ETF Edge - Navigating the Crypto Landscape

Episode Date: June 7, 2021

CNBC's Bob Pisani spoke with Greg King, CEO of Osprey Funds, and Michael Sonnenshein, CEO of Grayscale Investments. They discussed the crypto conundrum – the hot topics covered at this weekend’s big bitcoin conference in Miami …what it will take to really lay the groundwork for a potential cryptocurrency ETF this year and whether bitcoin will remain the dominant player in the crypto space. In the ‘Markets 102’ portion of the podcast, Bob continues the conversation with Michael Sonnenshein from Grayscale Investments. 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, Invesco 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, market analysis, and we're breaking down what it all means for investors. I'm your host, Bob Pisani. Today on the show, we'll discuss the crypto conundrum. The hot topics covered on this weekend's big Bitcoin conference in Miami. and what it will take to really lay the groundwork for a potential cryptocurrency ETF later this year. Yes, it's coming someday. It will come. And whether Bitcoin will remain the dominant player in the crypto space.

Here's my conversation with Greg King, CEO of Osprey Funds, and Michael Sunnonshine, CEO of Greyscale Investments. Greg, you're still in Miami. Very colorful commentary from some of the reporters down there. I saw people attacking the Federal Reserve saying they're evil. I saw people attacking Elon Musk saying. He was evil, kind of strange bedfellows there. I saw the president of El Salvador saying he wants to make Bitcoin legal tender.

While you're down there right now, just give us a sense of the flavor of what's going on there. A lot of excitement down here. You know, it's Miami, it's warm, it's sunny, and you've got an international investing pub. So you really have a confluence of a lot of people who are super enthusiastic about what's going on with Bitcoin. You do have that sense of community, though, especially. And I think you're talking about Elon Musk and whether this is a Fed. You know, the bitcoins tend to rally against what they see as forces that oppose them. But I think generally speaking, the mood here is one of positivity.

It's taking the movement forward from where it's been over the last 12 years. And certainly an endorsement by a country, you know, El Salvador saying they're seriously considering submitting a bill. And the president, I believe, said he will submit a bill that will make Bitcoin if it passes legal. tender. So a lot of excitement down here in Miami. And Michael, you're people a little different, right? Grayscale Bitcoin Trust is a little bit different. You have institutional investors, kind of a different crowd. You're not there. But I really was struck about this moment when the president of El Salvador

says, I'm going to make Bitcoin, you know, legal tender. The dollar is already legal tender down there. But that's kind of an interesting moment. I don't know if you took away anything from that. It is an interesting moment. And I couldn't be there because I wanted to be here with you, Bob. But it's an interesting moment. as we think as we think about, you know, nation states and central banks exploring digital currencies,

we're not surprised to see places that have historically relied on the dollar or folks who have experienced hyperinflation, exploring the potential merits of digital currencies. Yeah, and your, but I meant was quite serious. Your people are a little different than some of the, shall we say, libertarians that go down there to that particular conference? Institutional, more pension fund oriented people? We do. The gray scale family of products, we service a lot of institutions, accredited, investors, pensions, endowments, and then also a lot of retail investors as well. You know,

GBTC, largest publicly traded Bitcoin fund in the world. Yeah, Greg, I'm wondering if there's, just back to this, whether there's a moment or not. You know, Jack Dorsey purchased more than, I think, $200 million in Bitcoin through Square since October of last year, said that this was the most important project in the world that if he wasn't working on Square, he'd be spending his life working to develop Bitcoin. Is there some kind of, I'm looking for some moment here. Is this some kind of escape velocity that's starting to happen, or are we just reporters succumbing to too much of the hype around this? No, I think I wouldn't pin it all on this weekend, though. I think this movement started in the fall of last year. Certainly when Bitcoin crashed through or crashed

upwards through 20,000 its previous all-time high and started a new bull run. You started to see a lot of corporations like Square, Micro Strategy, and others. That was a new thing. Corporations putting Bitcoin on the balance sheet and big ones, Tesla famously. But you've also seen insurance companies start to dip a toe in. You saw large asset management groups like BlackRock et cetera, starting to talk about it. So Bitcoin continues to steamroll forward. And I think any talk about the most recent sell-ops down here was pretty muted.

Yeah. I guess, Michael, the question I have is, if you buy into the concept of crypto, what is truly special about Bitcoin, Or if you buy into the concept of blockchain, which I think is the truly revolutionary technology in my mind. I'm a big blockchain fan, not necessarily a Bitcoin fan. So I guess it seems like we've got all these alternative investments out there, NFTs, Ethereum, and the rise of Ethereum, smart contracts, decentralized finance. Is Bitcoin waning as this sort of dominant motif of blockchain in general and crypto in particular?

Well, I think certainly over the last year, as we've seen economic stimulus, keep getting pumped into not only the, U.S. economy, but around the world, you've seen a lot of investors gravitating towards Bitcoin for its verifiable scarcity. And there's a general appreciation that Bitcoin and the digital currency asset class as a whole are really here to stay. And so a lot of investors have begun moving not into just Bitcoin, but even assets like Ethereum, starting to explore new protocols within Defi and others, because there actually are differentiated use cases amongst the various digital currencies that are out there. Yeah, Bitcoin, I have said blockchain is the truly revolutionary technology because it answers the question, how do I know I ever owned anything in the

world? And it seems like those smart contract concepts behind Ethereum now goes a long way towards dealing with those particular issues that are out there. But I want to ask you about the Grayscale Bitcoin Trust, because a number of people wrote in and said, it's been trading at a substantial discount to Bitcoin this year. Can you explain why that's happening? Is there a supply demand issue here? What's causing that? Yeah, so Grayscale Bitcoin Trust trades under symbol of GBT. It's the first Bitcoin investment vehicle to become an SEC reporting company. And over the last few months, it has traded at a discount to its net asset value. That's not uncommon for funds that look a little bit more like a closed-end structure to trade at premiums

and discounts. And so what we've certainly seen is more supply coming into the market, and that may have an influence on it. But ultimately, the price of which it trades is dependent on market forces and investor sentiment. So for a lot of investors thinking about getting Bitcoin, exposure right alongside stocks, bonds, ETFs, whatever else they may own, GBT may be a compelling opportunity for them. But that's why I get back to the, is there some issue about it waning Bitcoin in general

because it was trading at a premium for the longest time into last year. And then suddenly February, it just around there, it just kind of changed. And it went to a discount. I mean, to me, that would say maybe people are interested in alternatives or something like that. Well, no, it is the secondary market for privately placed shares.

So over time, as the fund has grown to be larger, again, the largest Bitcoin fund in the world, more shares have come into the market. And so ultimately, over time, you'll see that supply and demand balance come back into play. Yeah, 24 billion assets under management. That's pretty good. That is definitely the largest one out there. Greg, I wonder this is a show about exchange traded funds, so I hate to pivot over there to the endlessly discussed Bitcoin ETF topic, but I've got to ask you about it.

And in both of you, I think I've said you're going to convert to a Bitcoin. E-CF, is that right? Am I right, Greg, on that? You've also said that, correct? Yeah. Correct. So give us an update. Give us an update on where you think we stand. We've got a new SEC commissioner. Everyone seems to think that he understands this. I don't know why everyone thinks that he's automatically going to agree to everything, but he certainly does. Gary Gensler, the new SEC commissioner, does understand it. What's your take on the prospects for a Bitcoin ETF this year? You know, we're hopeful that Gensler's administration there will take a good hard look and, you know, put his expertise to work. You know, he taught about a class about

crypto at MIT, so the guy knows his stuff. No one's debating that. I think people are sort of reading into it that that means that it's going to be green lights for a Bitcoin ETF. We're not so sure that's the case. Of course, we're in front of the administration and, you know, working with law firms, et cetera, as you do, and moving those processes forward. But personally, I think if something happens it's more likely in 2022. Just really getting going, these things take time. There's multiple years of rulings by the staff that he would need to kind of figure out how to how to treat and handle, etc., etc. So it's not a slam dunk at all, but I do think they will take a good hard look. The thing is, though, to your earlier question, Bitcoin is still a thing very much here at the

conference, but there's more to the whole blockchain crypto movement than just Bitcoin, and that's Like at Osprey, we've launched our Bitcoin trust, OBTC, which is the lowest price fund that's available on the market. But we've launched other things, KokaDat, Algarand, other cryptocurrencies and layer one platforms that are kind of going to what's next, right? To your point, blockchain is a pretty cool invention, and Bitcoin applies that to the problem of fiat currencies, right? But there are so many other problems, defy, decentralized finance, this whole NFT craze.

It's a little bit beyond me, but still very interesting. So other platforms like Pocabat, like Algorithm, like Ethereum, these are ways that you can get exposure to some of those trends beyond just Bitcoin. We love Bitcoin. I've invested since 2013, but there's more to this movement than just that. And Michael, just back to that ETF question again, the SEC under the prior administration, lead out some, I think, very high barriers here. They were concerned about fraud, about manipulation, about custody issues.

And every time this Bitcoin ETF question comes up, I said, read what the SEC said. Now, do you think the industry has cured the defects that the SEC specifically said, here's the problem that we had? What's your thoughts now? Have they addressed the SEC's concern to the point where Gensler can get to a yes? We've been working on this with the SEC since 2016, and they've been very public. So your point, market surveillance, you know, addressable markets that are regulated. You know, the industry continues to mature with each passing day, but clearly, even though we are

maturing, we're still not quite there yet. And so I think for a lot of investors looking at crypto today, they're accessing it through, you know, gray-scale Bitcoin Trust or through Osprey or through others. And it's a compelling opportunity because when GBTC does convert to an ETF, and again, we're 100% committed to converting to an ETF when the regulatory environment is ready to have it, that arbitrage, that discount or that premium would, you know, be arbitraged away, and the fund would trade at NAB like all ETFs do. And so a lot of investors are interesting, who are interested in Bitcoin, are looking at GBCC today for that very reason.

Now, Gensler has said publicly, we need more regulation of the exchanges, but he's a little bit unclear about what that is. It's not clear whether he wants more Congress to step in and actually enact some legislation, or whether or not the SEC has the power itself to do more regulation. Where do you stand on that? And Greg, I want to get your thoughts as well. I think it's important to realize how much regulators are engaged in the industry itself. The types of things that they're looking for are really about regulating the on-ramps and the off-ramps into the ecosystem itself. And so with each passing day, the exchanges are getting more mature, the K-Y-C, the AML that's being done,

And this is no longer a barrier to entry for investors. The institutions that now invest with us would not have thought about this two, three years ago when regulatory uncertainty may have been a hurdle for them. Nowadays, that's not the kind of pushback that we get. And so I think as time goes on, you'll see a maturation around those entry and exit points that will give regulators increased comfort with the asset class. And KYC, those who do not know your customer, those who don't know the nomenclature here, we throw around a lot of acronyms around here.

Greg, same question to you. Gensler has specifically said already about manipulation fraud in custody, and these issues need to be addressed. Do you think, same question, do you think that the industry has matured to the point where they can get Gensler to say yes this year? I do. I think that they can put some meaningful clarity forward in terms of regulation. From our perspective, one of the biggest issues is really just, with each particular coin or token, is this a commodity or is it a security? You know, that's a fundamental question that really dictates how investors can access these products. So for us, that's something we care deeply about. To Michael's point about KYC, which is no your client, an AML, which, by the way, is anti-money laundering,

I feel like those areas have been, you know, well addressed so far, it seems like, at least for U.S. persons. So we'd be looking forward to some clarity around the security versus commodity question, and we've heard talk about perhaps some kind of a grace period for folks to figure it out. But we're definitely eager to see something come from Gensler's administration. You know, I want to just pivot here and ask you about the digital dollar. I mean, one of the reasons I'm not terribly enthusiastic about Bitcoin is what I want is a digital dollar. I want a way to quickly transfer money to my friend in London,

have to pay an enormous vig if possible. And it would seem a digital dollar, a tethered dollar of some sort, would deal with a lot of those issues. How do you feel about things like a digital dollar? And would that reduce the popularity of Bitcoin and other digital current, at least partly? I know there's the crowd out there, you know, the libertarians and the people who are in other countries that are concerned about it. But for a guy like me, would that reduce the interest in Bitcoin? Not at all. I actually think we take the opposite view. We're definitely seeing not only the digital dollar project underway, but also seeing a lot of other countries

around the world getting into launching their own central bank digital currencies or CBDCs. I think that will not displace or, if anything, take or market share or compete with decentralized currencies like Bitcoin. And so I think it all trends towards the digitization of money and something that investors and just your average person as well who may not be in the investment market can glom onto as well. And do you think, Greg, your thoughts, feel the same way, I gather? Yeah. Yeah, so actually, I'll give you two things.

So one is CBDCs is something that Algram, which we just did a project on, we just launched a trust, is one of the layer ones at the forefront. You know, was founded by Sylvia McCauley, who's taught at MIT for 40 years. He's sort of the godfather of photography. And they're working with, they've done a CBDC for the Marshall Islands. So that's a trend that folks can play by looking at Al-Grand as a token. However, I agree with Michael in the sense that imagine the world's fiat currencies are digitized. I actually think that pushes more people into something like the Bitcoin, because, frankly, that would give governments even more control than they already have around their money supply.

And a lot of people who get into Bitcoin is for concerns about that type of control, whether libertarian or not. So I do think that both those trends push folks even more towards crypto in general, but there's different ways to play those trends. Yeah. Where are we with Bitcoin as money? I brought up the whole thing with El Salvador because as a means of payment, well, there it is. If they can get that through, that would be enormous.

But the other is as a potential store of value. I mean, fiat currencies will work on the blockchain. Any kind of currencies can work off the blockchain, but where are we with cryptocurrencies as money? In the developed world, the use case at the moment around Bitcoin is not as a payment mechanism. We do have financial services access. We're able to get credit cards lending. We're able to finance businesses, education, et cetera. So the notion that you may not be buying your cup of coffee with Bitcoin doesn't somehow equal that Bitcoin has somehow failed, right?

We are, however, seeing mass adoption in the developing world where there's either lack of financial services access or folks would rather own other stores of value or other transactional means than their local currency because it's being debased or inflated out of existence. So I think just where we are in the life cycle of this, it's important to realize that Bitcoin here in the developed world is much more being used as a store of value or a digital gold. Greg, same way with you, store of value rather than a means of payment. Yeah, for the moment, it remains to be seen how that works out over time. There are scaling solutions being applied to Bitcoin, but also to other cryptos like Ethereum. But, yeah, I think that Bitcoin's sort of coming into its own as a store of value, which kind of solves half of what it may be set out to solve. But the payments one remains outstanding, and that problem is still waiting to be solved by somebody.

You know, one of the problems, of course, people have had who don't want to invest in Bitcoin is what else is there invest in. We had this problem with ETFs in general because they go along with whatever is popular. The pot stocks had this problem years ago. There's nothing to buy. And then we had Coinbase come along. The Coinbase IPO was, I think, a pretty big event. It was. Barry Silbert, who works with you, runs Digital Currency Group. You're affiliated with him. Said it would result in the repricing of many companies in the space and would accelerate M&A. I wonder, has it fulfilled that kind of promise? I mean, the reference price was 250. It's 230 right now, I notice.

I mean, I know reference prices don't necessarily mean a lot, but it has been on a slowly downward trajectory since then. It's too early to see some of that play out. I think Barry's spot on that we will see increased M&A activity. The Coinbase IPO was a watershed moment for the industry, something that we've all been really excited about. And it also gives investors the opportunity for the first time to actually participate in value creation of a company that's actually building the rails or the picks and shovels of the industry, as opposed to historically only being able to invest in crypto itself. So I do think it is a new opportunity for a lot of investors, and it will cause other companies to come to the public markets as well from the broadly defined digital currency realm. And Greg, does it mean anything just to repeat the question that the reference price was 250 on Coinbase? It's now 230, essentially. No, I don't read anything whatsoever into that. I think that it's probably likely trading in line with the price of Bitcoin generally.

but I think Coinbase has a huge future ahead of it. Obviously, a big splash in their IPO or whatever we call it, direct offering. But more to come. I agree with Michael. So you think one year from now, are you in the prediction business? Want to guess where Bitcoin is going to be one year from now? I know people ask this question. I'm sorry.

I know none of you guys like to deal with that question. But where are we going to be one year from now? I have to say, from my view of the world, I am as encouraged as I've ever been. by who's participating in the ecosystem and the extent to which they're participating in the asset class. And so what that ultimately means for the price, you know, remains to be seen. But I think the institutionalization of this asset class has arrived and it's here to stay. You think it'll be higher than a year from now? I think it's tough to predict.

I mean, we've seen crypto go through quite a few series of bubbles and bursts over time. And each time the industry gets challenged, prices get challenged, it comes back more resilient than ever. So your guess is as good as mine. Greg, final word from you. We think it's going to be higher, my friend. It is still in a bull market, in my view. It's range-bound here. I would say it breaks decisively upward through $40,000.

Then it's going to keep going. If it breaks to the downside, we could be in for some trouble. My view is that it's bullish. But we take the mid-to-long-term view anyway. So this represents a good buying opportunity in my book. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is our Markets 102 portion

of the podcast. We're on the floor of the New York Stock Exchange today. We'll be continuing the conversation with Michael Sun and Shine from Grays to Gale Investments. And Michael, let me bring up just a few questions that I get all the time from the viewers. Objections or concerns about Bitcoin and cryptocurrency.

The first is just the tax situation. It's a damn nightmare. I mean, people keep saying, is there anything that you can do? And, of course, if you were to use Bitcoin to buy an Apple computer right, Now, you'd have to calculate, I think, the value of the Bitcoin at the time of the transaction and then pay capital gains on it. It's a bit of a mess.

Is there any hope for simplifying the tax structure? I think that the IRS, and again, it's a little bit of a patchwork between what you see here in the U.S. versus what you may see overseas, but here in the U.S., the IRS has clarified that Bitcoin is property, so it does get that long and short-term capital gains treatment. Now, that being said, we are not really seeing in the developed world like here in the U.S., people using Bitcoin as a transactional mean, actually using it to buy goods and services. That being said, those who do decide to use it for goods and services, there are some phenomenal tools that are being developed akin to what you may see for stocks or bonds or investment

accounts where your actual tax lot reporting is actually being captured in a way that can better create the infrastructure you need to be able to accurately file your tax returns. But I think over time, you will see regulatory agencies like the IRS continue to revisit the tax treatment of crypto and other assets. Yeah, it's a tough one. The other question I get is really what's unique about Bitcoin in general? I mean, a digital token could easily be tethered to a blockchain. We've got hundreds of them already. There's nothing really unique about Bitcoin's underlying tether to the blockchain, essentially.

So this is a question I get to me, but why Bitcoin was first in, so why is, Why am I going to invest in Bitcoin when there are hundreds of others? What's the demonstrated high use, the outperformance of Bitcoin versus others? So you're right that there's nothing unique about Bitcoin being tied to a blockchain because there's hundreds of currencies or digital assets that do the same. But where you're wrong is that Bitcoin is an open source protocol made up of millions of users around the world who've put their trust and faith in the Bitcoin ecosystem. itself. And so because it's open source as other coins or other protocols get developed,

they may try to reveal gaping holes or flaws in the Bitcoin protocol. And over time, Bitcoin has and will integrate some of those new features and attributes that Bitcoin can continue to gain strength and continue to out-compete other assets that may be out there. And so a lot of people, to your point, may worry that Bitcoin may be the MySpace to the eventual Facebook or any other analogy like that. But because it's open source nature, because of the properties that it has, because of the user base that has put their faith in it, Bitcoin has remained very resilient and has remained king as the largest digital currency out there. But you say open source, except it's some magic wand, you can create other open source

cryptocurrencies. You certainly could, and there are other open source cryptocurrencies. However, there are billions now, billions and billions of dollars of switching costs from Bitcoin to that next open source cryptocurrency, right? And so there would have to be some economic incentive and other attributes that that other currency would have in order to get folks to think about dropping Bitcoin for whatever that next thing may be. Yeah, it's a good point.

The other question I get is it really limited. I know that's supposed to be 21 million Bitcoins. There's, what, 18 million or so that have been mined so far? What would prevent the programmers from suddenly deciding they wanted to do more? There's been forks already. I mean, is it really limited? It is.

So, again, open source protocol, anybody can go and take a look at the Bitcoin source code right on the internet from any connected device, and they will see that it is hard-coded at $21 million. And again, while Bitcoin has and does implement changes, certain attributes like the $21 million cap or its divisibility out to eight decimal places, certain attributes like that, I would be hard-pressed to believe would be able to change in the future. But what you do see when changes do occur, and if that type of change were to be proposed, you would see a need to have a majority of the network download the newest software client,

almost as a vote for yes to whatever that change may be. But those kind of core attributes, I don't see those changing anytime soon. Well, that could create a debate about whether they wanted somebody, you could have a fork or somebody splits off. Yeah, that's a possibility. The other is the charges. It's not cheap here. I think you charge 2% right to get in? We charge 2% on the Grayscale Bitcoin Trust.

Yeah. Is there any way that would come down in the future as this goes up or becomes more widely used? We are committed to lowering the management fees on this product, certainly when it becomes an ETF. As I shared, you know, we've been working with the SEC since 2016 to convert GBT into an ETF. And while the market continues to mature, we obviously still have a little bit of a gap to fill as an industry in order to get regulators comfortable. Yeah, it's, you know, the ETF business has driven down cost of being a mutual fund industry. I think the average now, the average ETF is probably 20 basis points. It might be 30, but you can buy three basis points for the S&P 500.

So 200 basis points sur isn't cheap here for Bitcoin, even when you have, what do you have, 240, percent in the last year or something like that. $24 billion in assets under management? Yeah, but I think the important thing to remember is that Bitcoin still largely exists outside of the traditional financial system. And it's access products like GBT that are letting investors participate in Bitcoin in the same manner that they participate in stocks, bonds, and other instruments that they have in their brokerage account.

And so there aren't quite the same frictions that you might have around accessing Bitcoin as you may accessing a publicly traded company, and thus it's not really an Apple to apples comparison in terms of fees or the technological know-how it might take for an investor to determine where to buy trade, stores, say, keep Bitcoin directly. Yeah, it's certainly an interesting moment here. I can't quite figure out whether there's some kind of inflection point that's been happening this year, or it's all related to a certain extent to the mean craze that's going on. certainly more acceptance of a Bitcoin. And I think that's pretty obvious to me as a guy who's

been sitting here for 30 years watching the stock market here. That's it. Michael, thank you very much for joining us. Michael Sonn and Shy is the CEO of Grayscale Investments, which runs the Grayscale Bitcoin Trust. Michael, thank you for joining us. Thank you. That's it for today. I'm Bob Vazani. Thank you for listening. And make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETF Edge, CNBC. believes new innovations create new opportunities. Here's the greater possibilities together. Learn more at Invesco.com slash QQQ.

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