Stone Ridge reveals $ 115 million bitcoin investment as part of...

Stone Ridge reveals $ 115 million bitcoin investment as part of...
Stone Ridge reveals $ 115 million bitcoin investment as part of...
Three years ago, the founders of $ 10 billion Stone Ridge Asset Management had a problem. Several founders and executives of the consulting firm bought Bitcoin at such a price that it became clear the purchases needed to be scrutinized by the company’s auditors. When it became known that Stone Ridge employees were personally investing in Bitcoin to such an extent, the company’s customers increasingly wanted to represent the same thesis. As Robert Gutmann, co-founder of Stone Ridge, said, this thesis is a belief in “the long-term growth of an open source currency system – in assets like Bitcoin”.

The problem was that Stone Ridge needed a way to convert the dollars they wanted to invest in Bitcoin and safely store that cryptocurrency once they had it. And since they were personally invested in Bitcoin, they had to do all of this in such a way that not only their clients, auditors and regulators, but themselves were satisfied as well. Rather than just setting up a few custom funds for their clients as they are used to, Stone Ridge took the extraordinary step of building execution and custody tools from scratch and opening up a whole new source of income, making cryptocurrency purchases, and then the assets for keep their customers.

By 2017, that vision had evolved into the New York Digital Investment Group (NYDIG), the first Stone Ridge subsidiary not wholly owned by the parent company. That year, the company silently raised $ 50 million for a previously unannounced investment and set out to create a spin-off to serve the new generation of institutional investors who increasingly sought their services. Last Friday, that work took that work to the next level when NYDIG, led by Fintech Collective, with the participation of Bessemer Ventures and Ribbit Capital, raised another $ 50 million in fundraising, bringing the total to $ 100 million increased. As part of the announcement, Stone Ridge Holdings Group announced that NYDIG is holding 10,000 Bitcoin from the parent company, valued at $ 115 million at today’s price.

Behind the sudden surge in activity is the Covid-19 pandemic. When companies around the world closed their businesses or sought help from their governments as part of the quarantine, central banks sought to offset the decline in activity by bringing billions of dollars into their economies. While unemployment rose, markets remained surprisingly stable, leading to an impending collapse, Gutmann says in his first interview since taking over as co-founder and CEO of NYDIG. “We have seen a pretty dramatic acceleration in the number of institutional investors wanting to enter the market since March this year,” he says. “The macroeconomic backdrop against a public health backdrop has led many people to rethink their portfolio composition.”

New York-based NYDIG spent the $ 50 million it raised in 2017 to build the execution and custody services it would take to manage a chunk of custom Bitcoin funds and purchase two cryptocurrency-specific licenses. The first license, a BitLicense from New York State, is used by NYDIG Execution’s subsidiary to convert dollars into cryptocurrency and back again. Another subsidiary, NYDIG Trust, has a New York State trust charter that allows them to buy and hold Bitcoin and other cryptocurrencies for investors. Few NYDIG clients are public to date, though a company representative says Stone Ridge’s $ 115 million position isn’t the largest it manages. Last month, Ripple chairman Chris Larsen did

He had taken one of his XRP wallets into NYDIG custody.

Currently, the majority of NYDIG’s revenue comes from banks, registered high net worth individuals and institutional allocators. These products are based on a single platform that integrates execution, custody and anti-money laundering and knows your customer protection. In particular, NYDIG is building custom funds, Separately Managed Accounts (SMAs) for middle-income investors, and other services for high net worth individuals. “Various institutional allocators are used to buying fund management services. That’s why we sell them, ”says Gutmann. “Macro hedge funds are used to buying top-notch brokerage services. We sell that to you. RIAs are used to buying a range of high net worth advisory solutions. And that’s exactly what we sell them to. ”

The two largest funds currently managed by NYDIG are the Institutional Bitcoin Fund LP of $ 190 million published in regulatory documents in June and the Bitcoin Yield Enhancement Fund LP of $ 140 million released in May. Gutmann names, among other things, “several” smaller funds, the NYDIG Basket Fund totaling USD 2.4 million, including Bitcoin, Ethereum, XRP, Litecoin and Bitcoin Cash. While NYDIG doesn’t share all of its assets under management, the company currently holds more than $ 1 billion in custody, and the number of its clients has quadrupled in the past decade.

The second source of income is the integration of NYDIG’s underlying execution and custody platform with banks, foundations and university foundations. In September, the Office of the Currency Verifier (OCC), a branch of the U.S. Treasury Department, released a letter saying banks and other financial institutions could hold reserves for customers who issue digital tokens on a blockchain known as stablecoins. which are covered by US dollars. “We have a lot of discussions with banks about various types of partnerships, including basic sub-custody solutions,” says Gutmann, “through to end-user products that the banks offer, where we are the back end.”

In preparation for today’s public launch, Gutmann and other executives at NYDIG and Stone Ridge released an in-depth analysis, titled “Buy Bitcoin,” in February 2019 of the difficulties money managers face in finding significant bitcoin liquidity. The 22-page report initially concludes that today’s Bitcoin market is dominated by retail investors and speculators. From the report: “Given that agents (fund managers, trustees, and other trustees) control the vast majority of the trillions of dollars in investable assets in the world, we expect substantial institutional purchases of Bitcoin as these agents work their way through the challenges of this burgeoning asset class. ”


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So far the paper’s conclusion seems to be emerging. Last week, payment giant Square invested about $ 50 million in Bitcoin, or about 2.5 percent of its most recently reported cash on hand. Ailing business intelligence firm MicroStrategy converted a whopping $ 425 million of its assets into Bitcoin, and at least 20 institutional investors have filed with the SEC showing they have invested in the Grayscale Bitcoin Trust (GBTC). The newly launched Canadian digital asset manager 3iQ has a Bitcoin fund of USD 91.2 million on the Toronto Stock Exchange and the institutional investor Cathie Wood from Ark Invest in New York Forbes She sees Bitcoin as an “insurance policy” against inflation.

To make NYDIG’s in-house execution tools available to its customers, the company also bought New York-based Etale last Friday, 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 in-house execution tools with Etale to make them available to customers for the first time. As part of the deal, NYDIG also receives a dataset of high frequency price, offer and depth data to further refine its own offerings. The companies do not share purchasing terms, but all four employees will move to NYDIG.


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NYDIG showed further institutional interest in the asset class last month, hiring former Goldman Sachs partners Ronnie Wexler and Tejas Shah to lead the company. Some other notable NYDIG employees include former New York State Superintendent of Financial Services Ben Lawsky, former Goldman Sachs directors Eric Kramer and Rodney Miller, and Stone Ridge CEO and co-founder Ross Stevens. Brooks Gibbins, managing partner of the main investor FinTech Collective, joins the board of directors as part of the investment. The startup currently employs a total of 35 people.

The irony of the surge in interest in Bitcoin caused by Covid-19 is that the pandemic is also testing one of Bitcoin’s earliest value propositions: that it does not correlate with traditional markets. With the decline in traditional markets, Bitcoin has also declined in large part. The same applies to many upward movements. According to Gibbins, a correlation or a non-correlation can be found anywhere, depending on the time you look. For this reason, NYDIG’s leading investor, especially given this global uncertainty, advocates that institutions should allocate digital assets between 100 and 500 basis points of their portfolio. “Given the unprecedented fiscal and monetary stimulus that will kick in after Covid-19, hedging portfolios in digital assets is becoming increasingly relevant,” he says. The typical NYDIG Bitcoin investor has already invested between 1% and 5% of their portfolio in cryptocurrency, with some investors being over 5% more familiar with the technology. “When you have a position in an asset between $ 5 million and $ 500 million, there are a number of different offensive and defensive capital strategies you should employ,” he says.

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