ETF Edge - Spot Ether ETFs debut. Plus, the politics and positioning around cryptos 7/23/24

Episode Date: July 23, 2024

A slew of Spot Ethereum ETFs begin trading. How was the premier and what’s next for the digital “spot” market? Plus, as the election landscape rapidly changes, learn about the new politics and positioning around cryptos.   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. Investco Distributors, Inc. And welcome to EF Edge, your go-to place for everything, exchange, traded funds. I am your host, Bob Pisani. Nine Ethereum ETFs have become trading today. Will it be the hit that spot Bitcoin ETFs were when they launched seven months ago? Let's talk with Jan Vannek.

He's the CEO of Vaneck, which launched the Vanex Ethereum ETF this morning. David Mann runs ETF products and capital markets at Franklin Templeton. They also launched an Ethereum ETF today and Ben Johnson. My old buddy, he's the head of client solutions at Mooring Store, but he's really one of the ETF grandmasters in the field. So, Jan, let me start with you. Your ETF, the others are out. People always want to know.

Does it tracking Ether okay first day here? And do you think ETFs for Ether can be the hit-Spot-Bitcoin ETFs where seven months ago? No. I don't think they're going to be the same kind of hit. They are trading very well. They launched well. They weren't seated with as much money, but the spreads are tight. The volumes, our guests are about 10 to 20% of what we saw on Bitcoin in the first day.

So very much of a lower energy level for these funds. But initially, everything's tracking okay. Yes. Okay. Dave, your experience, it looks like everything's tracking fine with yours as well. But same question. Do you think is there any chance these spot Ethereums are going to be the hit the spot Bitcoin was? Yeah, we think there'll be a hit.

Whether they're going to get the same amount of assets is probably unlikely. I mean, if we used market cap of Bitcoin compared to market cap of Ethereum as sort of a proxy, maybe we're talking three to four X less. So if all those new funds, all the Bitcoin funds that launched in January had about 35, 36 billion over the first six months, then maybe these new ones have, you know, call it close to 10 billion, which isn't the same, but it's still pretty awesome. Yeah. And Ben, the same thoughts for you.

Same question, essentially. I think everyone was surprised, some pleasantly, about how the inflows that we had into spot Bitcoin ETFs, something, what, 17 billion under management, in inflows, rather, right now. What's your expectations here? Yeah, so I think what we've seen thus far today is proportionality. So volumes that are roughly proportional with, as David alluded to, the relative market cap of ether vis-à-vis Bitcoin. So clear there's healthy appetite, there's healthy volume, there's healthy demand there.

And I think what we're seeing is just ETFs once again doing their thing, the same thing they've been doing for the past 31 years, which is opening up access to new markets, new portions of the investment opportunity set for investors. And putting that in a package that is cost effective, it's convenient, and it's compatible with the way that more investors are building their portfolios these days. Yeah. Dave and, Jan, you can weigh in on this too. You launched, did you launch with zero fees until January 31st of next year?

Is that right on this? Did I get that right? Zero fees? Yeah, correct. Six-month waiver of zero months. managed to be correct. Right. So most of the others, including you, Jan, you have zero fees for at least six months. I think Jan has for the next year. And I know you guys all did this with the Bitcoin ETF basically cut the fees to essentially zero. This has got to be costing all you guys a lot of

money to run. So explain the rationale for this no fee structure. Yeah, sure. Maybe I'll start, John. Go ahead. You know, I think, you know, fee waivers have been in existence for a while. I think what's somewhat new here is at least at least in my experience within the industry is having so many identical exposures launching at the same time i think brought the you know the the fee conversation to the forefront in terms of differentiation you know for easy ET we'd love to you know talk about other things from a franklin templeton perspective in terms of our digital asset capabilities from differentiation but you know these are all going to provide the exposure to Ethereum. They should track the price of Ethereum. And so as investors are looking at

A to B to C to D, fees are going to be top of mind. And it wasn't surprised that so many issuers took the zero fee waiver. Is it just as simple, Yon, as this is a new asset class. We've got to attract new people. This is how you do it? You got fees or is it's something more going on? Well, it's because what the SEC decided to do, as was just discussed, is we were first to file of ETF issuers for a Bitcoin ETF, same for Ethereum, same for Salonah now. But the SEC and its wisdom decided to let everyone launch at the same time, which has a sense of fairness to it, but it meant that it's sort of a bloodbath for

ETF sponsors and we have to waive fees. I think how we try to differentiate ourselves is not going to be on the fees, but is our longer-term conversation with investors and pointing out, listen, Ethereum's got great, positive things about it because usage is growing at 70% a year, but it's got negative things because it's got in a price war a little bit with Solana, number one, and so it's losing market share. So you have to understand what's happening with the fundamentals for these blockchain software products to understand whether they belong in your portfolio or not, and that's what we're trying to do. Yeah, Ben, a lot of crypto enthusiasts are very excited about this because they say

Ethereum is very different technology than Bitcoin, which I happen to agree with. Bitcoin is a digital currency. Ethereum seems more of a technology play because the emphasis is on smart contracts and decentralized finance. And we can talk about what that means. But do you believe that argument? Is there really an important distinction here? And is that enough to attract new people to this as an investment and in using its technology?

Yeah, I think it's important to note that these are two fundamentally different underlying assets Bob. Bitcoin is finite. There's only ever going to be so many Bitcoin in circulation. So many think of it as a store of value, a form of effectively digital gold. Whereas Ethereum and the ether contract that sits on the Ethereum network is really more of an infrastructure play. It's something that really others are going to build all form of different things, all form of different smart contracts, to track shipments around the world to you know, validate real estate transactions, even to maybe rebuild large portions of the financial markets infrastructure. As we know it today, there's a lot of potential there. And ether,

by contrast, is infinite. It can grow to the dimensions of the use cases that ultimately people find for it. So understanding those fundamentals, understanding ultimately the investment thesis, if there is one, I think is essential. And this really brings, I think, investors back to basic. know what you own, know why you own it, and size your bets accordingly. Yeah, this is why, and the reason I'm excited about this is exactly because of the smart contracts and defies. This is the blockchain technology that really excites me,

the ability to reduce financial, produce friction in financial transactions, you can open a digital bank account, you can send money to your friends, you can borrow money, you can trade, you can theoretically buy real estate, you can theoretically do anything, you could use it to settle stock market,

trades even potentially. So it excites me a little bit. So Bitcoin has what, 1.3 trillion in assets right now? Ethereum is 400 billion, something like that. So I think, as Dave mentioned, Ethereum is one-third the size? But is that the right way to judge this technology? I'm getting a little wonky here. But when you invest in Ether ETFs, are you investing in just a cryptocurrency or are you investing in a technology involving smart contracts and defy and stable coins? Is that what are you getting when you invest? I think it's really important, as I said, like these are technologies that have to be used. So investors have to know how many people are using, whether it's a Bitcoin network

or the Ethereum blockchain to settle transactions, and then they have to earn money. So people look at the total, I'll call it market cap value, but we would say what revenue, what is Ethereum earning in terms of transactions? transaction fees. And over the last year it was about $3 billion. And as I said, its usage has been growing, but its transaction revenue is stalled because it had to do a price cut last year to compete against Solana. So people need to look at the sales, I'll call it the revenue or sales number, as well as the total market cap. Yeah. So Dave, for the moment, selling Ethereum as a new transaction platform seems

to be the main game. But the Ethereum enthusiasts, I think, have a very potent argument. The platform is at heart really a technology investment. That is fundamentally different than investing in Bitcoin. Is that what's going on here? I'm trying to figure out what other reasons other than I want to buy a crypto asset is there to make for investing

an Ethereum over Bitcoin, for example? No, I think that's right, Bob. You know, kind of working backwards, looking over the last six months, The initial conversation was sort of like, okay, how much crypto or digital assets should I have in my portfolio? What's the right allocation? Should I have one or two or three percent? But it was sort of this catch-all digital assets. And at the time from an EETF perspective, the only game in town was Bitcoin.

And now we have an Ethereum. And so there's two choices. And now, as Benyon both alluded to, we can now have better conversations about what's the difference between Bitcoin more of a store of value and Ethereum as the, you know, call it the protocol economy with all this. this interesting future of the internet and building smart contracts. So now we can actually have a conversation about cash flows and revenue that we aren't that different than other technology plays. If we look at some of our growth ETFs, equity ETFs, hey, why is our focused growth, overweight Nvidia and Microsoft compared to other tech companies?

Well, that's analysis and research, et cetera. And that's what we're going to start seeing here between Bitcoin and Ethereum. Yeah. Ben, the promise of Ethereum, I hear this from the enthusiasts all the time, and defiance, is that in theory, it could be a much cheaper and more efficient way to do business. So I can open a digital bank account, send money to my friend in London or Thailand, much cheaper than sending it through a traditional bank and giving a huge Vig to J.P. Morgan. And this is the promise. This is what we've been told.

Is that what is shaping up? Is there any indication so far that this really is a better and more efficient way to do financial transactions, for example? That's just one example of smart contracts, but you know what I mean. Yeah, no, Bob, I think the burden of proof is pretty high, right? And I think if you look no further than our own backyard in the ETS ecosystem these days, There aren't really that many more efficiencies that we could possibly eke out when we're living in an environment where you can own a portfolio of ETS that encapsulates virtually every investable security and asset in the planet for a handful of basis points. So, you know, the real gains, the real wins for an investor in a diversified ETF portfolio

by wholesale replforming this ecosystem into a new environment onto a new tech platform is really de minimis. the grand scheme of things. So I think the burden of proof is high. Now there are other sort of avenues, there are other industries where those gains might be greater for the end consumer, for the businesses that operate in those space. But when I think close to home, when I think specifically, at all of the gains that we've gotten within this ETF ecosystem over the course of the past three plus decades, most of the hard money has already been earned and ultimately is sitting in these investments, compounding to investors benefit as we speak right now in this very moment. Yeah, spoken like a true Boglehead, just like me. I'm a Jack Bogle disciple, folks.

So the same question for you. The promise here is reduce friction in financial transactions. I'm just talking about defy here, and there's many other uses, but is that promise real? Are we working in that direction? Does Ethereum deliver on the things that it's supposed to says it's delivering on? Listen, I would say it's not a solution in search of a problem. No. But I would agree that the ETHF ecosystem is pretty efficient, where what's inefficient and what you see the growth in use is payments. And the form of stable coins, which track the U.S. dollar,

is increasing. The volume of stable coins is approaching the volume on the Visa Payment Network, almost $10 trillion a year. Now, there's only $200 billion in assets, but the velocity is tremendous. So a lot of people are using. Does that increase stability in the system? Who's using it, right?

It's traders on crypto exchanges like Coinbase. Because if you want to trade Bitcoin from second to second or Ethereum, you can't go into the banking system to sell your transactions or weight plate for T plus one. You want to do that instantaneously. It's much more efficient use of your capital. So that's what's happening. And now people are using it for international payments as well. And it's been growing dramatically.

I think that is the breakout usage on the horizon for 24 and 25, stable coins. Okay. What about, I'm going to throw this out to all three of you, what about the politics of all of this? Former President Trump seems to be positioning himself as very pro-crypto. Biden and Gary Gensler at the SEC, maybe not so much. What does this sort of mean here? There's the politics of it. There's been a big backlash. This industry is really mad because the SEC declared war on it, used the enforcement mechanism, didn't set up any clear guidelines.

And for some reason, the Republicans have rushed to embrace it. And they've gotten a lot of support out of Silicon Valley. And they're using a lot of money in elections now to sway congressional races. Now, the Democrats are reacting, but only in half old. Ben, it is rather remarkable to see politics inject it. Is President, former President Trump coming to the Bitcoin? You will speaking on Saturday at Bitcoin Nashville. Bitcoin Nashville, this Saturday.

Ben, is that not remarkable? I mean, there's a very clear example. This must matter somehow a lot to him. Yeah, Bob, of all of the things that I could think of as being even remotely worthy of soaking up any amount of bandwidth in the political discourse right now, I would put this as probably if not the single silliest, maybe at least one of the silliest. we've got much bigger fish to fry in this moment, in my opinion. Apparently, the former president is great.

I don't know about that. I think, first of all, you're leveraging it to Silicon Valley, technology, venture capital, where J.D. Vance was for a while. And that community has a lot, is pro-innovation. And they think that if you have an anti-innovation present, that ripples through the economy into other sectors as well. Yeah. So, Dave, what's next?

Is this going to open the floodgates for other crypto ETFs? How are we reading this now? Well, it's funny to think through the regulations of all these vehicles that were, you know, these are 33-act products. So that's, you know, almost 100 years ago in terms of, you know, the regulations keeping track with these new technologies. You know, part one is, you know, we talked about at the start where, you know, we went through a lot of back and forth with the regulators. and they were, you know, asking right questions, how is this going to behave in terms of will the ETF do what it's supposed to do? And it's worked great. And, you know, we've got a few hours today for Ethereum, but everything looks great. No issues with the Bitcoin. So I think as

the comfort level with these new types of exposures, you know, Bitcoin and Ethereum is one, I'm hoping that that, okay, the ETAF vehicle has been battle tested. It works. And we're seeing that it does exactly in terms of tight spreads and tracking. Hopefully that will allow the next wave of digital assets to come down. We're excited about multi-coin opportunities, the next wave of coins if you go down the market cap spectrum. So hopefully the last six months for the Bitcoin ETFs

and trading so far is proof that it works. I don't want to get too long here, but there's a simple legal question here for this to proceed. Traditionally, you have to show that this is not a manipulated market, right? That was a big legal test to get approval for these in the past, wasn't it? We had some demonstration. Yes, that's what the SEC said. Well, all right.

I'm only going by what the SEC says. And the other thing is, in all these commodities to do that, you usually had to have a regulated futures market, right? So right now, you don't have any of that in these other ones, right? So if you had the current regime, you would need to have a regulated futures market. I'm just leading you down a path here. Isn't that correct? The core issue is are they commodities or are they securities, right? And that's why Congress has stepped in and they said, enough dragging your feet here, SEC.

We're just under the Fit 21 proposal that passed the House. We're just going to give all the jurisdiction to the CFTC and provide some clarity. So there's a lot of anger on Capitol Hill about the inability just to say what is it. It's hard. I will grant you that because all these tokens, some are decentralized. Some are more centralized. And so it's, well, that was another issue. There's a lot of gray.

There's a lot of gray, but I think the industry has been asking for clarity on the rules, so they know what to do. Ben, can you shed any light on this? He mentioned a very important point. Another test, decentralization, not being manipulated, but if we have a regime change, maybe all that'll change. I'm talking about whether this is opening the door to other crypto ETS. Yeah, I mean, I think what we have at this point, Bob, is a blueprint for what's worked. what's worked ultimately for for Bitcoin and what's worked for Ethereum. And let's not forget that ultimately what forced the issue was the SEC was effectively sued for rulings that were deemed arbitrary and

capricious for having allowed futures-based Bitcoin ETFs out of the barn and then trying to subsequently shut the door. So I think we've got a roadmap and I think one of the all-important and milestones on that roadmap is whether or not, there's some other regulated market that we can point to in the cases, both Bitcoin and Ethereum futures, that was indeed the case. So what's the next frontier?

Difficult to say in terms of the underlying assets, but I think what we will see and what we've already seen with Bitcoin products is iteration. So new strategies like trend following strategies, options-based ETFs, different just sort of permutations, iterations, iterations, on that underlying asset on that underlying theme, I think is all but certain. Yeah.

Well, let me follow up on that. That's a great point. One thing we know for sure, Ben, is that Bitcoin ETFs trade an awful lot. Do you expect that to same with Ethereum ETFs? And I presume you brought this up. I presume options are next on this whole game here. That's where this is going to go, right? Yeah, absolutely, Bob.

So I think what putting a Bitcoin in an ETF is, has done is it's served up trades and spades. So all of a sudden you have this very convenient exchange list instrument that you can do carry trades with. When and if we have options on these ETFs, there will be options trades that will manifest. So it creates an entire ecosystem of opportunities to make money in ways other than, you know,

totaling the underlying assets. And we've seen that really manifest in the massive volumes that we've seen over the first six plus months that the Bitcoin ETFs have been on the market. Have you filed for futures on this? Can you do that right now? Well, there were, we have an Ethereum futures ETF already, right?

So we need to move beyond that. Yeah, I mean options. Excuse me, I meant options. No, as I think by mentioned, there's no options on any Bitcoin ETS. So it's something that will, there's definitely market demand for it. It just, it hasn't come, it hasn't been approved by the regulators. Yeah, you did file for a Solano.

Yes. Yeah, you were the first one. You always are, right? Yes. We try to, yes. But listen, we have 11 token products in Europe. So the US is so far behind, you know, really where the rest of the world is. I mean, they have retail exchanges in Europe that have hundreds of tokens listed under a regulatory regime.

So we're just, you know, I know the US is important in the deepest pockets, but we're steps behind. I want to ask about one other little part of this whole thing. Ethereum has moved to proof of stake rather than proof of work, which is what Bitcoin still uses. Without getting too wonky, can you explain what the difference is and what does that mean for Ethereum investors? What does it mean to move to proof of your state? If you lock up some of your Ethereum, you can basically get paid for kind of contributing that to the network. So that's what staking rewards are. We get staking rewards on our Ethereum product in Europe.

We are not a lot. The SEC has banned that in the United States. For ETFs. ETS. And you can't, you know, you can't. Is that because it sounds like a security when you get paid like that? That's probably why, right? Yes. But I mean, I'm not sure it's a good legal argument, but it doesn't matter. They're suing. They've sued all, the SEC has sued all the exchanges. So you can't even stake your Ethereum on Coinbase. Yeah. It's, it's a, that seems to be a difficult situation.

But I understand why. If their argument is it's a, it's a security. So there you go. What's the harm? Dave, you want to weigh in on this? Is there a harm here by them? Go ahead. I mean, we originally had filed for staking, as, as Jan said, it's not allowed. I do think that the, you know, the Ethereum being staked is going to be an input into any opinion of the price of Ethereum.

you know, as all of a sudden, if all of a sudden the amount of truly traded Ethereum is locked up, that will be a consideration. But no, that's part of the proof of stake network. And for ETS right now, we can't do that. All right. Guys, fascinating conversation, appreciate it. Bottom line, folks, is day one, Ethereum ETFs appear to be successful. Whether it's as successful as Bitcoin ETFs, we don't know. But again, it's a completely different technology than Bitcoin. I did a story on this today for my TraderTalk.tradetalk.cbc.com. urge you to go take a look.

I think it's an interesting, worthwhile technology, whether or not you believe in cryptocurrencies or you think it's nonsense. The technology is very interesting. That does it, folks, for this week's ETF Edge. My thanks to Jan, Ben, and David. We asked Ben to stick around and give us his thoughts on trends in ETFs for the rest of the year, which has the potential to be a real. record year for inflows. We could have an all-time record year for

ETFs folks, $10 trillion assets under management. That's coming up on our ETF Edge podcast. And remember, you could see all of the shows on our website, etfedge.c.com. Everybody have a healthy, happy and safe trading week. How does InvestcoQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investco Distributors, Inc.