ETF Edge - Exposure to Bitcoin with 100% downside protection? 1/21/25

Episode Date: January 21, 2025

The first structured-protection Bitcoin ETF is here. How do you get up to 100% protection to the downside and, importantly, what do you give up for it? We’ll explain.           Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchanged trade funds, you are in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it all means for investors.

I am your host, Bob Pisani. The first structured protection Bitcoin ETF is here. Getting exposure to Bitcoin's upside with up to $100,000. percent downside protection. Now how does this work and what do you give up for it? Here is my conversation with Matt Kaufman, senior vice president and head of ETFs for Calamos and with Michael Venuto CIO and co-founder of title financial group. Matt we're here an auspicious moment today or no tomorrow you're launching an ETF that aims to capture some of Bitcoin's upside with a hundred percent

downside protection. Now most people are going to say what? How does this work? Yeah. Explain it to us and what do, what do, What are you giving up for this protection? Yeah, you said it. Tomorrow, January 22nd, we're launching the world's first protected Bitcoin ETF. You get the upside of Bitcoin, cap rate. If you're familiar with outcome-based strategies, the cap rate's about 10 to 11.5% with 100% protection over a one-year outcome period.

So if Bitcoin, let me just get this right, if Bitcoin is 10% higher in the one-year period from tomorrow, your ETF is going to underperform. You're going to give up. Everything about that. give up the upside past that cap rate. But yeah, if you think of the cap rate today, it's about three times what you might get on a risk-free rate products, you get really strong upside.

So if you perform in line, but you're below 10%, you're in line if you're below 10%. And then if Bitcoin is down in that period, you have protection to whatever. If it's down 10%, you're made whole. If it's down 20%, all the way down to 100%. That's right. Capture up to that cap rate, 10, 12%,

with principal, This is what, it's hard to get this product straight. The challenge here, as I understand it, is you only get 100% protection if you buy it tomorrow, right, on January 22nd. If you buy after that, right, for this product, Bitcoin is down, you'll get, it changes, right? Explain how this works. We can walk through that. So tomorrow we're going to open the ETF around $25. So you might get it around $2.01.

It's a little different than all the other defined outcome funds in the market. We're going to open right at $25. $25, so you may pay $2,501. You can get in all day long, get that 100% protection, and then at the end of the day, we're going to strike the cap. Okay. And so we do it that way because Bitcoin is a volatile asset. You know, we don't want the price of Bitcoin to move on you overnight. So we're giving you that chance to get 100% protection over that one-year outcome period. Right. Okay. So, okay, I think they have a good idea about it. Mike, I want to bring in you here. There's an explosion of these crypto products coming. I saw filings in the last week for new crypto products

around Solana ETFs coming, XRPETs, that's Ripple, by the way. And I'm sure we're going to see more products around. I hear about bundling cryptos into indexes, putting multiple crypto products into indexes coming down the road. Give us a sense of what you see coming. Here's a short list of it, but Bitcoin with equities, for example. What do you see? We're just talking about about crypto products right now. Sure. So we help people launch and grow ETFs and every single day we're getting pitched a new crypto idea. So we've seen stacking. Last week we had a filing for a client that's all the crypto bonds, you know, the convertible debts, the way that the institutions are

investing in them. I know Calamos invest in some of the micro strategy converts as well. We're seeing stacking. We're seeing... Stacking is what? Bitcoin and gold. We talked about it before but basically one dollar gets your dollar of Bitcoin exposure and and a dollar of gold exposure. I'm seeing products that are Bitcoin plus carbon futures. This morning we saw a slew of filings for things that included Dogecoin in this new Trump meme coin. That's not us, but to each their own.

It's not us either. You seem to be running away. You have a problem with meme coins? There's no fundamentals behind a meme coin, obviously. That seems to be why you're sort of back on. Yeah, from Calamos's perspective, we're a 50-year-old risk manager. Now that there's options available on Bitcoin,

That's the space we want to operate in. We want to deliver risk-managed exposure now that it's available to people. So that's the space we're going to operate in. You're not going to see meme coin, E-T-Fs from Calamos, but the ability to access Bitcoin in a way that meets your risk tolerance, that's what we're about.

So I got to bring in President Trump, just inaugurated yesterday. He's floated a whole bunch of ideas on crypto. He's proposed a crypti-friendly SEC chairman in Paul Eakins. He's proposed a strategic business. Bitcoin reserves, sort of like the Strategic Petroleum Reserve even. What do you expect to see from President Trump and from Congress this year on crypto? Yeah, the Strategic Bitcoin Reserve has been a comment that Trump's made over the months.

You know, as he was campaigning, you spoke at a Bitcoin conference a couple months ago and had said similar. So I think we would expect some type of legislation, you know, to move forward with a strategic Bitcoin Reserve. From a petroleum perspective, you know, that was to, you know, actually give people protection from inflationary. energy prices, we see a gold reserve, and so now we're potentially seeing a Bitcoin reserve. Yeah, let's not debate the merits of a strategic Bitcoin reserve, because you can debate the merits of a strategic petroleum reserve even. I won't go there, but your thoughts, Mike, on what we might be able to see from President Trump and or from Congress. So we live in the world of ETFs, right, and we've seen nothing but good regulations, right?

We've had a rule that made it easier for people to launch, then we had rules that made it accessible to use the derivatives and do all the wonderful things that Calamos is doing, Yield Max and all of our clients are doing. Crypto has suffered from no regulation, right? And regulation has been done through enforcement. That's a mess. So anything that's different is better at this point. I don't know if we're going to have a Bitcoin Reserve. I don't know what exactly regulations are going to come. but knowing the playing field, knowing the rules, allows people to do things in those rules. And I think that's the key. Yeah, I mean, there's proposals that President Trump might eliminate capital gains taxes on American-made cryptocurrencies. I mean, at the very least, we need an overhaul the regulatory policies. We need regulatory policy.

You'd think we could get a Bitcoin, or at least a crypto overhaul passed. Do you think so? You would think so? the laws that govern our world were written in 1933 and 1940. They really haven't been updated much. The idea of a Bitcoin or a cryptocurrency didn't exist in that world and trying to retrofit those laws into this doesn't make sense. We do need some sort of government-efficient group that can come in and regulate this

and make it make sense. Whether it's the SEC or something different, it needs to exist. And this is a sort of. a separate policy debate that the CFTC versus the SEC this never made any sense almost everybody else in the world has one regulatory body because of our history commodities being regulated by the agricultural committees and finance and banking regulating a lot of the the equities world there's two separate commissions essentially yeah we saw this play out with with Bitcoin you know right in front of our faces we

We had spot Bitcoin ETPs come out. The SEC said, OK, we want to regulate this. And CFTC said, well, hold on, we need to decide if this is a commodity, is it an asset. And that happened with the options too. After the ETFs raised $100 billion, we started seeing options talk. And so now the SEC approved the options. CFTC had to come in and basically say the same thing.

OK, we either need to approve these or decide that we shouldn't have any regulatory authority over these. CFTC surprisingly to me came in an overall. and said, we're good with these. You saw those options come to market. And now that's why you see the plethora of ETF filings, you know, with options on Bitcoin. You can do spot Bitcoin ETP options.

You can do CBO index Bitcoin options, which is what we're using. Now that that market is available, you know, you can take this any which way. You can do levered products. Do income products. You can do risk management. So that's what we're building at Calamos is at risk-managed space. I want to broaden this out a little bit because you, I had you on in April that, where you launched equity products.

You have similar products, downside protection for the S&P 500. You have for the NASDAQ 100, for the Russell 2000 as well. That matched the returns of the indexes up to a certain cap, but also provide downside protection as well. Here's the symbols folks that you can see here and when they actually move here. And there's the rate you're capped at. Yes, so these are just a few of our our office. our offerings in the ETF space, you know, that capital protected

ETF world had really not been captured until 2024 when we built the first one-year principal protected ETFs. So we're seeing tremendous adoption there. We're seeing about five, six hundred million move in just over the last few months here and being able to do that now on Bitcoin to be able to give you essentially Bitcoin with a safety net. And you can decide where that safety net sits. You can have zero percent downside, 10 percent downside on February 4th, or 20% downside, and then your cap rate just goes up and up based off the amount you put at risk. So, again, you put no money at risk, 100% protection, you get about 11% cap. You put 10% at risk, 30%.

Of course, the problem with these products is we're in an up market. So, I mean, I would imagine you'd attract a lot more assets under management in the down market where people would suddenly panic. It's a little counterintuitive. If you have capital protected growth, if that's your goal, getting 11% upside is the best power source. it's better than anything you're going to find in the market today. So you could put your safe money to Bitcoin now, which, you know, has been a little counterintuitive, probably not something people would actually think of,

but tying some safe money to the price of Bitcoin getting good upside. Safe money in that it's 100% protected. Yeah, you have no downside risk. That's right. Yeah. Yeah. Where else can you get 11% upside with no downside? Yeah.

And Mike, the ETF world is seeing a flood of these derivative-based products, not just in crypto, but even in general. So some might use buffer strategies. They use options to provide downside protection. Some use options to generate income like JEPI. We've had them on. Some are leverage and inverse products that use derivatives to magnify returns. Generically, what's the appeal of all these products?

Why is there a sudden explosion of them in the last year? So the explosion occurred because of good regulation. You couldn't have done these four or five years ago. The second reason is people were doing these trades themselves, right? They were taking our ETFs that all these wonderful issuers are coming up with, and they're putting the options trades on. Guess what? They've got to pay like two to three times as much for the margin, for the prime brokerage, for all of that stuff. Hiring professional managers to do it for you in a nice, clean wrapper in a tax efficient way, it's just a much better way to go.

And now you've got those kind of three core things that you mentioned. We can enhance returns through a form of leveragement options. We can create income like we do with wide. bit on on Bitcoin we're generating almost a 70% yield 68 to stay compliant right and then you can protect the buffer kind of things next you'll see combinations right so we did one a couple weeks ago for a client where it's a basket of crypto companies we're generating yield off of them but we've also bought some puts to protect the overall portfolio you watch flows very carefully have these products generated any significant assets I mean the Bitcoin ETFs have been a

spectacular success there's a really successful product in general But have all these, let's just call them various derivative products, generated a lot of assets under management? Yeah, we were in the top, I think we were number 11 in flows last year. And we're only a $30 billion ETF platform. Of that, about $9 billion was in derivative-based product for Yield Max, Defiance, Nicholas Financial, SOFI, we have a product like this called Theta. So yes, these are generating significant interest, especially amongst the do-it-yourself investing crowd

and those who are looking for income. And this is going to continue, essentially. I sure hope so. It's going to get more and more complicated. The problem I have is who's buying these in general? I mean, I always say these things are successful if you can explain them to your mother. Buffered products get a little complicated.

These products that you have get a little complicated. So who are you seeing buying them? Yeah, I can tell you personally my own parents' own buffered type products, and it's easy to explain to them. You say you've got the upside exposure to a cap, a protection level, and a certain number of days that you have to hold to get there. It can be boiled down as simply as that.

So from a retiree perspective, there's 11,000 retirees entering the market every single day. It's the largest swath of people we've seen enter retirement in history. So we see retirement side, folks that can't take on all of the volatility. Financial advisors, you know, turning to Bitcoin, we saw about 11% of advisors using Bitcoin products or Bitcoin exposure in 2023. That jumped to 22% in 24. Some good research from VATIFI there.

And that's only going to continue. And so the Bitcoin products coming to market, the protected Bitcoin products can give people an opportunity to access Bitcoin, but then put on some protection. Maybe you're pairing it with your spot Bitcoin exposure. This gives you a way to take off that tail risk and get good upside. And I know you're on file with two other protected Bitcoin strategies, right? This one we're talking about is 100%, but you also have one that's coming out that's going to be 90%. And another one, 80% protection over one year outcome.

So I guess the lower the protection, the higher the caps will be. You got it. Yeah, these would be called floor strategies. Oh, there we are. So these are floor strategies. And so the first one, the 100% would be a zero floor. So if you think about Bitcoin with a safety net, you can set that net at zero. You can set it at minus 10, set it at minus 20.

Your cap rate goes from 10 to 12, all the way to 28 to 30, and then 50 to 55 percent upside. So now you, on February 4th, you'll be able to get 50 to 55 percent upside of Bitcoin, which is about the compound average growth rate over time with 20 percent downside risk. And so you're putting 0, 10, or 20 percent at that. risk. I mean, the probability that Bitcoin's going to drop 80%. It seems a little remote to me. I mean, heaven knows. I wouldn't go so far as say that. I mean, it could. It has in the past. Yeah. I wouldn't necessarily expect it going forward, but yeah, maybe put 20% at risk. I mean, that seems like an interesting proposition for me. If I, if I was a betting person, 50 to 55% upside, and you have 80% downside protection, you know, that gets a little. I'm going to take that that trade too.

What are what are the prices here? What are, what are, they're all 69 basis. 69 bases. Yeah, that's right. So, I mean, for that kind of protection, that's relatively cheap. Mike, you were saying you could have done this before. You could have synthetically done this trade using options, but it would have been complicated and probably more expensive, right? For an individual to do it using the options that have just recently been listed on these things, yeah, it would be very complicated. And then it changes. There's margin calls. I know there was a story about interactive brokers changing the margin rates for people playing with micro strategies. So like, give those. headaches to the ETF issuers let us take care of those things let us use our scale with the market makers with the APs with the primes this is what ATFs are made for like this is what it just makes the whole product easier and more manageable with that said it aids in the explosion of the options business now

some people think this is wonderful others are not so sure we it's hard to get your head around the the derivatives industry and how big it is we we don't even know how big it is yes now we have flex options which are more tax-efficient, we're able to actually redeem them in an ETF. So that's an even more powerful thing, right? If you do this yourself, you're definitely generating taxes. So here's a question. I mean, is there a point at which these are not great products,

or is there a point in which some of them could pose systemic risks? Remember the volatility products that blew up on us a few years ago? Nobody thought that was going to be a risk. And then out of nowhere, suddenly I had to explain what volatility products were and why this thing kind of went crazy on every. Is there any chance of this? Leverage always has systemic risk. And if it gets too big, the street starts to pull back.

We've seen it with some of the leverage products out there. The covered call and the buffer kind of concepts, using protection or sending income, I don't see systemic risk there, right? Those are actually lowering risk. The issue is really if the market loses liquidity in an individual name. But there's always liquidity at some price. That's the beauty of exchange traded products. Yeah, and I think from Calmosis' perspective, when you build an outcome-based solution,

you want to build things on very liquid underlines. So that's why you see outcome-based products on S&P, Russell, NASDAQ, Bitcoin, the liquidity shot through the roof almost overnight with the spot Bitcoin ETPs. $100 billion space, $2 to $5 billion traded every single day. And so now we're able to build risk-managed exposure on Bitcoin. It's also a reason we didn't go into the leverage side or build a 2x exposure to Bitcoin, things like that, because if Bitcoin falls 50%, that product could be down 100% over that short time period. And so we want to focus on that risk management space, do it in a liquid way, and give people safer access.

I guess what's a little breathtaking to me is the Bitcoin products are sort of showing natural evolution here that the equities products showed, but in a very compressed period of time. So we have plain vanilla, Bitcoin ETFs. We have futures first, but we have plain vanilla. And now we're getting this explosion of derivative products around them. Whereas with equities, it happened much more slowly. I guess that's what's amazing to me. It's just how breathtaking.

Everything in crypto is that way, right? Like, you see all the memes, the good memes of somebody who's been in crypto for six months. And they look like Gary Busey after a mugshot, right? Everything in crypto just moves so much faster, and the ETF industry has helped bring that access to the traditional rail. So now I see people pushing Solana or Ripple, which is used for basically money transfers, essentially, or stable coins like your dollar, and care of to speculate on what might be the next hot thing. I know this is a losing proposition, but I'll give you a show. I'm so I also manage block BLOK I've been deep into this since 2017 I'm probably more of a Bitcoin maximalist I believe in that chain I understand the value of Ethereum I understand the value

of Solana and these things a lot of this is stuff that may work and if it does work we'll get co-opted into the Bitcoin blockchain over time is how I've always viewed it so if you're not buying and learning these blockchains, then you're just speculating. I'm not really terribly interested. But it always strike me that Bitcoin is a cryptocurrency running off the blockchain. Why isn't blockchain in general the concept the truly great thing to invest in? To me, that's what's amazing. I find defy and smart contracts to be, that really appeals to me. Here's something that is really broad. You can use to send money, you can do real estate transfers, you could do stock settlement with smart contracts. I mean, that's very exciting to me.

And yet Ethereum as one version of a smart contract platform has sort of had a moment and then been pretty slow for whatever reason. Maybe it's just because Bitcoin is sort of like moves quick. It's a get rich quick idea for a lot of people. They claim there's a store of value around it. But I don't know. To me, blockchain is intellectually.

I find blockchain more exciting than just Bitcoin. I do as well. That's why I run block. And we invest in a lot of things and mostly companies like you mentioned ripple we've owned sbi holdings all the way through they own ripple right like uh so like i'd rather own the picks and axes in any gold rush than the gold um and that's where we focus matt what what's calumos going to do for the rest of the year what kind of yeah you know from to answer your question i'm not a speculator i'm a risk manager we're a hedger

and so anything that's liquid that has an options market you know we're looking at building risk managed solutions for that but there's got to be a really kind of safe number of filters before bring something in an ETF. And so Bitcoin meets those filters. I agree with you. I think blockchain is a tremendously valuable asset. But in terms of delivering, you know, a store value and doing it in a risk managed way, the protected Bitcoin ETFs is where that. You've been doing this a long time. Calamos has been around a while. We've been making risk for 50 years. I've been building options strategies for, you know, the last 10 to 12 years here. So there's a, there's a lot of, there's a reason we've been around a long time. Now it's time to round out the

conversation with some analysis and perspective to help you better understand ETFs. This is the Markets 102 portion of the podcast. Michael Venuto, CIO and co-founder of Title Financial Group continues with us now. And Mike, we had a great discussion on crypto ETFs and the explosion of derivative products. Just to finish that conversation, what other Trump trades do we see out there? We have these meme coins that we just saw announced yesterday. I think you're seeing, you know, there's always been a number of like politically oriented ETFs. There's a MAGA one. There's a GOP

one. There's a Dems one. Our firm supports one called Cruz KRUZ, which is tracking what the congressional members of the Republican caucus are purchasing. It's actually been outperforming since the election, the opposite side, which is Nancy. She made some news

yesterday too. So there's a lot of that going on. I also see you know, we talked a lot about derivatives we didn't really talk about the single stocks there's a ton of activity in single stocks right we mentioned you can generate yield with derivatives you can protect with derivatives or you can leverage with derivatives so far in terms of single stocks we've seen a lot with with yield

Tesla O-Ark MSTY you've seen a lot with leverage MSTX or there was a SOFI one you haven't seen buffered single stocks yet so maybe Calamos will jump on that one so a buffer would provide you participate up to a certain upside and then if you provide some downside protection too so pick what? Invida

might be you would participate all the way if NVIDIA was up to 10% and then maybe you would be made whole if it was down 10% a buffer product? Explain that. Yeah it would be similar to that. I don't know the exact ranges because the volatility

of NVIDIA is actually higher than the volatility of Bitcoin so you might have a different range on that buffer. But that is the general concept. You're selling a call, buying a put, right? And doing the spread to get the upside and cap the downside. Yeah. I noticed commodity ETFs had some inflows this year. Are we going to see any new products around this? And why? I mean, it's been a more of an asset class for ages and ages. Yeah, I think that people are afraid that the inflation trade is back. That's one. Two, there's better ways to do it now. So we work with Newfound, Corey Hofstein. He's got the return stacks. So basically he'll do a managed

futures, which is more or less commodities combined with equities. So you're not having to give up room in your portfolio to get those commodities into the portfolio. Now explain that again. Okay, so it's stacked. You're 100% long managed futures and 100% long equities. And then he's got 100% long managed features, 100% long bonds. So you don't have to take from your bonds or your stocks to get your commodity exposure. Another one that's interesting, we're launching for US commodities funds to X copper.

In a world where we're going to build again, copper is that industrial metal. Now, we talked about this. Leverage implies risk in general. Does the world need two times copper or three times inverse oil products? does not create some kind of, if it gets big enough, some kind of potential systemic risk?

Sure. So what does the world need? The world needs capital efficiency. They're going to get their 2x or 3x oil exposure. They're going to get their 2x or 3x copper exposure. Are they going to get it efficiently by doing it in futures and small accounts where it doesn't work and they're paying somebody else the exposure? All the ETF does is democratize access to trades that people are already doing

and often makes it more efficient. We were talking earlier about ETFs to try to maximize the tax benefits of the ETFs structure. What will we see in that area? Yeah, so we've seen a lot of people coming to our platform with new ideas on how to deal with taxes. ETFs are more tax-efficient than any other vehicle for accessing baskets of securities, right?

And it's primarily because of a happy accident. The fact that we're exchanged traded, allows us to send gains to the market makers APs. That wasn't intended when they built it at the American Stock Exchange. It was something they figured out later. Now you're seeing people come with newer ideas. So Alpha Architect did Box. Cambria, which is a client of ours just did tax. We did a 351 exchange for multiple clients last year, which allows you to reset cost basis on high price stock. It doesn't get you out of taxes, but it gets you out of other people's taxes, right? That's the beautiful thing about an ETF.

And yet with all of these new derivative products, tax advantage products, it's the plain vanilla that still gets the vast majority of inflows. And it should, right? The bulk of people's portfolio should be a Vanguard or I shares or State Street core broad-based exposure. But once you've got that and you know what you have

and you can plan around it, there's so many other things that can augment returns, give you trades. People should enjoy investing. Jack Bogle, the founder of Vanguard, It was the man who had the most influence on me in the 90s, said the called the scratching the itch. Take 90% of what you own, put it in index-based products.

And then if you think you're a genius, take the other 10% and trade around it. Yeah, I'm a big fan of Harry Brown and the permanent portfolio concept. Same thing is written in his books, right? Once you have your permanent number set, your existential problem solved, speculate, enjoy. This should be fun.

That scratches the itch essentially. Scratch the itch. Yeah. It's a lot safer here that on draft kings are on some mean coin. Yeah, well, yes, that's for sure. And it's a lot safe for owning a Bitcoin ETF than having a wallet somewhere that could get broken into stolen or you lose the passport. It's one of the reasons I was a big backer of Bitcoin ETFs. If you want to own them, it's just a safer way to do it overall. Democraticizing assets. It's what we've been doing for 30 years.

Any other last thoughts about 2025 and what we're going to say? I think we're going to still see a lot active. Almost everything that comes to the title platform today are managers that are active looking to take what they've done successfully and a separately managed account or a mutual fund or a hedge fund and move it to the best investment structure out there, which is the ETF. I agree. Matt's going to be a great year and we're already heading towards $11 trillion in assets under management. It still keeps going up and up. Matt, Mike, excuse me, we're going to have you back soon to talk about broader trends. But thank you very. much. Mike Venuto is the CIO and co-founder of Title Financial Group. That does it for ETF Edge,

the podcast. Thanks for listening. Join us again next week. Or remember, you can see all of our shows, etfedge.c.cnbc.com. How does InvescoQQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investco Distributors, Inc.