founder Ross Stevens. Managing partner Brooks Gibbins of lead investor FinTech Collective will join the board as part of the investment. The startup currently has a total of 35 people.
Ironically, the level of interest in Bitcoin increased due to Covid-19 also testing one of its earliest value claims: not correlated with traditional markets. When traditional markets drop, so does Bitcoin for the most part. The same goes for upward movements.
However, depending on timing, Gibbins argues, there can be either correlation or no correlation anywhere. Therefore, especially in the face of such global volatility, NYDIG’s top investor advocates institutions to allocate 100 to 500 basis points in their portfolio to assets. digital products. I said:
“With unprecedented monetary and financial stimulus taking place globally after Covid-19, portfolio hedging in digital assets will continue to be more relevant.”
Currently, the typical Bitcoin investor NYDIG has between 1% of the 5% portfolio in cryptocurrencies while some investors are more comfortable with technology reaching rates above 5%. I said:
“If you are achieving positions of 5 to 500 million dollars in an asset, you will want to adopt a number of different offensive capital and defense strategies.”