ETF Edge - Spot Bitcoin ETFs’ had a remarkable first year. And, now… 1/13/25

Episode Date: January 13, 2025

It’s hard to believe Spot Bitcoin ETFs are only now turning 1 year old. Will 2025 witness more maturity… or a case of the “terrible twos”?           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 Invesco QQQ, proud provider of access to innovation for the last 25 years. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchanged, traded 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. 2024 was a remarkable first year for Spot Bitcoin ETFs. What new innovation should investors expect in 2020? Here is my conversation with Samara Cohen, Chief Investment Officer of the

ETF and Index Investments Business for BlackRock. She also runs the largest Bitcoin ETF and Mike Akins from ETF action. Samara, from almost nothing to what, over $100 billion in assets, Ibit has half of those. Congratulations. How do you explain the success? Is it just retail investors, a great up year with the price of Bitcoin? Is it the ETF wrapper? I mean, explain how...

It's all of those things combined, Bob. It is both interest in Bitcoin and then confidence in the ETP wrapper, which came together in 2024 where there was a bridge between the two worlds. Now there are kind of three broad investor bases, individual investors, wealth advisors, and institutions. To your point, individual investors were really the driving investor base in 2024. But also there were a lot of crypto-native investors that preferred the ETP. wrapper and simply swapped wrappers for their existing Bitcoin investment. So it was both of those

things that came together for all of that. Mike, do you agree with that? I mean, it seems like the ETF wrapper, I know I'm an ETF guy, but it certainly attracted a new set of investors. Why is that and give us your take on why this product was so spectacularly successful? Yeah, I mean, I think the ETF wrapper is still undefeated when it comes to terms of getting access to liquid asset classes is an efficient wrapper and a meaningful way to trade it. So just, you know, if you ask me if I'm going to invest in Bitcoin, and I might do it on an exchange like Coinbase or that's got, you know, somewhat oversight, but not a lot.

Or if I do it in a hard wallet or do it through a firm like BlackRock or Fidelity, I'm going to pick Black Rock and Fidelity every day of the week and twice on Sunday. So I think the wrapper is a big part of this component. There's clearly demand for this asset class or these types, of digital investments, but the ETF wrapper provides a whole new level of security to that. In terms of where the demand's coming from, I mean, I think SMARA hit it. You know, if you look at the ownership of the data that we currently have as of 930, a lot of it is being driven by the retail market because we can't trace the ownership back

to 13F filings. And what I mean by that is 60% of all ETF assets can be traced back to 13F filings here in the U.S. only about 25% of the cryptocurrency can be traced back. And a lot of that is through Ibit, which is the BlackRock product. So of that, most of it is hedge funds, not investment advisor. So clearly the demand currently is hedge fund driven and from the retail side of the coin. Let's talk about, let's spin this ahead tomorrow.

Let's talk about new products for 2025. 2024 was the year of the spot. Bitcoin ETS. I keep calling 2025 story maybe Bitcoin plus ETFs. That is, we're hearing about ETFs that might combine with Bitcoin with active management or with leverage or with options, even downside protection. Your take on this, is this good news? It seems to be getting more complicated at this point, but is that the natural evolution

of the product? Innovation and complexity always go hand in hand. I think what's critically important to investors right now is portfolio diversification, Because recall, 22 was a scary year for investors where you had historically bonds and equities both going down together. 2023 saw rising rates and you were able to be defensively positioned in 2023. But now as investors look to re-risk, they want to have a diversified portfolio and think in addition to the traditional 60-40 kind of equity bond positioning, what might add some ballast to their portfolios. And that's where you start to see these buffered ETFs that provide limited downside.

you know, certainly crypto ets, new investors looking at incorporating gold ETFs into their, you know, so I would kind of first frame innovation in that category. So this is part of a larger trend. You're putting Bitcoin's in a larger trend of people looking to diversify, in some cases looking to provide downside protection like we've seen in people buying buffered S&P products, for example. So you're seeing there's a larger thing going on here. Particularly given the concentration that we've seen in U.S. markets globally and even

within U.S. markets, investors looking for assets that don't have the same drivers of return. Mike, it does seem, I'm picking up on this trend. It seems like the ETF industry does want to broaden things out a lot. Some say make it more complicated. I noted last week Calamos announced that it will launch a structured protection ETF to give investors a way to capture some of Bitcoin's upside with downside protection. So things are getting definitely broader or more complicated at this point. Is this good news or bad news for the industry?

Well, I suppose a little bit of both. All good things come with a little bit of bad things. I worry a little bit. If you break down the market last year, you think about kind of two areas that really exploded in terms of product growth. You saw speculative assets or very risk on assets explode. A lot of that being driven by the retail. And when I say that, I include crypto in that space.

I do think the majority of people that are investing in crypto right now, the retail side are doing it because they think they're going to get really good returns. And that is really the sole reason they're doing it. And you can link into that the single stock ETFs, right? We've got now $27 billion in single stock ETFs broken in across mostly leveraged inverse, but also synthetic incomes. All of these single stock names are across technology names, more volatile names, folks that are looking to make a very aggressive play into the market.

And then the flip side is you have the, what I would say, risk off side of the explosion of the market, which is more of the synthetic income, broad-based synthetic income, the explosion in buffer ETFs that we've seen, both in terms of number of products and the AUM following them. So it's really kind of interesting dynamic where you've got kind of the gamification of the which I don't necessarily think that's a good thing long term and then you have the I guess more maturing of the ETF market where you're seeing a lot of products that have been around in mutual fund format for a long time but now becoming available in the ETF wrapper. Yeah the it's definitely gotten a lot more complicated you use the word gamification I'm not

sure I would use exactly that word but it's certainly a little bit it's part of the maturity process right The increasing complexity is a characterization of markets, right? You tend to offer simpler products, like a spot Bitcoin ETF. Then you start offering options. Now you can even offer some downside protection. The way you're characterizing this is a normal situation. It doesn't mean people should necessarily buy any of these products, but it's a normal trend in the financial markets, right?

That's right. And I think a very important characteristic to keep in mind with today's markets is that the fastest growing sector, really, is a newer sector of individual investors. self-directed investors. And that changes markets. Self-directed investors, you know, want more bang for their buck

and will be more interested in, you know, a derivatives-embedded product. And so that is a characteristic of innovation. They're more interested in options. That's part of the explanation of the growth in options, growth in short-dated options. And so as markets look to embrace those new investors, they become more complex because they have more products

for more investors. types. Mike, is this curmudgeon here. Maybe what you need to do is explain to people how difficult it is to make money in the options business. It's the dealers that make the money. Just like in sports betting. And maybe people like you need to do in education. But I agree with Samara. I mean, it's a very natural part of the evolution of financial products. Go ahead, Mike. I was going to say, I mean, I think, you know, if you think about an asset manager's job, you know, there is deliver product, good, clean, well-protected.

protected rail design product to their audience, right? And I think the industry is doing an incredible job of that. Now, the people that are using those products with the democratization and the less barriers to entry into some of these strategies, that potentially is going to have some downfalls when you're talking about that complicated nature. I mean, some of these single stock ETFs that have been filed recently, they haven't been listed, but a few of them in the quantum space a couple weeks back had bigger than 50% drawdowns in one day. If you had a 2x leverage on those types of products on those days, they would have been kaput, right? I mean, 2x of 50%. You basically would have gone away.

So I think people need to understand that there's a large level of risk that comes with leverage and inverse and we're seeing an explosion in that space. I mean, crypto as well, right? Crypto's already a volatile space. I think there's like $7 billion in leveraged inverse crypto products at this point and the market as a whole has like an 11 to one ratio on an ATF market of leveraged products to inverse products, which is the highest I've ever seen it. Yeah, we have expressed these concerns before that there could be even systemic risks associated with us. We've actually do some real damage to the underlying assets in the case of too much leverage. But let's move on here. Samara, I want to talk to you about what we can expect from the Trump administration on

on policy in 2025. Does BlackRock have any thoughts on Trump, Congress, Bitcoin, 2025? Yeah, look, we've been talking about innovation, and I think that is the story going forward. And I'm really excited and optimistic around the opportunity to do what we do really well in US markets, which is support innovation and combine it with effective and smart investor guardrails.

So going back to Mike's point, I don't disagree, you know, generally with what he said, absolutely education is critically important so investors know what they're getting, but we want them to have the broadest choices possible. And I'd like remind us, one of the really interesting pieces of data that came out of that Q1, 2021 spike that we saw

in retail participation, is a lot of those investors who kind of came to the market for leverage and meme stocks stayed because they moved into index and ETP products. So sometimes that journey goes from saver to greater to investor and you bring investors in, they learn more, they take advantage of what's there for education, they get some hands-on experience, and they become long-term investors. The key and the hope here is nothing blows up in between and they throw up their hands

and say, I don't want to, I just lost all my money, I don't want to come back and we want to keep them long-term. So young people are less risk-averse than older people, by definition, they're not so worried about taking those kinds of risks, but as Mike said, there could be a serious downside here if we have a down to. Education and guardrails together are required to make sure you maintain confidence in the markets. Just on the just on the Trump administration and Congress, is there any thoughts here about what what if any kind of legislation? Are we going to get better clarity? Do you have any confidence we will? Absolutely. But let's recall digital assets are really at this point feel like a

bipartisan issue. I think there will be progress made on you know, Fit 21. There will be progress made on stable coins, there will be progress made just on definitions and taxonomy. And most importantly, I think we will increasingly create more clarity for traditional finance participants to find the place in digital assets that make sense for their businesses, which really grows the ecosystem for investors. So I think all of those things will happen. Mike, your take on any legislation or anything out of the Trump administration? I mean, there was talk to Trump administration might consider establishing a strategic Bitcoin reserve, kind of like parallel gold,

in which Bitcoin would be secured as a financial hedge from the U.S. dollar like gold is right now. Thoughts on this? I think there'll be less roadblocks, right? I think there'll be less regulations with the Trump administration trying to slow digital assets. I think as far as a tailwind from a terms of a strategic asset or things like that, I just don't think that government moves that quickly. I don't think

that's something that will make its way into the decision process, certainly not in 2025. There may be a lot of discussions about it to see something officially happen, but I even am very skeptical that happens ever. I think there's a weird dynamic playing out with use cases of these digital products, right? There's no denying the underlying technology of tokenization and what it can do, for a number of different industries, including finance, breaking down, I know, barriers to entry, creating more efficiencies, all of really good things that technology has been doing across the board. But then there's that kind of, it backs into this idea of, you know, decentralization, which is, you know, a naive way to think about finance, in my opinion.

But it kind of backs into each other and really doesn't make sense when you try to put the two together in terms of an investment case for digital assets as a currency, if you will. So I think we're going to have a lot of discussion about it. And I think that obviously Congress and the Trump administration is clearly pro. And I think Congress is very interested in talking about it. I'm not sure that they're ready to leap in and be a tailwind to this space anytime soon. Okay. I'm going to just move on here and talk about flows for 2025.

A lot of the buyers still seem to be retail and hedge funds, but getting institutions more interest. It seems to be the key to increasing assets under management. Talk about that. What does BlackRock anticipate? No, that's right. And as Mike said, hedge funds have been the largest part of the institutional category. And part of that is that there's just less plumbing involved for a hedge fund to participate in a new asset class with institutions. There is, you know, new investment guidelines, board approvals, and most importantly, really kind of the long-term risk analytics and work being done to look at portfolio interactions to figure out, like, how does Bitcoin play in my investment strategy? So unquestionably, and we probably knew this a year ago, institutions will have a much

longer tailwind. And of course, what's also going to be important is that this is a relatively young asset class with a meaningful trading history that's still 10 years old. Like Bitcoin started trading in its first transaction was in you know 2008 well the paper came out in 2008 but there wasn't really any transaction happening on the network until 2010 so you know this is this is an asset class around which people have to do work and incorporate into their risk systems that will be the longer term pace of of institutional uptake I got to ask about the price of Bitcoin I know you're not a commentator on Bitcoin prices but it's been under some selling

pressure recently I think we're 15% off of the recent high and December what's any thought on what's causing that I know I had some people comment that we crossed the one-year mark that brings us into the long-term capital gains territory some people might decide to start taking some profits here some cited the government's decision they were going to sell what 69,000 Bitcoin's they just announced recently as a factor I don't know any thoughts on what's causing some of the week yeah well number one let's remember Bitcoin is a risky asset so 15% in the context of Bitcoin is not an enormous move

if investors should expect volatility in Bitcoin as an asset. And that's kind of a prerequisite to determining that it's a place in which you want to participate. So certainly there was a big run up to the end of the year. So for the reasons that you said, it makes sense that we would have a pullback. But in the long term, the price of Bitcoin is really going to be determined by the level and pace of adoption.

And that is something that, again, will unfold over the long term. Mike, is it fair to talk about gold ETFs as a parallel to Bitcoin ETF? So the Bitcoin bulls are saying, this is what happened with gold ETFs, Bob. Gold ETFs help popularize a safe and easy way to go and own gold. Instead of you have to have gold bars and you lose the gold. You can't find them. Now you have a safe place. That's going to be true for ETFs.

That's helping drive broader ownership of ETFs. Is there a parallel there with gold ETFs? I think that's a fair statement to say that from an access perspective, right? So if you just keep it on the concept of accessing gold, the ETF made that much easier. It made it much easier to do in context of a portfolio. The same thing is happening to the crypto space with Ibit, with that BTC, with the other Bitcoin ETFs that are out there,

it is creating a more meaningful way to access. And really, if it plays out, a much more meaningful way for investment advisors, financial advisors to allocate for their clients and control it in the context of an overall portfolio, right? Nobody was having, you know, loads of gold bars delivered to their branches at Merrill Lynch or any of these offices. But when the gold ETF came around, it created it as an asset class. In terms of price, just to hop on that just one second, I mean, I think, The only story is supply and demand, right? So if the story of Bitcoin continues to play out and people buy into the narrative of a store of value,

there is more demand than there is supply. The price is going to go up. And that's really the only way you can possibly price this asset. I think the real risk and the interesting part of this will play out is right now, it is a very risky asset. It trades at a much closer correlation and a higher beta to. something like NVIDIA than it does to any other commodity that trades with some sort of rationale to the economy. And where this will get interesting is price discovery in the sense

that if NVIDIA were to drop 50% today, you know, there's a lot of analysts out there that can turn around and tell you exactly what that means from evaluation multiples to its underlying business. That doesn't exist in this space. It's purely supply and demand. And I think that is something that's going to be a challenge for this entire idea of investing in the crypto tokens. But that's true of gold too, right? This is the argument. They always said, you know, there's nothing behind what's the fundamentals. Well, there is a use case for gold. It does have jewelry, for example, industrial uses, but this, you know, the argument that there isn't anything really behind Bitcoin, it's a belief system and a hope for a store of value. He's right. There's no

fundamentals, but this is true of collectibles. I collect rock posters from the 60s, for example. What does that rock poster work? It doesn't throw off any income, doesn't do anything. It sits on my wall. And it looks worth whatever anybody will pay me if I try to sell it. So in a sense, there's a belief system around almost any collectible. It's true for Bitcoin. It's true for gold.

I think one of the differences here is that Bitcoin may reach a state of maturity where it behaves much more, where investors really do look at it, much more similarly than they look at as they look at gold. Whereas right now, because there's this uncertainty and potential trajectory, around adoption, there's a bit of a difference right now in terms of how investors will look at Bitcoin versus gold. So in thinking about portfolio implications, I think there is phase A during the initial adoption phase of Bitcoin and then you know phase B how Bitcoin behaves when it's more mature and we've reached a target state of adoption. I know you're not in

charge of product development, but what can we expect from BlackRock in 2025 in this space? We're looking across that whole suite of alternatives that we talked about in order to provide a really broad group of investors with what they need for their portfolios. So, you know, something we talked about earlier, and Mike mentioned, is a concentration in U.S. stocks. And we talked about, you know, dynamics with individual investors who are coming to market. A lot of investors want to participate in the market with stocks that they know, that they know have driven, largely driven returns in the market. market in recent years. So, you know, we have a top 20 product. Top T. Top T. Yes. You just launched that, right? It's the top 20 S&P 500 stocks. How's it doing? It's doing well. It's new and it's it's to your point about complexity. This is an

ETF that is very easily understood with names that are familiar to investors and there are investors doing that's very important. There's also investors who are embracing the complexity of buffered ETFs that allow them to come back into the market, but limit their downsides. And particularly investors who are largely in cash, but who have longer time horizons and know they need some sort of equitization, that increased complexity of the derivatives product is important for them.

Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the market's 102 portion of the podcast. Mike Aiken's ETF Action Founding Partner continues, with us now. Mike, want to just broaden out the discussion here. We had a great talk with Samara Cohen about Bitcoin ETFs and all the new products

we're gonna see from Bitcoin derivatives in 2025. Let's talk about what else we might see. I had Will Rind on last week. He runs some of the biggest single stock ETFs out there. These are all leveraged. You can get Nvidia two times leveraged and all sorts of other products that are out there. like Tesla leverage these days.

It seems like there's two kinds of ETFs in the world. The eti-fication of the world is going on. Most of the money is going into plain vanilla index S&P 500-type funds, but there's this explosion in alternative products that are out there, largely tied to derivatives, and leverage an inverse, like the single-stock ETFs. Is this trend good, bad, or is it just normal evolution of financial markets? Handicap this for us?

Yeah, I think it's a little bit of both, right? I mean, generally, anytime you're going to get advancements in an area and growth in an area, there's going to be a little bit of both good and bad. And generally speaking, ETFs have provided an incredible resource and tool to investors of all skill levels to get efficient access to markets. I think that we are, you use a great word, etification of the market is a little bit dangerous. I think sometimes people think that better, more easy access or easier access, to the market is a good thing always.

And sometimes barriers to entry is a feature, not a bug, in the sense that you don't truly, you start offering up double leverage products on something like micro strategy as an example, right? Something that has incredible volatility, now you're going to add 2X exposure to it. I've had a lot of folks that bought MSTX as an example, and I don't know which issuer does that one,

but it gave a $14.40 cent distribution on 12. So if I bought that single stock ETF on 1228, I got a $14.40. Distribution off my nav because they had to pay out all that crazy gains that was done through that leverage in that derivative income at the end of the year, even though I experienced none of it. I have a massive tax bill. So if you start adding more and more derivative around these strategies, there are complexities that people just don't understand. And a lot of times they're going to be. Yeah, is a massive tax bill a characteristic necessarily of leverage DTS? Well, it depends on if it goes up or down, right?

So it depends on how much income is generated through those derivatives. But you have to know these things, right? So anybody should that should have been announced, and I'm sure it was, and they should have seen that coming. But that's not how people are buying these products, right? They're out there and they're like, oh, I know, micro strategy. I really want a piece of that. I want Michael Saylor's company. I want 2X exposure and they saw it on, you know, X or some social media posts and they buy it.

And then they walked right into a train wreck. They're on the hook for that. So if they put, you know, a $20 NAV, or I think it was the time, it was a $37 NAV and it went down to 23. So all of that is taxable at their expense. And I think that's something that people need to understand about these products. They're not designed to be held. And the flip side is you're getting a lot of good, right? Samar did a great job on the earlier component talking about, hey, there is a demand for some

equitization of the market, but for an older generation who can't afford the risk drawdowns and stuff, and these buffer ETFs are providing that. So as long as you understand what you're giving up for protection, there's a really good side of this market too. But I think we need to be careful about what we're doing in terms of some of the individual names. I mean, where does it stop? Are we going to go?

Are we going to have the Russell 1,000? single stock ETFs in a couple of years. So you'd have a trade every stock. You can get a leverage and inverse Russell. Yeah, you can get a leverage 1,000 of Russell 1,000. And we have leveraged in every single name. But I meant every single name in the Russell 1000. Well, the answer is it depends upon the demand, right?

We had a Pfizer leveraged, uh, ETF single stock. It didn't go anywhere, right? It's, I recall because nobody wanted it. Right. So it's a function of demand. It is, but if you, with the ETSs, If you have them out there, you never know when the demand is going to happen, right? The demand happens when there's some sort of news cycle that goes around the name of the stock.

And these things are, I think a lot of these are lying and waiting with the filings so that they can be ready to go more quickly versus having to wait that approval period. Any other trends that you see in 2025? And we talked about, obviously, if Bitcoin keeps going up, there'll be more interest, if it keeps going up. Leverage and inverse ETFs are definitely a trend. anything that's going to come out of nowhere. I know it's always hard to figure out what the new hot product is going to be before it happens

because it doesn't, it's not obvious, but is there something we're not thinking about? Well, one area I like, I think it's happening already. Bond blocks is a great example. They're leading the effort in this space. But you're seeing a breaking down of the fixed income market, similar to what we've seen in the equity markets. And I think, you know, if you really just go back to where ETS started and go back to how they started as an efficient access tool into the markets. I think we're starting to see a lot of that happen in the bond market,

just as we did at the equity markets, where you can break down narrower portions of that fixed income market. So I expect that to continue. What is bond blocks doing that you like? What product are they offering that? Is it, it would be good for investors and why? It's more, so it's more tranches, right? So think about breaking down the S&P 500 sectors with the select sector spiders,

right, XLK, XLY, XLV, they're doing that to the high yield bond market, right? They're breaking it down into tranches, right? You can get telecom and utilities. You can get discretionary staples. You can get tranches of that market. And I think that is, you know, at the heart where the ETF market becomes really efficient is as an access tool into the market in a very efficient way to help you implement your views on the market. Now, the flip side of that is you're getting to more of the buy and hold.

which is awesome, right? You're seeing T-Roe come to market, John Han come to market, these large legacy, large asset managers that are active shops that are embracing the ETF wrapper. And that's gonna continue to trend. And I think that's gonna,

when we have some serious market volatility, I think you're gonna really see that second leg up for active ETFs because they are diversifying away from over high pockets of the market and you'll see their performance due, better in those time periods when we, if we ever get another pullback in the market. Okay. Mike, thanks very much for joining us. Appreciate your thoughts as always. That's Mike Akins from ETF Action. And that does it for ETF Edge, the podcast. Thanks for listening.

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