Grayscale Research Lead: Privacy Assets Are The Final Frontier For Massive Upside (Our Predictions)

Transcript

One benchmark uh that I would give, not a price prediction, uh is if Zcash were say 5% of Bitcoin's current market cap, that would put the price at the 4 to 4 and a half thousand uh level uh roughly uh speaking, depending how long it takes uh to get there. Welcome to the rollup. My name is Robbie and every day we speak to the biggest and brightest minds in digital finance so that you can outperform the market. Take a moment, please, to subscribe, like, and leave a comment if you enjoy the content. We greatly appreciate it.

We're live. We're here with Zack on big day. AI super cycle, the AI surveillance state, uh, continues and Zcash is a response to that. We're going to get into the entire thesis with Zcash, uh, but also the ETF that you guys converted, uh, from the trust. Uh, Zach, it's a pleasure to see you again. You've been on the show a couple of times. Welcome back. >> Great to see you, Robbie. Awesome to be back. huge day for for Zcash. Delighted to to share views on it. >> Absolutely. And congratulations. So maybe let let's start there, right? We'll get into all of the thesis around Zcash. Why uh you know there's uh you know several market participants that are rallying around this. It does feel like it's a return to the original ethos that you know a lot of us came into this

space with. But first let's talk about the trust that is now an ETF. Uh Gayscale has done this with previous products. Bitcoin was a trust converted into an ETF, a couple others as well. Can you walk us through the mechanism and what transpired today to ultimately bring this Zcash ETF to market? >> Absolutely. Very similar story uh to the Grayscale Bitcoin uh trust, one of the uh first vehicles for getting uh regulated access to to Bitcoin here here in the United States. Look, Zcash itself is around 10 years old. The Grayscale uh trust is around 9 years old. I think speaking to uh how closely this business has followed the ecosystem, the

conviction uh in Zcash as a network as an asset. Uh so these uh products they start out as basically closedend vehicles, private placements uh for accredited investors and uplisting them uh to ETFs makes them open-ended uh vehicles and greatly broadens the accessibility uh to many more uh investor types. And so we're delighted to be able to do that here uh with Zcash as we have with these other uh products. But the conviction, the thesis around uh the asset doesn't really uh change. This is about uh the value of decentralized digital currency which Bitcoin uh demonstrated but building on that vision with uh the critical element of of

financial privacy. I know we'll get into all that today. Uh but we're delighted to be able to tell that story and share access to the Zcash ecosystem with many more investors in the form of the Zcash ETF. AB: >> Absolutely. And we you know we've been following Zcash for quite a while. Near has been a partner of this show for quite a while as well and Near Intense helped uh expand the ecosystem and Zcash ultimately became uh an asset with utility and I think that is what a lot of Bitcoiners might be a little bit disillusioned and and uh you know fallen out of uh favor with uh as we've sort of started to notice this rotation from Bitcoin into Zcash because of two

reasons primarily and I'm curious if these resonate with you and kind of the institutional investor network that you've speaking to, you know, this quantum resistance. Bitcoin tried, there was a a movement to try to make Bitcoin a little bit more quantum secure. It it has not transpired quite yet. Zcash has been a lot more fast-paced, a lot more proactive in making its protocol more quantum resistant and ultimately quantum secure. Um and the other being that you know uh Zcash does have confidential transactions and the ability to shield its transactions and it gives that element of financial privacy. So quantum resistance and privacy, how important are those to the investment thesis for Zcash?

>> Look, I I agree with uh with all of that, Robbie. Um you know, Bitcoin has many strengths uh of course and and how I might frame it is that Bitcoin has first mover advantages in this space. the first decentralized digital currency, the first blockchain, and has tremendous network effects from that first mover advantage. But we would argue that Zcash has second mover advantages. It has particular strengths in areas that were not possible or less relevant when Bitcoin first took off. And that's what's required in order to uh challenge something with deep network effects like uh Bitcoin. And I think you articulated uh the case well. How I would put is number one financial

privacy. Uh number two is more active development uh for quantum readiness to harden the blockchain uh against AI uh powered attackers. And third is something that you touched on as well which is crosschain reach. We don't really need uh to have every merchant in the world uh except Zcash for this asset to serve as a private hub uh with kind of universal uh access. The magic of intense technology means that we can keep our assets in a shielded pool and have them reach anywhere potentially with say stable coin payments on Salana or on on Ethereum. So financial privacy, the active development culture and the

crosschain reach to me are really unique advantages that give Zcash a real shot uh of taking market share in really competing against Bitcoin in this use case. >> Yep. Absolutely. And I I want to highlight and double click on uh the second mover advantage that you pointed to. Um there was actually a friend of the show uh Lorenzo who uh kind of outlined that this is a a um phenomenon that we see across sectors. It's not just in kind of the hard money assets like you're pointing to with Bitcoin and Zcash, but also uh in several onchain businesses. I would even say that we've

seen this in the AI world as you see AI frontier model companies leapfrog one another. There is a a second mover effect where once someone is out live in production, we can learn, stress test and dis uh uh distill those models and then you have the next best model ultimately leapfrog uh the one that was ahead. And so I'm curious how the second mover advantage ultimately transpires when it comes to the hard money assets, the scarce assets, the ones that we believe have monetary premium. you know, Zcash is in a position where you said it has more proactive development. We also saw that they went to, you know, uh, I believe it was anthropic and was able to get, you know, one of the more advanced

models, I believe it was Mythos, to stress test the system, something that I believe, uh, one of the Winklvoss twins was suggesting that we should push for more in the CFTC advisory committee. And so, Zcash has been on the frontier, uh, you know, of the industry for quite a long time. What what do you see in this second mover advantage? We're already seeing quantum resistance and privacy at the forefront. What else do you anticipate coming out of the Zcash ecosystem in which it can further advance beyond Bitcoin in you know some of these more technical uh development areas?

>> Yeah, a lot of elements that we can touch on how I would characterize it. You Grayscale looks at the crypto asset class as a whole. There's so many different tokens, so many different types of blockchains with different use cases. And this is we're focused on the currencies category here. And in that category today, Bitcoin is king. Bitcoin has more than 90% market share in the currencies uh category. The blockchains that are designed for the use case of sound money or or a hard money. Uh just like in other categories in there can be competition. In smart contracts, Ethereum was the first mover and has a lot of uh strengths and and of course a lot of attributes that we love about

Ethereum. But there's room for some competition, room for other blockchains that are making different design choices and servicing users that have a different set of needs. I think Salana is a great example of that. you know, Salana showed that there's a different set of choices that you can make and create a lot of value uh for users and ultimately value for uh the token. Uh in the currencies category, we have lacked that competition. There really hasn't been uh as much dynamism and and anything competing with uh Bitcoin in in a head-to-head way. In that same type of sense, I I think the you know, Zcash has is an idea whose time has come. It is 10 years old and these these assets these

ideas have been uh I would say being nurtured uh for a long time but the time the time is now. uh the category is ripe for more competition and we think Zcash is placed to to take some market share. Now, just like in the smart contracts uh category, you know, Ethereum is not going to go away and Bitcoin is not going to go away and the competition probably will make Bitcoin stronger. Uh just like the competition from Salana uh made Ethereum uh stronger. But today, we we see Zcash's uh market share as just uh too small uh for the value that it's bringing. Just less than 1% 0.9% of Bitcoin's market cap. still seems to undervalue uh the properties of

financial privacy and the other unique attributes that uh Zcash is is bringing. So more competition uh to this category, more value placed on the unique proposition of of financial privacy. That's how we think about uh the investment thesis. >> Yeah. And you recognize the investment thesis very early on. What was the the the light bulb moment for the market? Was it, you know, the frontier model companies just advancing, you know, at such a rate or was it something else that ultimately was the catalyst for, you know, after really eight years, nine years of dormcancy for Zcash to really start to take off and resonate with the market? What what do you think was the the real catalyst here? It's a onetwo

punch of the risk of AI surveillance and I think uh an awareness of the power of these tools and what it's going to mean for our uh lives. You know, we're seeing that in the physical world with AI powered cameras and we're going to see that in the financial world with uh monitoring of transaction and labeling of address and all of those uh types of things. I think the other element is just the growing up uh of crypto uh the maturing of public blockchain uh tech and as uh we have started uh to enter uh traditional finance as traditional institutional investors have explored uh blockchain technology they immediately recognize that privacy is a missing element. uh you know it is obvious uh

that public blockchain technology requires a privacy layer and a very natural uh way to start investing in that thesis is at the most important use case of this technology and of these assets today which is decentralized uh scarce uh digital money. Uh and so bit B bit bitcoin is the the first uh element in a way of of the the crypto ecosystem uh that is getting its privacy layer uh that category is getting the privacy layer but we're going to see that privacy layer added to uh smart contract uh platforms uh to stable coins and and to tokenized assets and to dexes all of that's going to require privacy uh as well. So I I think many eyes being opened uh from uh the power of AI technology from the missing pieces of

public blockchain technology as it grows up and it starts to enter big boy uh finance uh privacy becomes obvious uh I think and and something that is clear to so many people and that explains why we've had such an explosive move in in the price of uh of Zcash at 19x uh or so uh since uh uh last year. Um I think that this is um only the beginning for for Zcash and only the beginning uh for privacy across our ecosystem. >> Yeah. In incredible and you know this is kind of had two major run-ups in Zcash.

Obviously the first was spurred by what you're talking about the convergence of factors the legitimization of the industry quantum resistance and privacy as a response to this. Uh there was uh the ironwood upgrade uh which was an upgrade from the orchard pool in which you know there was uh the anthropics mythos models that ultimately looked at Zcash. It said hey we should make this upgrade and they implemented this turnstyle accounting that made sure that the upgrade went out uh without a hitch. Uh and and so now that seems to be behind us going forward. You know, I I'm curious because, you know, you've put out research that talks about the ratio of Zcash to Bitcoin. What do you think the ratio of Zcash to Bitcoin to get to

and what do you think the catalysts for the increase are? >> The the question is what is the value of uh financial uh privacy? Um today uh the market is valuing that at less than 1%. And that seems a surprisingly low uh number uh to me. I think it's very difficult to uh estimate exactly uh where we will land uh in in terms of the the value of this alternative uh technology and I'm not going to give a a price prediction uh uh here. Um but less than 1% seems an awfully uh low number uh from our viewpoint. And if investors are you know thinking about how to do this scaling you know just one one

benchmark uh that I would give not a price prediction uh is if Zcash were say 5% of Bitcoin's current uh market cap that would put the price at the 4 to 4 a half thousand uh level uh roughly uh speaking depending how long it takes to get there and accounting for supply changes in in the price of Zcash. So that's not a price prediction, but I think it does go to say that, you know, we're we're we've had a large move, a 19x uh move since uh last year. Um you know, it has appreciated in value uh of course, but at the kind of $800, $900 level in to my eye, we are still putting a surprisingly low price uh on the value of uh financial uh privacy.

>> Yeah, absolutely. I I think 5% uh is probably conservative in that regard and we're believers in the in the importance of uh privacy when it comes to uh fi finance and money and uh in addition to scarce assets right uh because that is also part of the thesis here and this is one thing that we've seen the macro liquidity environment has become accommodative at least signaled by Treasury Besson in these buybacks we saw we saw this explosion off the lows and that drove Zcash uh higher in this latest move but again the ratio between these hard assets is still ripe for changing. Um maybe you can walk us through a little bit more of the me mechanics here because Grayscale had the foresight to create these products. It

was a closedend trust early on. There was significant demand there. Now it's converted into an ETF. Um there was and and I'd like to maybe dispel some misconceptions here. There was one floating around that, you know, these guys have been locked up for a long time in this trust. They're up a lot because of that foresight that Grayscale had now with this open-ended ETF. Uh they have the options of getting liquidity. Do you have any idea of how much uh of the assets in the trust are looking to exit via the ETF? Do you anticipate the demand for the ETF offsetting uh the the potential exit in liquidity from the trust?

>> Yeah, it's a great question. Let me let me say a couple things about this topic. You know, first off, this is a good reminder that this is not a brand new ETF. It's a 9-year-old uh investment access uh product and investors that uh have been involved in the product from from the g beginning and and throughout uh its history have uh experienced strong returns already uh in this product. Uh as a result there there can be profit taking um certainly uh after big appreciations and around a certain level. Um that being said, you know, we had very similar uh stories around the launch of the Bitcoin ETFs that this was a kind of uh buy the rumor, sell the fact type of event uh in markets and

that proved to be dead wrong. Uh of course, you know, the ETFs uh were uh a moment for investors to get new liquidity. Uh but they were the starting point of the rally in the price of Bitcoin in uh in 2024. Um so I I would be careful with this uh logic. We're very grateful uh to have provided value to many different types of investors for a long period of time almost as long as the network has been around and I can't predict the behavior of all of those uh investors. Um but I I think that this is the beginning of something uh not the end of something for uh for Zcash and the Grayscale uh Zcash uh product uh the Zcash ETF. And of course the open-end structure does mean there can be inflows

and outflows. That's a great advantage of this product. That means there's investor liquidity. That means it will very accurately try track track the price of the underlying uh token and work exactly as the other uh very successful crypto ETFs now available in the market. >> Yeah, absolutely. And uh you mentioned this is a more flexible product. Uh and actually I I I mean I when I saw you were coming on the show, I wanted to ask you this because as far as tradi go, uh you're extremely wellversed in the likes of DeFi. And so I think uh it's helpful to understand someone's perspective when they can kind of see both worlds as these worlds collide. And so I understand the ETF is going to provide access to get exposure to the Zcash

access asset. You know that from those who may not have another venue in which they can get access. But a lot of the value of Zcash is its utility, its confidential nature in transactions, its quantum resistance, um these sorts of things. We've we've spoken to leaders of the Zcash ecosystem in Mert who's told us about the Tachon uh upgrade that is coming to Zcash and this is another primary upgrade uh in addition to Ironwood that went live a couple of weeks ago. And so when you're speaking to investors or prospective investors, how do you you know describe the ETF to them versus you know buying this and and utilizing the asset in its confidential nature? Is there a balance balance that

you know we can strike between these products? How do you reconcile this in your own you know personal mind uh given that a lot of the features of Zcash are available when it's on the blockchain? AB: Absolutely. And a very important uh question. How how I would answer this is that the the ETF is an excellent way to get investment exposure uh to the Zcash ecosystem and the Ze token in the context of a broader portfolio in the context of your uh brokerage account or tax advantaged account. Uh that that's what this product is is designed for.

But of course with the the ETF, you are not getting the full experience uh if you will. And so I I would not hesitate to encourage investors to look at the value of shielded uh technology and I think that anyone that does this uh is is certainly going to have their eyes opened uh to how important uh this technology is. We are not uh at Grayscale in the business of offering you know wallets or or access to shielded uh Zcash. Uh the trust holds um uh transparent uh and auditable uh Zcash uh in Coinbase custody like our other uh ETF products and really designed for investment exposure. But I would

absolutely encourage uh listeners to look at shielded uh Zcash that that is really where the the value is uh coming from. And I I think for for people that haven't uh done that um they will be uh have an eyeopening experience of how easy and effective uh the ZK technology uh is in providing uh fully decentralized uh scarce open-source private money. It's a really remarkable uh technological uh feat. So uh you're right. It's it's about striking a balance. one vehicle for investment exposure, one vehicle to give you uh really that uh fully private uh set of assets and transactions uh without a centralized intermediary.

>> Yeah, absolutely. And um there's a couple more uh just mechanical things around this ETF. I think I saw it was a 2 and a half% fee associated with it. Maybe you can just round out some of the details around the ETF. anything else that you think investors should know as they're looking at this product and how you think the market is going to react to this launch? >> Yeah, that's right. The the fee the product has been around for nine years and the fee has been constant since the launch of the uh the product. Uh investors have had a a good experience and strong returns throughout uh that period of time. I would like to add that we have also committed uh to for the first year of this uh ETF uh taking 100% of the fee revenue and plowing it back

uh into the Zcash ecosystem through education and other elements of support to support this product and to support uh Zcash. you know, this is a real long-term commitment, a long-term conviction uh in the value of this network, the importance uh of these tools uh in our uh world today. Uh and I think that that context is important when you think about the product. Uh beyond that, I you know, I think about kind of broadening uh the access and broadening uh the toolkit uh like we have with uh other uh ETF products. I think you should expect the development of derivative markets uh around that particularly options uh structures uh for for hedging uh for adding yield

oriented strategies around Zcash and because it is a high volatility asset. I think that some of those ideas will be uh quite compelling uh for certain types of uh investors. The most important thing that I'd like to uh emphasize uh here though is that it's sort of a privacy imperative uh that you know gets us to this uh point. U you know this this is important technology in in blockchains. It's important technology uh we we think for uh uh for for people around the world to have uh the choice about what financial information uh they are disclosing uh out into the world.

And Zcash is a very special piece of technology that gives uh people that that autonomy uh that uh that choice to decide are we going to disclose the value of our assets and and the value of our transactions uh or not. Uh it's a very powerful idea. I think an idea that's going to be increasingly important as AI uh reshapes our our world. Our part uh is just to give uh straightforward efficient investment access to this uh theme through Grayscale's products uh and to help support the ecosystem over time. Uh we fully expect to do that.

>> Yeah, I mean well well said and I think you guys are pros when it comes to launching these products. Like you said, this one has been around a long time. Now the conversion to the ETF uh the the you know 100% fees back into the ecosystem I think is you know just incredibly incentive aligned uh we here at the rollup I we pride ourselves on educational uh commentary on the on the space and we're big fans of Zcash so would love to to you know put something together on that front. Um, you know, there's one thing, Zack, that that occurred to me as as you were kind of describing this broad thesis here and how Grayscale is interacting with the space, and that's, you know, this AI side of the thesis for Zcash. You know, we've been talking about kind of the AI surveillance state as it is, and you

know, how Zcash is a response to this with financial privacy and taking that ownership into one's own hands. You know, the thing that occurs to me is that, you know, the Aentic commerce and Aentic economy is getting built out at the same time. And I can't help but think this is maybe a little bit far out, but you know, these agents are going to need some form of money. And I have a feeling they are smart enough to also recognize the inflationary effects of the fiat system and stable coins that a lot of us have also recognized. Agents also may value their privacy on behalf of their humans or or not. And so do you think there's a a a thesis here or vector in which Zcash could become the predominant form of money for agents

and AI AI agents? Do you think that this is potentially realistic? >> A lot of uh a lot of layers. Um but you know I bring it back uh to uh to near intense and how that's powering uh things today. Um, you know, we're also big believers in in Near and we're uh thrilled to see these two ecosystems come together to give such a convenient uh user experience uh with some of the Zcash wallet infrastructure uh today. Um to me intense is what I expect an agent experience uh to feel like. Uh I just want something to happen uh happens behind the scenes to how is being

powered. Um I think uh near near intense uh working with Zcash uh is along the lines of where the agentic finance uh uh element is going to go. Um you know agents are going to need privacy uh on working on our behalf in the same way that we are going to need uh privacy. I think Zcash can absolutely uh play that role uh powered uh by additional tools like intents. >> Absolutely. Well, Zach, uh we really appreciate all of your hard work and pioneering uh this space and bringing it to investors at large. Uh and we realize that it's exciting times and busy times and so really really appreciate you you spending some of your time here today.

We're big believers uh in this asset as a response uh to the surveillance state uh with all of the progression that AI is is uh moving and uh big believers in financial privacy as a whole. So, thank you so much for uh spending some time with us here today and helping educate our audience around Zcash. >> Thanks, Robbie. We'll see you soon. >> Absolutely. Absolutely. See sac.