Breaking down the Bitcoin 'halvening' and what it means for investors

Michael Sonnenshein, Managing Director at Grayscale Investments, joined Yahoo Finance's Myles Udland, Dan Roberts, and Melody Hahm to discuss Bitcoin's third halving and with it means for investors.

Video Transcript

MYLES UDLAND: Bitcoin, as Dan Roberts said, hath halved. The halvening-- halving, however we're gonna call it-- has happened. Michael Sonnenshein, Managing Director at Grayscale Investments, joins us now to discuss. Michael, I guess maybe in the simplest terms, we'll start here. What happened with bitcoin at 3:23 Eastern when it halved?

MICHAEL SONNENSHEIN: So bitcoin has a really unique attribute, which is that its supply rate is known and it's predictable. So folks know that there will only ever be 21 million bitcoin that are ever going to be created. There's about 18 and change million bitcoin in circulation today. And the rate at which new bitcoin come online is known and very predictable.

And so what happens is roughly every four years or so-- it basically works out to that timeframe-- you see that the rate at which new bitcoin come into circulation drops in half. And so as I talked about this with Dan, I almost equated it to a faucet, where there are new bitcoin coming out of the faucet every single day. More of them are coming online. But each time we come up to one of these halving events, we basically shut the faucet off by half and reduce that supply rate. So this just happened about five, 10 minutes ago.

And so, yeah, I guess, Michael, there's been several halvings through bitcoin's history. There will be more as we go forward. I guess maybe let's just take a look at the last four years, since we halved last time. I mean, the bitcoin space is completely different than it was in the spring of 2016. In your estimation, what is the biggest fundamental change? Is it the institutional interest we've seen? Is it just, you know, the price of bitcoin having gone from where it was to where it is now? Where do you see this space out right now?

MICHAEL SONNENSHEIN: I think that there's a lot of things that have changed in the ecosystem from the first halving in 2012, the second halving in 2016, and now the third halving just having happened a couple of minutes ago. From our view, being the largest asset manager in the space, I think first of all, we're on the front lines of seeing that institutional participation.

So we're raising assets primarily from hedge funds and other institutional investors that are looking for exposure to the space. And when you combine that with the development of derivatives, the development of regulated futures contracts, the amount of regulatory clarity that we've seen in this space-- and just overall, how many more access points there are for investors to gain exposure to bitcoin and other digital currencies-- it's really amazing how much progress has been made.

Now, historically, these halving events have been price catalysts for bitcoin. And so there is a lot of confusion and questioning of how much of that is baked into the current halving, how much of that people anticipated going into it. And what we saw in the past two halvings was that it was a price catalyst, but it didn't really get into the bitcoin price for a couple of weeks or months that followed.

And so if you look out about a year after the first halving, bitcoin price was up 81x from that time. And after the second halving, the bitcoin price was up about 3x from that halving. So obviously, remains to be seen what's going to happen after this halving. But certainly, a very important event for bitcoin overall.

MELODY HAHM: Hey, Michael. And then, of course, Paul Tudor Jones calling bitcoin a great speculation, but also acknowledging that he has about 2% of his assets in it. As you think about these leaders and traditional forms, do you really think that they buoy bitcoin's price?

Do you really think that they're going to be leading the momentum forward? Because it almost seems counterintuitive, right? Because the bitcoin, perhaps biggest advocates of bitcoin and biggest advocates of crypto, would denounce that their opinion matters. But we're seeing this kind of working in tandem right now.

MICHAEL SONNENSHEIN: Well, so if you got a chance to read what Tudor said, he was actually looking at the unlimited amount of quantitative easing that's currently being injected into the system. And he was trying to call it into consideration, what tools investors really have in order to protect their portfolios from inflation or really just the general uncertainty going on in the market. And he didn't just jump to bitcoin in his argument. He actually looked at everything from gold to equities to treasuries, currencies, commodities, and really came to bitcoin really because of, again, some of those fundamental attributes that it has.

It is quite interesting too if you think about the halving taking place at the moment. It's actually tightening its supply while central banks are just infinitely expanding their balance sheet-- so really interesting time for this to take place, which we obviously couldn't predict we'd see this kind of joining of forces there. But nonetheless, I definitely think that Tudor and Renaissance and a lot of these other storied investors definitely add some tailwinds to the asset class, for sure.

DAN ROBERTS: Michael, Dan Roberts here. Thanks for joining us. I think when a lot of regular people, so to speak, retail investors who might read or watch Yahoo Finance, when they see this event happening they might have the reaction of, OK, who cares? Why should I care? And of course, people in the bitcoin space have said, well, this occasion is a reminder of bitcoin's scarcity, and that's why it's a good investment. It's digital gold. And of course, you guy's service the institutional side. I know that over the last couple of years, a lot of firms like Grayscale have said, see, we're seeing institutional investment flood in.

But what about regular people? What about retail investors? I mean, have we actually reached a point where you think the regular person understands it and has become convinced to allocate a little bit of their portfolio to cryptocurrency? I know that Grayscale just a year ago launched a TV ad campaign trying to convince people to drop gold for bitcoin. Has that worked?

MICHAEL SONNENSHEIN: Definitely. I would say based on the allocations that we're seeing-- and it's not just institutions. We definitely do see individual investors coming to Grayscale as well. I think one would be in the popularity of some of our publicly traded products. So you definitely see investors not only accessing digital currency directly through setting up wallets at exchanges or various service providers that allow that, but also just getting digital currency exposure right in their brokerage account. One example would be our digital large cap fund, Ticker GDLC, where investors are actually just getting exposure to a basket of digital currencies right through a traditional investment vehicle.

And so I think a lot of these investors are writing in, downloading our research. And when we look at the traffic to our site and the consumption of content and the number of inquiries that we're getting, there is really now empirical evidence that investors are really thinking about their portfolios and looking for those diversified return streams, which perhaps in their minds only alternatives like bitcoin may be able to provide to them.

MYLES UDLAND: And then, Michael, just quickly on that-- so when people are looking at this, I guess, digital diversification, if we want to call it that, is bitcoin the thing that people are focused on most? Because I remember 2017, it was all about the alt coins and ether and all these other names. It seems like the last 18 months have just been, OK, bitcoin is a real thing. We'll discuss bitcoin on its merits. But all these other projects maybe we don't have to focus on quite as much.

MICHAEL SONNENSHEIN: Yeah, that's an excellent question. So as an asset class as a whole, bitcoin now takes up about 68% of the market cap of all digital currencies. So it is far and away the dominant asset amongst all of the different cryptocurrencies.

That being said, most investors we encounter, their first foray into investing in the asset class is in bitcoin. And that's largely because it's where they've done the most homework. They're the most comfortable. It's probably overcome the most adversity over time and really demonstrated a lot of staying power. But we definitely have seen, even just in the last years, a lot of investors seeing and wanting further diversification within their crypto holdings and making allocations to other digital currencies as well, which too are gaining traction and real adoption in the real world.

MYLES UDLAND: All right. Michael Sonnenshein is a Managing Director at Grayscale. Great to get your thoughts. Thanks for joining us.

MICHAEL SONNENSHEIN: Thanks for having me, guys.