Compiled & translated by: Deep Tide TechFlow

Guest: Krista Lynch (Senior Vice President, Capital Markets, Grayscale Investments)

Host: Bonnie

Original title: Is Wall Street the master of exploiting retail investors? Former BlackRock executive explains the truth!

Podcast source: Bonnie Blockchain

Air date: May 25, 2026

Editor's Note

The "10 AM sell-off" in the Bitcoin ETF, the unusual activity in on-chain wallets, and the transfer of whales into the ETF are not the "institutional conspiracy" that retail investors imagine. They are a new market structure jointly shaped by NAV pricing, AP creation and redemption, market maker hedging, and physical creation/redemption.

This episode features Krista Lynch, Senior Vice President of ETF Capital Markets at Grayscale Investments, who breaks down how the primary market, secondary market, liquidity providers, authorized participants, and custodians work together.

In this conversation, Krista Lynch put "institutionalization" in great detail. Bitcoin ETF bid-ask spreads can be as narrow as 1 cent, and the premiums and discounts of some ETFs have converged to single-digit basis points. Tokenized assets are moving from stablecoins and stocks to more complex RWAs, and more and more whales are starting to exchange on-chain tokens for ETF shares to gain advantages in taxation, estate planning, margin, and collateral.

Essential Quotes

ETF Mechanism and the "10 AM Market Crash"

“When you see Bitcoin or other tokens going in and out of our wallets on the blockchain, many people will think that Grayscale is actively buying or selling; but in reality, we are just responding to the needs of end investors and completing ETF creation, redemption and settlement.”
“ETFs have become a barometer of financial instruments in this asset class; they are no longer just for speculative investment, but are also used for institutional investment and hedging.”
"Shorting the Bitcoin ETF does not necessarily mean that you think Bitcoin is finished; it simply means that you are expressing a certain investment view through the Bitcoin ETF."
"Before GBTC was converted into an ETF, because it lacked primary market functionality, market makers were unable to maintain a tight balance between the share price and NAV, so the discount or premium could reach 10% or even 20%, which is very rare in ETFs."

The so-called "unfairness" between authorized participants, market makers, and retail investors.

“Authorized Participation (AP) is more like an administrative function. The real decision to create or redeem and drive the operation of the entire mechanism is made by ETF market makers.”
“End investors actually benefit from these efficiencies because when you and I buy Bitcoin ETFs, the bid-ask spread is usually only 1 cent, which is close to the narrowest possible spread.”
“ETF inflows and outflows usually move in the same direction as price movements, but I wouldn’t say one is a leading indicator of the other; if I had to say, ETF fund flows are more like a delayed reaction to price changes.”

Tokenization and its integration with TradFi/DeFi

"The biggest topic in my recent conversations is no longer price appreciation, but infrastructure construction; this shows that the industry is maturing."
“I see stablecoins as tokenized cash, which will be where banks and other traditional financial institutions first gain a foothold, and then move towards the tokenization of underlying assets such as US stocks.”
“In the most advanced world, we may have a global currency, but I don’t think that will happen anytime soon because central banks have a real reason to control and protect their own monetary systems.”

Ethereum staking, yields and liquidity

“The differentiating factor of Ethereum’s products is that we implement staking; these products can actually generate returns and provide the value generated by staking to investors.”
"The most difficult part of pledging assets in ETFs is not the return, but that the assets are no longer liquid after being pledged, and the fund must still fulfill the redemption at any time."
“We use mathematical models to dynamically determine how much unpledged assets should be retained in the fund, and at the same time arrange delayed settlement with liquidity providers so that investors do not feel any interruption at the front end.”

Whales, the next wave of ETFs, and institutionalization

“What surprised us was that whales are increasingly willing to put their tokens into ETFs because converting tokens into shares often grants access to features available in U.S. brokerage accounts, such as tax planning, estate planning, margin, and collateral.”
"We are no longer at the stage of 'doing whatever the regulators allow'; we must be more selective in deciding which assets are worth launching into the market in the form of ETFs."
"HYPE and BNB are two protocols I'm currently monitoring."
"Bitcoin is becoming more institutionalized, and perhaps less exciting in some ways, but this also means that the asset class is maturing and attracting more investors who were previously on the sidelines."

Opening: Starting with the "10 PM Market Crash"

Bonnie (Host): Welcome to the show. Today we're talking with Krista Lynch, Senior Vice President of ETF Capital Markets at Grayscale Investments (a crypto asset management company), about the future of institutional adoption and tokenization. Krista, welcome to the show, it's great to see you.

Krista Lynch: Thank you very much for the invitation.

Bonnie: I'm really looking forward to this conversation. Let's start with the "10 AM sell-off" mentioned earlier. Some people in the market speculate that around 10 AM every day, Bitcoin experiences a 2% to 3% sell-off, followed by retail investors buying in. This seems to be related to APs (Authorized Participants) and ETF issuers. What's your take on this?

Krista Lynch: I know there are a lot of these kinds of theories on Twitter or X. I can't say I know exactly all the driving factors behind it, but there are a few things that are important at certain points in time, mainly related to the NAV (Net Asset Value) calculation and key pricing times for other financial instruments. For example, some Bitcoin and other digital asset futures determine their value at a fixed time, which I think is around 10 or 11 a.m. in London time, which corresponds to about 10 or 11 a.m. here, which matches the timeline you mentioned.

Another important time is 4 PM in the US, which is when these products calculate NAV, so you'll see a significant increase in trading activity between 3 PM and 4 PM. We often need to clarify some theories in the market, especially regarding Grayscale products. People see tokens going in and out of wallets and assume we're buying or selling, but often we're just facilitating settlement. I suspect the "10 PM dump" is similar. These time points are important for value determination and trigger a surge in trading, but they don't necessarily have a deeper meaning.

Bonnie: There's also discussion about ETF fund flow data. Retail investors see the inflows and outflows of the Bitcoin Spot ETF and say "institutions are buying" or "institutions are selling." But there are actually many hedging methods involved. Could you explain that?

Krista Lynch: That's true. When our Bitcoin or other digital asset ETFs settle, you can see Bitcoin or other tokens going in or out of our wallets on-chain. Many people assume Grayscale is actively making buying and selling decisions, but we are actually driven by end-investor demand. After an investor buys a share, this demand is transmitted to the AP, which may initiate creation or redemption.

When creation or redemption occurs, my team will buy or sell Bitcoin in the amount corresponding to the creation or redemption share. We are not an actively managed fund and do not actively express directional judgments; instead, we are driven by market demand.

The hedging you mentioned is also important. As ETFs have become a financial instrument, or rather, a barometer of this asset class, they are no longer just speculative investment tools, but are also used for institutional investment and hedging. You can go long or short. Going short doesn't necessarily mean you think Bitcoin is finished; it simply indicates that you are expressing a certain investment view through a Bitcoin ETF.

GBTC premium/discount, primary market and secondary market

Bonnie: When I first started reporting on this area, Bitcoin ETFs hadn't been launched yet. Grayscale's GBTC (Grayscale Bitcoin Trust, later converted to a spot Bitcoin ETF) was the benchmark for institutional adoption of securitized products. At the time, its discount or premium relative to NAV was often used as an indicator of market sentiment. Before discussing sentiment, could you explain why a premium or discount would occur?

Krista Lynch: Yes. ETFs are actually traded in two markets simultaneously. Investors like you and me buy and sell ETF units in the secondary market through brokerage accounts like Fidelity and Schwab. But ETFs are also traded in the primary market at the institutional level. In the primary market, authorized participants work directly with ETF market makers to create new units or remove existing units from the market.

A premium or discount occurs when the secondary market price is not equal to the NAV, which is the primary market price. Typically, the AP (Advanced Partners) or, more precisely, the ETF market makers that work with the AP, will keep the secondary market price and NAV very close.

However, GBTC lacked primary market functionality before becoming an ETF. Therefore, ETF market makers could only access one side of the market and couldn't maintain a tight relationship between the share price and NAV. Why was the market so focused on this premium/discount at the time? Because it almost became a sentiment indicator of the market's perception of our chances of winning the lawsuit and converting GBTC into an ETF. The market knew that once GBTC was converted to an ETF, the mechanism would function as designed, and the share price should revert to NAV. Whenever significant news emerged, the premium/discount would suddenly narrow or widen, as the market used it to digest what this news meant for the ETF approval probability.

Bonnie: But the Bitcoin market was already very liquid at that time, so why didn't arbitrageurs completely eliminate the discount or premium?

Krista Lynch: They can do it now. If you look at current Bitcoin ETFs, the premium and discount are usually only single digits (bps), very small. But before GBTC could be listed on the main exchange or converted into an ETF, the premium or discount could reach 10% to 20%, which is almost unimaginable in an ETF. The reason is that arbitrageurs couldn't access the primary market and could only trade in the secondary market. When there is an excess of supply in the market and no mechanism to reduce that supply, the price will deviate.

Centralized exchanges, liquidity providers, and ETF creation processes

Bonnie: What role does a centralized exchange (CEX) play in the whole mechanism?

Krista Lynch: These are very important trading outlets. As I just mentioned, when we receive creation or redemption instructions, we need to buy or sell Bitcoin. For Grayscale, we conduct bilateral transactions with some trading institutions. But some issuers rely on exchanges as another place to obtain liquidity.

Ultimately, we'll refer to these institutions as liquidity providers. Traders who trade with us are also integrated into this ecosystem. Therefore, whether you trade directly with a liquidity provider or obtain liquidity through an exchange, this system is symbiotic. Liquidity providers may obtain tokens from exchanges or provide their own liquidity on exchanges; all of these converge into the very tight pricing that ETFs can achieve.

Bonnie: Could you explain in order? What happens in the background when I buy a Bitcoin spot ETF?

Krista Lynch: This is my favorite question, and the one I deal with most of the time. You and other investors buy Bitcoin ETFs. When market demand builds up to a certain level, the ETF market maker that supplies you with those shares might become short, meaning it sells shares to you, but may not actually have those shares in hand. To cover this short position, it needs to create new shares.

So it will partner with AP. AP is a licensed institution that can interact directly with issuers like Grayscale. ETF market makers will package their short positions and approach Grayscale through AP, saying, "I need to create shares to cover existing short positions."

My team asks how many shares are needed, converts that number into a corresponding amount of Bitcoin, and then buys that Bitcoin in the market, using an equal amount of Bitcoin to back those shares. After settlement, the ETF market maker receives these shares through AP, while you've already received your share. All of this happens behind the scenes. At the end of the entire lifecycle, AP delivers the shares to the ETF market maker, who then covers their short positions. This creation and redemption process continues daily.

Bonnie: Does this process take a day?

Krista Lynch: Settlement typically takes about a day, but the trades themselves are very fast, maybe only 5 to 10 minutes. This is intentionally designed this way. We don't want the market to move drastically while APs are seeking quotes, and in highly liquid markets, a single news item can cause significant market volatility, so we complete the trade process very quickly.

Bonnie: Let me ask another question. Some previous discussions suggested that some APs are also liquidity providers.

Krista Lynch: That's true.

More specifically, AP is technically a US broker-dealer. Many people mistakenly believe that AP is the party that connects and decides on creation or redemption, but it functions more like an administrative function. The real brains are the ETF market makers.

Many large companies that house ETF market makers also have crypto trading enterprises. Therefore, we often see ETF market makers sending orders via AP (Agent Programming), and when I go out to buy Bitcoin, their crypto asset trading departments often win the trade. This is actually intentionally designed by ETF market makers because it allows them to mitigate risk. If you are hedging a trade and have ETF shares, and also want to match your Bitcoin exposure, winning the Bitcoin trade helps them consolidate the risk.

Bonnie: But can you understand why retail investors feel this is a bit "unfair"? They feel that you are smart money and we can't beat you at all.

Krista Lynch: I understand, but my counter-argument is that end investors actually benefit from this because they get a very tight market spread. When you and I bought the Bitcoin ETF, the bid-ask spread was typically only 1 cent, which is basically the narrowest it can be, a single-digit basis point price.

This pricing is possible because ETF market makers can achieve these efficiencies. You and I can't access the primary market, and I believe many theories originate from there. But we ultimately benefit because APs must trade huge volumes, while we are unlikely to trade such large volumes, yet we can enjoy the extremely narrow spreads they provide. It's an ecosystem where everyone wants the best outcome. Those theories have their origins, but I hope I've clarified them.

Tokenization grows as prices fall.

Bonnie: Grayscale Research reported that six crypto sectors, including on-chain finance and ETFs, experienced negative returns in both Q1 and Q2. Meanwhile, tokenization volume grew by 245%. What are your thoughts on this contrarian trend?

Krista Lynch: The biggest topic in my recent conversations has been more about infrastructure build than price appreciation. This reflects the industry's maturation. We're no longer just discussing whether a token can increase tenfold in the coming weeks or months, but rather what real infrastructure we're actually building on the blockchain.

In my view, this determines what the future holds. We've talked about banks potentially using stablecoins, about asset tokenization allowing assets to be traded 24/7, and about bringing some principles of digital asset investment into the mainstream US market. Therefore, even if prices fall at certain stages, there's still a lot of progress behind the scenes, and the industry is truly implementing the spirit of blockchain technology.

Bonnie: Grayscale's research covers six crypto sectors: currencies, smart contract platforms, finance, consumers, artificial intelligence, and utilities and services. Which sectors do you see as having the greatest growth potential for the remainder of the year?

Krista Lynch: I'm more token agnostic than many people. I personally think that stock picking or token picking is very difficult. Therefore, I prefer index products that include multiple assets. We have a product that covers the top five tokens by market capitalization, but excludes meme coins and stablecoins. We've calculated that it captures about 90% of the returns in the entire crypto market.

Some people prefer to pick the right token or the right sector, but I don't do that when I buy stocks. I buy the S&P 500 (S&P 500 index). To me, this product is the S&P 500 analogy in crypto, and it's how I invest.

Larry Fink's "Tokenization of Everything" and Global Monetary Issues

Bonnie: I'd like to ask you to respond to your former boss Larry Fink's (BlackRock CEO) comments about tokenization. He said we're only just entering the early stages of tokenizing all assets, from real estate and stocks to bonds. BlackRock has a $10 trillion tokenization vision. More broadly, why do we need his "total tokenization of all assets"?

Krista Lynch: I don't disagree with his point, especially regarding the fact that we're still in very early innings. Here, particularly at this conference, a recurring theme is the convergence of Traditional Finance (TfF) and DeFi (Decentralized Finance). We were wearing suits at Consensus (a crypto industry conference hosted by CoinDesk), something I never expected to happen before.

In my view, tokenization is a continuation of this trend. As we just discussed, I see stablecoins as tokenized cash. I believe this will be where banks and other very traditional financial institutions first gain a foothold, before moving on to tokenizing something basic like US equity.

There, you can reap the benefits of digital assets, such as 24/7 trading, instant settlement, and the borderless investment capabilities we just mentioned. If I were in another country but wanted to buy a US stock, tokenization could truly make that happen.

Of course, some might say this isn't that new, nor has it gone that far. You mentioned real estate, which is a very different application. I think it will be many years before tokenization of assets like real estate enters mainstream adoption and becomes a focus of tokenization. But I do believe we will eventually get there, just one step at a time. We'll start with cash, then stocks, and finally move to more advanced underlying assets.

Bonnie: Countries sometimes protect the flow of their own currency and capital. How will tokenization change that?

Krista Lynch: I spoke with someone working in the payments industry last night about this. I think tokenization could threaten existing systems in some ways. You can already see the "who can invest in what" rules in tokenized products. Even in the US, we can't necessarily invest in all tokenized representations of US stocks.

I believe that countries will establish some protective mechanisms to maintain a certain degree of centralization in their monetary systems. However, you could argue that Bitcoin has already broken down some barriers because it is, in essence, a global currency. Therefore, we need regulation to clarify what can and cannot be built in different regions, which will give practitioners more confidence to move forward.

Bonnie: I'd like to ask another question. What will have changed if we look back 20 years from now?

Krista Lynch: Frankly, it will depend on geopolitics. What will countries accept and allow? In the most progressive world, we will have a global currency, but I don't think that will happen anytime soon. Central banks have a real reason to control and protect their own monetary systems, so I don't think countries will accept the widespread adoption of any single currency anytime soon.

However, I do believe we will see more FX trading around these assets. In fact, we've already seen different trading pairs in some cases, such as Bitcoin/USD and Bitcoin/other currency pairs. I can imagine a more globalized monetary system emerging in the future, which will create more demand for FX trading in order to convert currency with countries that still retain their own national currencies.

RWA, stock tokenization, and "who really owns the assets"

Bonnie: Let's talk about tokenized real assets. Many RWA (Real World Assets) projects promise individual investors that they will retain ownership of an asset. For example, I like music, and a Stradivarius violin is tokenized. Many people hold tokenized shares of this violin and have a say in how it is used and played.

But how does this translate to stocks? How does ownership in stocks actually work? Let's say there's a company called Christa Lynch Co., with a total of 100 shares issued. Bonnie owns 100 shares of your company, so she's the largest shareholder. Now, each share is split into 100 tokenized shares, and I hold these tokenized shares. So, who actually owns your company?

Krista Lynch: There are many similarities here with ETFs, which is exactly my area of work. The key issue is ownership rights and voting rights. ETFs have dealt with similar issues. If I hold shares in an ETF that holds 500 stocks in the S&P 500, can I vote on the management decisions of one of those stocks? This is very similar to the dilemma faced by tokenized stocks.

Another issue is, in tokenized representation, do you actually own the underlying stock, or do you only own an IOU (debt certificate/IOU)? These are precisely the regulatory issues we need to address now: who owns what, and who has rights to what.

We can look at the differences between US ETFs and some European ETNs (Exchange-Traded Notes) or ETPs (Exchange-Traded Products). In some European products, you own shares or rights in the issuer, not the underlying asset itself. I will study how these traditional assets handle similar issues in other regions. We spend a lot of time looking at analogies in traditional finance to determine the path digital assets should take.

Therefore, I wouldn't be surprised if there's a greater need for roundtable discussions and thought leadership in the future to study these real-world cases, help the industry find its way forward, and develop clear rules on these issues.

Bonnie: What's your personal opinion? How do you think it should be designed?

Krista Lynch: That's a good question. I haven't done enough research to form a clear position because it's closely related to product mechanisms. If you're direct on-chain, then you probably have more reason to have decision-making power and discretion.

However, if you're using a different system, where the stocks are still held in custody by a large financial institution and you're simply holding one IOU, it's more like the ETF model I just described. For administrative purposes, the institution responsible for tokenization and providing you with the IOUs should likely retain more discretion.

Pricing deviations of TSMC, ADR, and wrapper

Bonnie: I have one more small question. TSMC (Taiwan Semiconductor Manufacturing Company) is one of the largest companies in Taiwan, and it also trades in the US under the ticker symbol TSM. If I hold shares in TSM, do I own a portion of the company? How does it operate?

Krista Lynch: It depends on how it enters the US market. A common structure is called ADR (American Depositary Receipt), often used to bring US stocks overseas or overseas stocks to the US. It depends on the specific product structure; I need to review the prospectus or related documents. My guess is that you might not actually own the underlying shares, but you could. The devil is in the details.

This is another example of a wrapper. ETFs are wrappers, tokens are wrappers, and ADRs are wrappers. These are all objects of our study, examining how these structures operate in the US and overseas financial systems today, and how we digitize them. There are already these cases in the market available for study.

Bonnie: Do these wrappers track the underlying assets? Sometimes they trade very differently, for example, a US ADR might rise 15%, while a Taiwanese local stock might only rise 10%. I try to understand this because I hold both.

Krista Lynch: If the wrapper works as designed, it should be matched one-to-one with the underlying asset. This brings us back to the GBTC case we discussed earlier. The reason for the premium or discount is that the mechanism is not functioning properly; it cannot enter the primary market, thus causing a price misalignment.

Regarding your situation, since different markets have different opening hours, and some Asian countries may have longer holidays, I suspect this difference often occurs during periods when local markets are closed. Products in the US market then become a way for investors to continue expressing their views, even if Asian markets are not open at the time.

Grayscale low-fee products, ETH products, and staking rewards

Bonnie: US Bitcoin ETFs recorded a net outflow of $173.7 million as of April 1st. However, Grayscale's low-fee Bitcoin ETF attracted an inflow of $10.25 million. How did Grayscale manage to buck the trend?

Krista Lynch: We love seeing this phenomenon and have done a lot of research. We believe that because we are one of the lowest-cost instruments in the market, our investor base is more sticky. Many investors aren't looking to quickly enter and exit the market, or to express a short-term inflow or outflow, but rather they genuinely have faith in this asset class and want to hold it for the long term.

Therefore, they are less sensitive to short-term news and will remain invested in the product. So even if competitors experience outflows, we often see our own investors still holding onto the product.

Bonnie: Do you have different investor profiles?

Krista Lynch: Possibly. Our investors are more like long-holders, those who believe in digital assets and Bitcoin, rather than risk-on/risk-off investors. The latter might just be looking to make a very short-term judgment, believing they can capture value within the next 5 minutes, and thus establishing some kind of exposure. This kind of fund flow can be very volatile and not necessarily driven by long-term investors; low management fees are more attractive to investors who want to hold for the long term.

Bonnie: Ether ETFs saw a $769 million quarterly outflow in the first quarter, the worst three months since launch. However, Grayscale's ETHE or ETH products, despite charging a higher 2.5% fee, still attracted funds. What does this tell us about institutional demand?

Krista Lynch: One differentiating factor of our Ethereum product at the time was our implementation of staking. That is, our Ethereum product could generate yield, providing value to investors through staking. For those unfamiliar with staking, it is basically putting assets into the operation of the protocol and receiving a return in the same form of asset for that contribution.

The real challenge lies in liquidity. Assets held in a pledged state are illiquid. If the fund needs to fulfill redemptions—meaning I need to sell Ethereum to provide cash to AP—I cannot always use already pledged assets. Therefore, we must establish a very robust framework to measure how much liquidity the fund needs to maintain, how much asset can be pledged, and continuously monitor these factors.

We submitted our model to the SEC (US Securities and Exchange Commission) for demonstration. This process took a long time to prepare, and it wasn't implemented until late October last year. But this is truly what differentiates our product. One of our ETH products actually pays out distributions, with investors receiving cash allocations; another ETH product reinvests rewards, making it cumulative. This is likely why investors remained in our product even during periods of capital outflow.

Bonnie: Regarding yield, there's currently a discussion on Wall Street about whether banks can accept stablecoins as yield payments. Could Grayscale or other firms design a stablecoin derivative that embeds native yield? This would be very attractive to investors.

Krista Lynch: We've already generated returns for investors through covered call strategies. We use options overlay to build returns on Bitcoin and Ethereum positions. In addition to delivering staked assets through ETFs on several protocols, we can also develop returns for investors through these synthetic products using options overlay.

Bonnie: One last related question: Which tokens on Grayscale's extended watchlist are likely to receive an ETF wrapper this year?

Krista Lynch: You mean ETF wrappers. We currently have several active filings. I won't go into more detail, but HYPE (Hyperliquid ecosystem token) and BNB (Binance ecosystem token) are two protocols I'm currently monitoring.

How Grayscale selects its next batch of ETF assets.

Bonnie: How do you decide which asset to choose?

Krista Lynch: For a period of time, this issue was largely decided by regulators. We had Bitcoin available first, then Ethereum. Later, the number of applications submitted by issuers to the SEC exploded, and the SEC had to process a huge number of documents—I remember there were around 90 at one point. So they developed generic listing standards, a framework that allows issuers to understand whether a token is eligible for an ETP (Exchange Traded Product).

Currently, this standard covers approximately 15 tokens, and the list is growing. This brings us to a crossroads: we must now be more selective. In the past, it might have been "if it can be done, then do it," but now we must incorporate more judgment and be more cautious in deciding which assets to launch in the form of ETFs.

We currently offer ETFs for eight tokens, with several more to be added soon. Regarding your specific question, we have a research team that conducts extensive due diligence on protocols, meeting with teams and spending years understanding them. They develop investment theses, build relationships, and understand what these protocols truly are. Beyond assessing "regulatory feasibility," they also consider "should we do it?" We work closely with our research team to develop investment perspectives and drive the adoption of specific protocols.

Bonnie: You mentioned BNB and HYPE. HYPE doesn't have venture capital (VC), is that a factor you're considering? BNB is also quite decentralized. Would you be less inclined to choose a token with a large concentration of whales?

Krista Lynch: Not necessarily. The whale issue is very interesting for ETFs. Recently, there has been a surprising phenomenon: whales are becoming increasingly interested in including their tokens in ETFs. We initially thought that for crypto-native participants, entering the US financial system and holding assets through ETFs might be off-putting.

But what makes ETFs attractive is that if you convert your tokens into shares, you often gain access to tax planning, estate planning, and other benefits offered by a US brokerage account. You can also typically use the shares as margin and collateral, which is also very appealing. Therefore, we've recently seen whales wanting ETFs because they can put their tokens into them to gain these functionalities.

Bonnie: Can you explain in detail how this works? Let's say I'm a whale holding a certain token, and I come to you and say I want to convert it into an ETF.

Krista Lynch: That's roughly it. Of course, there are many steps behind the scenes, but my team does work directly with whales. We'll engage with AP partners or other third-party intermediaries to help them with in-kind creation, putting the tokens into the product.

We've been discussing the cash creation and redemption process. Last summer, the SEC decided to allow in-kind creation/redemption, which truly opened the door for these types of investors. Now, my team no longer needs to go out and trade; instead, we coordinate with all the necessary third parties to transfer tokens from whale accounts to our trust and issue corresponding shares to them.

Bonnie: For people who don't understand this, in the past, if you wanted to buy a spot ETF, you had to go to the market to buy one; now I can give you my tokens directly.

Krista Lynch: That's right.

Bonnie Blockchain: You're saying this change happened last year?

Krista Lynch: Yes. Now you're actually entering the primary market. We've mentioned the primary and secondary markets earlier. The primary market is almost never open to individual investors due to AP requirements. But we have some very clever APs that have opened the door for individual investors to work with them to accomplish this.

ETF fund flows, price correlation, and Bitcoin supply ceiling

Bonnie: We now have two years of data on the Bitcoin Spot ETF. Have you observed a correlation between ETF inflows/outflows and subsequent price movements? In other words, does the ETF inflow/outflow usually occur first, or is the underlying asset sold off first?

Krista Lynch: That's a very good question, and one we've researched for our staking model. We need to explain to the SEC whether sudden price changes, especially for highly volatile assets, could lead to redemption chaos.

Our finding is that while some correlation exists, it doesn't necessarily mean one indicator can point to another. ETFs are highly efficient tools for quickly expressing risk sentiments, so you might see rapid inflows one day and rapid outflows the next. This is because the tool itself is very efficient.

Generally, when prices rise, you see creation demand; when prices fall, you see redemption demand. Therefore, they usually move in the same direction, but I wouldn't say one is a leading indicator of the other. If I had to say, I'd lean towards prices moving first, with ETFs reacting with a lag, but you can't assume the other will inevitably happen just because you see one.

Bonnie: If more and more Bitcoin is bought up by treasury companies, will this distort the creation and redemption process of ETFs? Will the liquidity you use for this mechanism decrease?

Krista Lynch: We get asked this question a lot, especially since the total supply of Bitcoin is capped at 21 million. Some people might say, "Oh no, will we buy up all the Bitcoin?" But from a basic supply and demand perspective, this should only drive up the price of Bitcoin and not hinder the creation and redemption process.

It only means that the cost of buying Bitcoin might be higher, but this will manifest as a higher Bitcoin price, and NAV will move accordingly. I don't think the actual execution cost will be higher.

Tokenization of Real Assets: Pricing, Authentication, and Timelines

Bonnie: Back to tokenization. One issue we discussed last year was how to ensure that a token truly represents 1% of a piece of real estate? Does it require a country to step forward and say, "We'll verify this"?

Krista Lynch: I think this is one of the gray areas that must be addressed before success can be achieved. There needs to be some kind of regulatory rule, regulation, or guidance to explain how value is determined. But it's not that different from similar problems in traditional finance. As long as there is ambiguity in pricing, such as with an index, there is usually a very robust set of rules that determine the pricing waterfall.

In some cases, you can challenge this price. For example, you could say, "I usually use the Bloomberg index for pricing, but today I disagree with this price because it differs from the most recent transaction price by a certain percentage." These kinds of issues go through a dispute resolution mechanism, and we do see that the traditional system works as designed.

There will be friction, but it can be healthy friction. I believe tokenization must move towards a similar mechanism. There must be some kind of golden source of truth, or a committee capable of reaching consensus. This issue will continue to evolve, but it is one of the necessary conditions for the success of tokenization. Again, it's about taking it one step at a time, starting with cash, then stocks, and finally real-world assets.

Bonnie Blockchain: Is there a timeline?

Krista Lynch: Real-world assets are still a long way off. On the cash side, we're already seeing adoption through stablecoins. I suspect many banks are already using stablecoins behind the scenes, whether they publicly acknowledge it or not.

Regarding stocks, some US institutions, such as the NYSE (New York Stock Exchange), Nasdaq, and DTC (Depository Trust Company), have already announced related projects. I think we'll see progress in the coming months; it's just around the corner. But how far it can go may require several more years of development.

Is it possible that the Federal Reserve will buy Bitcoin ETFs?

Bonnie: The Federal Reserve has a history of buying ETFs, especially during emergencies like COVID-19, primarily in the corporate bond sector. Do you think it's possible for a future Federal Reserve to buy a Bitcoin ETF during periods of market stress?

Krista Lynch: I think it's possible. Don't say anything is absolutely impossible. But in my opinion, they still need more time to familiarize themselves with this asset class.

Bonnie: How long is enough to be considered familiar?

Krista Lynch: I think it will take some more time. But you've already seen pension funds and endowments start doing this, and I think that's the first sign. Bitcoin is becoming increasingly institutionalized.

At Grayscale, we meet a lot of people who are just starting their crypto journey; they're new to the field. But here, we naturally assume everyone should have it, everyone already has it. The reality is that investors are on a long continuum. However, I do believe that eventually this will be something everyone has in their portfolio.

Has Bitcoin become less exciting due to institutionalization?

Bonnie: Is Bitcoin becoming more institutionalized and therefore less exciting?

Krista Lynch: I'm reluctant to say it's not exciting, but it is definitely becoming more institutionalized. Walking around Consensus today, there were more traditional banks and more people in suits.

This in itself is exciting because it demonstrates the maturation of this asset class. Ultimately, this will attract more investors, opening doors for those who were previously on the sidelines. ETFs play a significant role in this: many people don't know how to open a wallet, and many institutions lack the risk infrastructure to manage wallets, nor do they want to build one specifically.

So while it may not be as exciting in some ways, I think it's very exciting from the perspective of increased adoption and institutionalization.

Bonnie: What do you think of those Bitcoin OGs predicting that Bitcoin will rise to $1 million, or some other ridiculously high price?

Krista Lynch: I hope they're right. I think there are indeed supply and demand dynamics that could make it a reality. Of course, $1 million is a very high price, and I think it will take time to reach that.

However, if you look at the supply cap of 21 million coins, and see that DATs (Digital Asset Treasury companies) and ETFs are buying Bitcoin, and see that ETFs are bringing new investors into the space, these are all positive factors driving the price up.

Bonnie: I think the solution to make it exciting again is to institutionalize meme coins. There's a huge Pepe booth over there, and they even have frogs. Maybe we could collaborate on that.

Krista Lynch: I saw it.

The Different Futures of Bitcoin and Ethereum

Bonnie: So what does the future hold for Bitcoin and ETH (Ethereum) this year? Where do you think they'll end up by the end of the year?

Krista Lynch: In my view, Bitcoin represents "all of the above"—it represents blockchain, Bitcoin, and other digital assets. We work with many people who are just entering the world of digital asset investing, and they are often just beginning to understand Bitcoin, so they are most easily attracted to it. They may have heard of Bitcoin, but they haven't yet been able to delve deeper into the token spectrum.

Therefore, I find Bitcoin very attractive because many investors use it as their first entry point into this field. Ethereum excites me for different reasons. I believe much of its value lies in the development of smart contracts.

It would be very exciting if we could use blockchain technology to improve processes and codify (code/standardize) some back-end functions, such as the back-end processes in fixed-income bonds, making them more efficient. Therefore, I believe both Bitcoin and Ethereum have very bright futures, just for slightly different reasons.

Explaining ETH ETF with staking functionality to the average person

Bonnie: I'd like to talk about Ethereum. You mentioned staked ETFs earlier. Could you explain how they work, like you would explain it to my mother? How do you stake ETH and how do you earn returns?

Krista Lynch: We partner with third-party validators. Simply put, a validator is someone you contribute tokens to, helping to make the entire protocol more secure and reliable. Strictly speaking, "staking" isn't the most accurate term, but for simplicity, you can think of it as contributing your assets to serve the entire ecosystem.

When assets are used for staking, they are locked and no longer tradable. This is the challenge we face when implementing staking in a highly liquid product. You contribute assets to the ecosystem's security, and in return, you receive a reward in the same asset form. For example, with Ethereum, you would receive additional ETH in your wallet.

How do we handle these rewards? For one of our ETH products, we monetize the rewards—that is, we sell the rewards to get cash, which we then pay out to investors. For another ETH product, we re-stake the received ETH, allowing it to grow with compound interest over time.

Regarding liquidity, we use sophisticated mathematical modeling to determine how much of the fund should remain un-collateralized and dynamically adjust this based on market conditions. Furthermore, we've implemented delayed settlement with some liquidity providers: they can provide us with cash on a T+1 (one business day after the trading day) basis, and we settle with them once the tokens are available. They will, of course, take a small spread, but this makes the product more efficient and allows us to generate returns. Ultimately, the overall economic effect benefits investors.

Bonnie: So you could say that if everyone wants to get out of this ETF, you're still safe?

Krista Lynch: Yes. We keep a portion of the fund's assets unstaked to ensure immediate liquidity. For additional top-up needs, we work with liquidity providers who provide cash within the normal business process. Therefore, as an investor, you won't experience any disruption at the front end; the back end is handled by us.

Why should retail investors also pay attention to ETF products?

Bonnie: My last question is that your products are clearly attractive to institutions. But how would you convince retail investors to focus on ETH products, or other Bitcoin products?

Krista Lynch: We're hosting an event called Crypto Connect nearby later today, for advisors and end clients. Our BTC and ETH products are usually a major focus. They're a low-cost way to get into Bitcoin and Ethereum.

If you consider the transaction costs of buying spot tokens on an exchange, they can be far higher than the spreads and management fees of these ETFs. For example, in some cases, buying and selling tokens on an exchange can incur costs as high as 1.5%; while the spread for buying and selling ETFs might only be 1 cent. They also have very low management fees, which is certainly an attractive feature.

Bonnie: This is also a way to access staked ETH without having to stake it yourself.

Krista Lynch: Absolutely right. I think that's very attractive. I wouldn't personally stake my fractional Ethereum, but Grayscale can do it for investors and pass the returns to them.

Quantum computing, AI and service provider risks

Bonnie: I'd also like to know how you conduct due diligence to assess the impact of quantum computers on Bitcoin, and whether AI will disrupt smart contracts?

Krista Lynch: This is a topic that came up a lot in the cocktail parties at this conference. I heard competing opinions. Some people think this will be the biggest threat to Bitcoin; others say that these things are already happening, AI is already running, and we already have related models.

I think this definitely warrants close attention. I haven't formed a definitive opinion on whether it will disrupt Bitcoin. But I hope the industry stays ahead of the risks. This is something we need to remain vigilant and continue to monitor.

Bonnie: How does the company handle this issue internally? What were your internal discussions like?

Krista Lynch: We are definitely monitoring this. We are also very concerned about how it affects service providers. We look not only at its direct impact on our own teams, but also at how it affects hosting providers, access points, and other service providers. For example, are they potentially vulnerable to hacking? So we not only study ourselves, but also delve into all touchpoints.

Taiwan Stock Exchange, Overseas Markets and Innovation Incentives

Bonnie: Earlier we mentioned a conversation you had about Taipei and the Taiwan Exchange. What was that about?

Krista Lynch: That was very interesting to me. I attended a Bloomberg-sponsored roundtable that introduced U.S. publishers to incentives for bringing products overseas. One of the incentives was related to innovation.

Krista Lynch: It seems there's market demand for the covered call products we discussed earlier. Of course, I'm not sure if digital asset covered calls are a specific direction the government is looking for, but there are a lot of signals encouraging innovation, and I think this might be a direction we can further promote.

Bonnie: Okay, Krista, it's about time for today.

Krista Lynch: Thank you for your time and for the invitation. It's a very insightful question.

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