ETF Edge - Crypto Craze & 2021 ETF Trends

Episode Date: February 17, 2021

CNBC's Bob Pisani spoke with Christian Magoon, founder and CEO of Amplify ETFs; Som Seif, founder and CEO of Purpose Investments; and Andrew McOrmond, managing director at WallachBeth Capital. They discussed the crypto craze and what it takes to push a bitcoin ETF through regulatory approval. In the 'markets 102' portion of the podcast, Bob continues the conversation about blockchain with Christian Magoon from Amplify ETFs. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, supporting the innovators changing the world. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange-traded funds, you are in the right place. Every week we're bringing you interviews and some market analysis. I'm going to break down what it all means for investors. I'm your host, Bob Bassani. Today, we're diving into the crypto craze and what does it take to push a Bitcoin ETF through for regulatory approval.

We'll ask the man who's launching the first Bitcoin ETF in North America in Canada, as a matter of fact, as the digital currency surges past $50,000. Here's my conversation with Andrew McCormand, managing director at Wallach Beth Capital, Christian Magoon, the founder and CEO of Amplify ETFs. And Soam Seif, he's the founder and CEO of Purpose Financial. Soam, let me start with you. I understand your ETF is going to be trading tomorrow under the symbol BTCC in Canada. Canada. Is that correct? And would this be accessible somehow to U.S. investors?

Yes, Bob. It's, first off, thanks for having me on. And look, we're really excited about this. It's going to start trading tomorrow, first in the world that will be physically backed. You know, basically a dollar invested will be backed by a dollar of real Bitcoin in our cold wallets. And this is a trade of security. So like any trade of security, it's available for anyone to buy anywhere. It is a registered fund for Canadian investors specifically. But I'm sure we'll see institutional demand and interest around this from a global investor base. So if I'm sitting in the United States, just hold my hand a little bit, and I have a Schwab account or whatever e-broker account, would I be able to access that and buy it if I wanted to? Well, I think it really comes down to whether your brokerage firm will allow you to buy, you know, a security.

that are not listed in the U.S. exchanges. So anything that's traded on a Toronto Stock Exchange or, you know, in many cases, some of the international exchanges. And I think if that is the case, then, you know, you'd be able to trade this security just like any other. And we hope that, you know, investors are able to achieve that, but ultimately it is to comes down to the brokerage firm that they work with.

Yeah. Let me ask you what turned around the Canadian regulators. I mean, what argument did you make? Why did they approve a Bitcoin ETF this time around? I know there were several issues with them, just like there were several issues with the SEC here in the United States. Should investors have access to this investment? Is it appropriate for them was one issue? Could it trade officially?

And then there was that whole custody question they still have in the U.S. Could it be done in a regulated manner? Were those issues addressed? Were you able to cure them? What did you tell them to convince them to approve it? Well, first and foremost, I think if you go back to sort of 2017, 2018, when the first batch of Bitcoin filings, ETF filings, came out, a large part of the struggle was, is the industry accepting of this as an asset class? And I think,

you know, the regulators were really struggling with that question for a lot of the kind of, this was still an early stage asset, you know, that hadn't been fully proven out, very retail oriented, was institutional interest in there. But the bigger real point was, was the infrastructure there. And I think, you know, frankly, as I think I've told you, I think that the infrastructure wasn't there in 2017. And, you know, I think if they had gone about it and improved these products back then, they wouldn't have worked out well, I think. But a lot has changed in the last three-plus years around the, called the plumbing, when you talk about custodial elements.

I mean, today you have real institutional quality and regulated custodians. You have futures market that just wasn't really there a number of years ago, but today is now a heavily traded and very liquid market from a market maker's perspective and liquidity perspective. There's the ability for market makers to now, you know, directly trade in the Bitcoin. market as opposed to only using the futures market. So there's so much plumbing that has been built into this space in the last number of years. And I think that from a regulatory perspective, you were able to address and we were able to address with the Canadian regulators those key hurdles,

those key questions over the last couple of months. And then the real question of was their acceptance. And I think that has, you know, for the most part, you know, changed. I think people have recognized that Bitcoin is a real asset. It's a real security that people, you know, should have access to. And frankly, they're going to go and have access to it regardless of if it's in a regulated way or non-regulated way and might as well, in my opinion, get it in a regulated way. And I think that's what the Canadian regulators saw. And can you describe the mechanics of this? How does this operate? Are you going to physically go out and buy Bitcoin and hold it yourself directly? Can you do creations, can you do in-kind creations,

those kinds of things? How does this work mechanically? Yeah, no, it's a great question. And look, as I said, there's a fair amount of work that had to go into getting this to where it is. I'm just even, you know, being the first to be able to do so. So first and foremost is these are going to be, what I say, backed by real Bitcoin. So there's no futures. There's no notes or anything like that. So we are actually owning every dollar invested in the ETF will be backed by a dollar of Bitcoin in our cold wallets. The principle there is cold wallet. So as you know, in the digital asset base, yeah, I really have to. kind of start thinking about the custody in a different way because you're dealing with a security that is, you know, kind of movable in different ways. So we use a cold wallet, a custody solution with Gemini. That enables, that's actually the unique element of what we've done. So we don't have

to actually store a large part of our, any part of our Bitcoin in hot wallets, which is where you have the risk of, you know, potential hacking or risk of, you know, it not being secure for you. And then the principle there was then how do you get the fluidity for daily activity, daily trading, buying and selling within the security? So we worked with our market makers, with our custodian, and with our, I'll call it, broker-dealers trading agents, ensuring the ability to execute this. And what doesn't get lost on this, Bob, is that we're dealing with a digital asset that effectively settles instantaneously. And then, of course, the regular ETF and the market, security market, trades in a T-plus-1 or T-plus-3 settlement, and managing those gaps is a a really important part of this. And some of the stuff that our team has really built into this. Yeah. Andrew, let me just turn to you. I wonder, you're an observer of all of this for many

years. What if any effect is this going to have on the prospects for a Bitcoin ETF in the United States? I mean, you and I have discussed this for years now. The SEC made it pretty clear to everybody in the last couple of years. They're not going to approve a Bitcoin ETF unless, number one, you address the issues of market manipulation around prices. They said they couldn't get their head around the way Bitcoin prices on some of these exchanges, particularly overseas exchanges, number one. And number two, issues around custody, around the wallet's getting stolen and other issues around custody. How do you feel about all this? Do you think that Bitcoin ATMs made progress? Yeah, I think it has. I'm going to take everybody out of the weeds a little

bit here. Those are good technical things that we want, obviously, our listeners to learn. But I'll take you right out of the weeds to the basics here. So first of all, I'm congratulations. That's quite an accomplishment. I think it's great. Partnering with Gemini is great. Bob, there's big players in the ETF world making these moves. Dave Abbott means to run Wisdom Tree Europe. He's over at Gemini.

He's an ETF guy, so he understands the plumbing. Remember, good ETF through the last two decades, solve problems. This Bitcoin ETF and the future U.S. ETF is going to solve a problem, right? And that is the plumbing, just like he said. Do you want to take on the plumbing yourself? You certainly don't want as a retail. And if you're running a treasury fund for a state, you don't want to take on the plumbing yourself either.

That's the whole point of the ETF. The ETAF is going to manage the plumbing, both from a regulatory and a seamless standpoint. Commenting on the Canadian ETF, so just going back to that first point, we will be able to access that Canadian ETF for our institutional clients. Now, everyone should know there is going to be a currency layer on top of that, right? You can't buy and settle in U.S. dollars a Canadian-listed product. So this is going to be a currency big there. You know, good brokers will do a good job at minimizing that.

It's something to be away from if you trade for an ETS. That's part of it. As far as it coming to the U.S., I think this is going to lay the groundwork. Again, a lot of people don't want to do the legwork to figure out what is good. They want to hire an expert, right? His firm and the subsequent U.S. firm that launches this is going to be the portfolio manager of the fund, right? It's not just a tool, so you're going to rely on their expertise to kind of to move those things along. And the plumbing has come a long way. When we talked about it a few years ago, you know, market makers weren't involved as pot. The popularity increases the spreads, allow market makers to figure out how to make markets in these underlying coins, and they're going to do it. And, of course, it's going to mitigate single stock risk.

I'd be interested to have a single coin risk, excuse me. I'd be interested to have a question what other coins is going to hold. I'm sure a subsequent U.S. one would not just be all Bitcoin. And if it holds the other coins, then it's really going to be successful because it's hard for the investor to choose outside of Bitcoin and Etherium. I have to be long Etherium. Which ones really mean anything? Right. So this just holds Bitcoin, right? That's right. So this is just a pure play 100% Bitcoin. And we think that that's an important product first to bring.

I do think that there's an opportunity to bring an ether strategy or other things like that. And I'm not as big a fan of bringing a multi-coin asset at this stage. I think there's more exciting things to do in decentralized finance and other things like that. But I think this is for us, the two main coins that I think are really interesting. or Bitcoin and then subsequently maybe an ether. Yeah, and Bob, it just adds a regulated ticker, so people can feel comfortable trading versus opening a coin-based account. That's why it's going to be a success. Sure. No, I agree with your point. An average investor doesn't want to deal with all the plumbing issues,

and that is a major problem for Bitcoin. Christian, I want to bring you in here. You've got some milestones as well. You run that Amplify Transformational Data, the symbol is BLOK. It crossed over a billion dollars this week. eighth best-performing ETF in the U.S., and this is primarily a bet on not cryptocurrencies, but blockchain itself, which is what I'm really interested in. Are there really enough companies

around right now that are devoted to blockchain that can enable you to actually get positions on this? Yeah, well, we definitely think so, Bob. We launched the ETF back in 2018, and the universe of companies has only expanded. We've seen more pure plays, Certainly, IPOs, spinoffs, and even now some SPACs that are quite interesting. The fund has 54 holdings, and we can talk a little bit about those. Kind of interesting, though, going back to Purposes Bitcoin ETF, and congratulations to Sam. He's been super innovative for a long time.

Currently, you can only really buy GBTC as a package product in the U.S. There is, I guess, a Bitwise offering as well. But, you know, some of those products have premiums to, net asset value that investors have to deal with. So I think it's exciting that, you know, the ETF solution can come around and not actually have those premiums that investors sometimes don't realize they're paying. Kind of interesting, though, Bob, is we just passed our three-year anniversary in Block. And believe it or not, Block's outperformed GBTC since its launch by more than 20 percent. So here, the blockchain and crypto-sensitive stocks in Block have been able to

actually deliver a better return to invest. investors than something like the gray scale Bitcoin Trust that's one of the primary ways investors in Packaged Product Land are investing in Bitcoin today. I see you, there's Galaxy Digital Holdings right up here on the top here. That's Novogrances Fund, isn't it? That's right. That's right. So that is an interesting holding because it's really a venture play in the crypto and blockchain space. It certainly is doing a fair amount of investment banking with that firm, but also several different ventures of private and companies. And we're a significant holder of that stock. And we have other companies in there that are mining companies, companies that

are part of the whole transactional system when it comes to crypto, whether that's custody or storage or digital wallets. It's quite an interesting portfolio and has a unique set of kind of diversification characteristics it brings to the average portfolio of, for example, just state straight technology or financial needs. Yeah, I know everyone is obsessed with Bitcoin, and this is sort of a question for all three of you guys. I find the obsession overplaced. I think the emphasis should be on blockchain. Blockchain to me is the truly revolutionary technology, cryptocurrency. Bitcoin is just a cryptocurrency running off the blockchain. Blockchain answers the question, how do I know

I own something, Christian? How do I know that I sent some money overseas to my friend in London? How do I know I bought a piece of property and get title to it? I can use blockchain for that. How do I know I bought 100 shares of IBM? We have companies that exist as middlemen to make sure we do them and do settlement. But blockchain could do that. When do you think the world's going to catch on that blockchain is truly revolutionary? And Bitcoin is this little flapping appendage.

I don't mean to belittle it, but I don't understand why people don't see the truly revolutionary potential of blockchain. I agree with you. I think everybody in this panel would agree with me that it was kind. Maybe this is the wrong analogy, but I really think that the Bitcoin was a little bit of a cart before the horse, right? And it just slowed the blockchain down. Blockchain is definitely the real story. And that ETF is doing well. I mean, it has square and PayPal in it.

If you're in that ETF, you're getting the benefit of those gains on those companies, whether blockchain takes off or not. So that's a good way to put it. But it was really a cart before the horse. And everyone, because we had an initial little bubble in Bitcoin, goes from 20 grand to 4 grand, people are like, I'm staying away from this, and they associate blockchain with it, when really, if they had just done blockchain first and then came out with Bitcoin, we'd be much further along. But I think we're closing that gap. I'm curious if everybody agreed.

So let me just, we've got to wind down, but I wonder what your thoughts are on a tethered cryptocurrency. For example, the thing that would matter to me would be a U.S. dollar, tethered U.S. dollar where you could have a digital wallet, I suppose you'd have to open a digital bank account or some kind of thing, where I could send my money to my friend overseas in 0.1 seconds. Why hasn't that taken off? Is there's, what's the limitation? That seems to be truly revolutionary. Yeah, I mean, Bob, it is. I mean, first off, you know, to your question earlier, like, look, Bitcoin, you have to respect what Bitcoin did. It is unbelievably fascinating how this technology has been built and the original principle of it. But it's a very linear,

mindset. What it is now done, Bitcoin has become more of this kind of asset store of value principle, less on the technology side. But the underlying technology then spawned all the subsequent things like Ethereum and other stable coin principles, which to me are revolutionary. And I, you know, look, I mean, from a principal perspective, I think from a technology investor perspective and a business manager and a business operator, you need to be paying attention to blockchain. It's going to revolutionize many of the elements of how we operate. But, you know, Bitcoin in itself has become unique. It's a ubiquitous asset that is ultimately now being mass adopted as a store of value. And in the last number of years, you've seen that. But I agree with you. We already have stable

coins. Stable coins have exploded this year in utilization. And I think the stable coin principle, whether it's USD-based, fiat-based, or just actually a different type of stable asset that it backs, which is actually really fascinating, will be, I think, very important to, kind of decentralizing finance in many ways. But is there a certain impediment of that happening? Do we not have digital wallets? I mean, theoretically, I could do it now, right? But why isn't it taking off?

Is there the infrastructure? Fed involved somehow? What's the impediment? Yeah, Bob, I mean, I have to remember, I mean, you know, the internet wasn't built overnight. But today we look back in 20, 30 years, we see, oh, everyone's now transacting in the Internet Square and PayPal and players like that

have built phenomenal businesses on the latest. on top of the protocol. But the protocol has to be built. And that's ultimately what, you know, Bitcoin and then Ether and subsequent, call it, protocols are really focusing on, is can they build the protocol that can scale? And then the businesses will layer on top of that, the, you know, applications that will basically really change the way we interact and do business and transfer money or, you know, do contracts and all the things that you talked about earlier. I think it's going to be really exciting. But the protocol has to ultimately be proved. It's already proven security. It's already proving governance, the key thing is scalability.

Okay, guys, I'm going to have to leave it there. It's been a fascinating discussion. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is our Market's 102 portion of the podcast, and we'll be continuing our conversation about blockchain with Christian Magoon from Amplify ETFs. Christian, thanks for sticking around and talking a little bit more about blockchain. I've often expressed my frustration that Bitcoin gets completely overshadowed. or blockchain gets completely overshadowed by Bitcoin when I feel it's blockchain, that's the truly revolutionary technology. I want you to talk a little bit more about how you think blockchain is going to expand this year.

And I don't mean how the price of Bitcoin is going to expand, but where are we going to see blockchain this year? So two areas that are obvious to me, three areas. One is money transfer. When can I be able to transfer money using a digital wallet simply and effectively? Number two, real estate. When would I be able to set up blockchain to transfer real estate and deeds in real estate? And finally, when would I be able to confirm that I bought 100 shares of IBM and use it for some kind of settlement? Yeah, Bob, you're exactly right. I mean, you know, blockchain is the technology, and one application of that technology is cryptocurrency,

and it's getting all the headlines simply because of the price movement. I guess the good news is it shows that, you know, blockchain technology. technology is useful. But, you know, more important, there's thousands of other use cases like you just referenced for blockchain technology. And we're starting to see more and more rollout. You know, everything from food safety. IBM has a very kind of well-known food safety blockchain that Walmart's participating in that tracks produce, for example, from farm to the actual table of a consumer, helps them manage food spoilage. any types of problems they have with the food quality.

It took them about two weeks normally to track down kind of the route, a piece of produce, like a mango would take to get to a Walmart store. Using the blockchain, it takes less than an hour to see its entire journey. We're seeing another type of blockchain chain rollout called the Rappert Supplier Connect that is geared towards tracking PPE during COVID-19. and making sure inventory and supplies are where they need to be. There's some testing and contact tracing blockchain applications that are out in the marketplace right now to manage the virus. There's also some distributed system blockchain applications

that distribute computing power to different research centers because oftentimes the computing power needed to decode genomes, and do genomic research is substantial. And when a university may not be using their computing power because maybe it's overnight, another university can use it via distributed ledger in blockchain. So we're seeing it there. Certainly cashless payments are surging with the virus.

And then supply chain management just general. So lots of applications out in the wild right now for blockchain in 2021. So you seem to be very confident that blockchain is, dramatically expanding. Let me ask you about our area, and that's the stock business. There was a whole brouhaha about Robin Hood and the ability to settle various trades recently. Do you foresee the day when blockchain could be used as a way to do settlement on stock transactions right now? We've got a whole infrastructure that does that. It's a T-plus-2 business. Is there a way? Could you envision blockchain eventually disrupting that business?

Yes, we do. We definitely do. And there's been some security. issuance, including, I think, bond issuance from Thailand, sovereign bonds that were settled via blockchain and reduced the time from sale to settlement by almost 90%. We're seeing applications by fidelity being tested in the marketplace by, you know, major players. So, yeah, we think that the digitization of much of the settlement or record-keeping or trust between two parties where a middleman exists today. That is all kind of changing here right before our eyes. There's $2.7 billion spent on blockchain development in 2019, and that rose to over $3 billion last year. The thought is that's going to grow by 10x through 2025. So this is creating a more efficient

way to transact. It's almost like how stock trading was digitized. It's now coming for in our industry, kind of the settlement process, the record keeping, and I think it'll make things a lot more efficient and should avoid some of these issues we saw in terms of the time it takes to settle or even to monitor various transactions. Okay. Kristen, we're going to have to leave it there, but I really appreciate your input on all of this. Everybody, Christian Magoon, of course, from Amplify ETFs.

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