Crypto Credit Markets Will Rewrite Risk Management | David Grider

This episode reveals how the convergence of traditional finance and crypto is creating a sophisticated credit market, fundamentally rewriting risk management and opportunity for institutional investors.

David Grider's Journey from TradFi to Crypto

David Grider, Partner at Finality Capital Partners, outlines his background, which provides critical context for his integrated market view. His career began in traditional finance with equity research and capital markets before moving to PwC for valuations of complex securities like CLOs and CDOs. This experience in dissecting capital structures informed his early entry into Bitcoin around 2015 and ETH after the DAO hack. After running a small fund during the 2017-2018 ICO cycle, he led digital asset strategy at Fundstrat under Tom Lee and later served as Head of Research at Grayscale before launching the Finality Liquid Opportunities Fund.

A Hedge Fund Approach to Digital Assets

Grider frames his strategy not as a typical "crypto fund" but as a hedge fund operating across the entire digital asset industry. He draws an analogy to an energy-focused fund, which invests in the spot commodity (like Bitcoin or ETH), related derivatives, and the equity and debt of associated companies. This holistic approach allows his fund to navigate opportunities across both crypto-native assets and traditional financial instruments tied to the industry.

• Strategic Flexibility: The fund invests across the capital stack, from spot crypto and tokens to the debt and equity of public companies like miners and Digital Asset Treasury companies (DATs).
• Integrated View: This model combines macro analysis with fundamental views on specific assets and companies, allowing for dynamic allocation based on market conditions.
• Grider’s perspective is clear: "I actually don't think of us as a crypto fund. I think of us as a hedge fund that invests across the digital asset industry."

Benchmarking and Risk-Adjusted Returns in a Volatile Market

A core challenge for any digital asset fund is selecting an appropriate benchmark. Grider notes the difficulty, explaining that while Bitcoin is a common choice, investor expectations can shift rapidly to assets like ETH during periods of outperformance. His fund addresses this by providing investors with multiple comparison points, including major liquid assets, crypto market-cap-weighted indices, and traditional finance fund indices. He cautions that focusing solely on outperforming token indices can be like managing a small-cap fund (the Russell 2000) while missing the primary growth engine of the market (the NASDAQ), which he currently sees in crypto-related equities.

The Primary Source of Alpha: Proactive Risk Management

For Grider, true alpha in the current market comes from disciplined risk management rather than simply chasing beta. He highlights two key components of his fund's strategy:

• Macro-Driven Exposure: The fund utilizes a discretionary macro signal to adjust its overall market exposure, moving to as much as 50-70% cash at the beginning of the year to preserve capital.
• Strategy Diversification: Instead of just holding a diversified portfolio of tokens, the fund diversifies its strategies. When avoiding direct token risk, it allocated to instruments like MicroStrategy preferreds, which offered a 9% yield. This approach provides what Grider calls "credit-like downside, but crypto-like upside."

The "Alt Season" Has Been in Equities, Not Tokens

Grider presents a compelling argument that the much-anticipated "alt season" has already occurred, but not in the token market. Instead, it has played out in crypto-related equities. Companies like Coinbase, Circle, Galaxy, and various crypto miners have seen significant capital inflows and performance. He attributes this to two main factors:

• TradFi Capital Flows: Institutional and retail capital is more easily flowing into regulated, publicly traded equities.
• Token Supply Overhang: The token market faces persistent sell pressure from a large volume of venture-backed projects unlocking their supplies, creating a fundamental mismatch with available hedge fund capital.

The Evolution of Crypto Derivatives and TradFi Convergence

The crypto derivatives market has matured significantly in terms of infrastructure and counterparty reliability. Grider identifies the central theme for the next 12-18 months as TradFi convergence. This trend is accelerating through ETFs, regulated futures markets (like those from Coinbase), and broader institutional adoption. He shares an important observation: traditional funds holding DATs are now actively using crypto perpetual futures to hedge their positions, which in turn deepens liquidity in the underlying derivatives markets.

Measuring Froth in a New Market Structure

While traditional indicators of market froth like funding rates and basis remain relevant, their interpretation has become more nuanced. The rise of sophisticated strategies like the basis trade, popularized by firms like Ethena (a Finality venture investment), can act to suppress how high basis rates can climb. Grider views the emergence of DATs as another component of froth, analogous to a hot IPO wave. However, he suggests this may be a "healthier" form of froth, as it creates publicly traded vehicles that can drive positive, long-term price impact and adoption for the underlying assets.

Deconstructing the Risk of Digital Asset Treasury Companies (DATs)

Grider provides a detailed analysis of the systemic risk posed by DATs, concluding that leverage is not the primary concern at this stage.

• Low Leverage: He estimates the entire DAT space has relatively low leverage, with even MicroStrategy at approximately 15% debt-to-equity and most ETH DATs holding no debt at all. He argues there is significant room for the sector to take on more leverage.
• Covenant Light Debt: Much of the existing debt is covenant light, meaning it has fewer restrictions on the borrower, reducing the immediate risk of forced liquidation.
• Real Risk Factor: The more significant risk is a "prisoner's dilemma" scenario during a bear market. If multiple DATs begin trading at a steep discount to their Net Asset Value (NAV), fragmented holders may begin selling, forcing the companies to eventually sell their underlying crypto assets to fund buybacks or appease activist investors.

The Mechanics of DAT Debt: Converts and Preferreds

The conversation dives into the mechanics of the debt instruments being pioneered by companies like MicroStrategy.

• 0% Coupon Convertible Bonds: Companies can issue debt with a 0% coupon because investors are compensated through the embedded optionality. A convertible bond is a debt security that can be converted into a company's stock. The high volatility of the underlying crypto asset makes this conversion option highly valuable.
• Compelling Risk/Reward: Grider details a structure where an investor can buy a senior note in a DAT, effectively getting an "at-the-money put" for downside protection and a "30% out-of-the-money call" for upside, all while holding a heavily overcollateralized debt instrument. This offers a cheaper and safer way to gain structured exposure than what is typically available in crypto-native markets.

The Emerging Crypto Credit Market

Grider is particularly focused on the growth of the crypto credit market, which he estimates is currently around $30-35 billion and poised for significant expansion. He identifies three distinct opportunities for investors and researchers to watch:

• Performing Credit: Earning attractive yields from crypto-related debt that is often misunderstood and mispriced by traditional markets.
• Convertible Upside: Using convertible instruments to capture crypto-like upside while maintaining the downside protection of a creditor.
• Distressed Debt: A later-cycle opportunity to acquire the debt of struggling companies at a deep discount, similar to when Coinbase bonds traded at 50 cents on the dollar.

MicroStrategy's "Bank-Like" Capital Strategy

Grider demystifies Michael Saylor's capital strategy, explaining his pivot to issuing preferred stock—a class of ownership with a higher claim on assets and earnings—as a way to build out a complete risk curve for Bitcoin.

• The Bank Model: He compares MicroStrategy's model to a bank: it borrows at lower rates (in terms of future Bitcoin-per-share dilution) to acquire a long-duration asset (Bitcoin), thereby capturing a "net Bitcoin per diluted share margin."
• Investor Optionality: By issuing debt and preferreds with varying durations, MicroStrategy allows investors to select instruments that align with their macro outlook. For example, an investor expecting falling rates could buy long-duration preferreds to benefit from price appreciation.

The Sophisticated Toolbox for Modern Crypto Investors

The maturation of the digital asset ecosystem has created a sophisticated "toolbox" that allows investors to move beyond simple long-only spot positions. Grider highlights several ways sophisticated allocators can now manage risk and express nuanced market views:

• Relative Value Trades: Choose between Bitcoin or ETH-related credit instruments to bet on the relative performance of the two ecosystems.
• Hedging with TradFi Tools: Use traditional instruments, like call options on the VIX, to hedge against broad market downturns that impact a crypto portfolio.
• Investing in Core Infrastructure: Gain exposure to the growth of the industry by investing in the equity of foundational companies like Circle, Kraken, and Galaxy as they come to public markets.
• Grider emphasizes this shift: "There's just so much of a traditional tool kit you can use across TradFi nowadays to manage risk in different ways than has ever existed in what a 'crypto fund' would do."

Conclusion

This conversation reveals how crypto credit markets are creating sophisticated tools for risk management, moving beyond simple spot exposure. Investors and researchers should analyze these emerging debt and equity instruments to build more resilient, alpha-generating portfolios in a maturing digital asset ecosystem.