On The Brink with Castle Island - Weekly Roundup 01/05/24 (ETF looming, DoJ drops SBF charges, TNG DDY) (EP.495)

Episode Date: January 5, 2024

Matt and Nic return for another week of news and deals. In this episode:  Matrixport's bearish ETF take The DoJ drops campaign finance charges against SBF Goldman and JPM are authorized participants for the ETF Where will the fees settle out for the major Bitcoin ETFs Nic's vanity license plate story Do we still believe in tungsten Sponsor notes:  Coin Metrics State of the Network's 2024 Outlook In Coin Metrics State of the Network Issue 240, we offer our perspective on some of the biggest trends to watch in 2024 in the digital assets industry.

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of Conjecturee easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin. Welcome to On the Brink. I'm Matt Walsh.

And I'm Nick Carter. And this episode is brought to by Coin Metrics, and here is the Metrics Minute. For today's Metrics Minute, we're exploring key trends heading into 2024. Over 6 million Bitcoins or 30% of the total supply hasn't moved in five years. Only 30% of all Bitcoin was active on-chain in 2023. significant source of illiquidity. Ahead of the Ethereum Denkan, DENCAN, upgrade with the IP 4844,

the demand to transact on layer two roll-ups is rising with a 1.3 million ETH bridge to Arbitrum and 330-K-Eth bridge to optimism. The stablecoin market is witnessing a diversification with new stable coins like PYUSD, exceeding 250 million in supplies since its launch, interest-bearing stable coins are also gaining traction. As of right now, there's 29 million ETH staked on the beacon chain with Lido holding a 32% share.

This highlights ETH growing appeal as a productive asset bolstered by developments like the Layer 2 Bridge Blast with a billion currently in blast. That is your metrics minute. Good metrics minute. You know what I've been thinking about, so everyone's talking about the inflows that. will come to these Bitcoin spot ETF products. What are the corresponding outflows that no one is talking about from Bitcoin? So, you know, you have the Mount Gox coins going back. You have, you know, the U.S. government has, what, $8 billion worth of Bitcoin that they could theoretically auction off. One of my predictions in the last episode was that you'll see some legislation

to prohibit that this year. I think there's some momentum and some members of House that actually think that it's a good idea to not sell those. But what other sources of selling are there? And it comes to mind that we don't really have a good handle on what other countries have seized Bitcoin and are sitting on a lot of Bitcoin. So the idea being that they would, now that there's an ETF, they would transition their holdings into that? Or just that the price is going up, right? So if you have a situation where you have Bitcoin trading at all-time highs, are there governments that are saying, okay, well, we have three, four, five billion dollars

worth of seized Bitcoin that we took away from drug dealers or whatever, do they sell? And does that offset? I'm fudding the market here, if you can't tell. Yeah, that is, that sounds like fad. Well, I think the biggest outflows will be from GBDC itself. If it's not in that first round

of conversions, the GBDCAUM is 26 billion roughly. So, But how would that outflow? I mean, if it doesn't convert, they're not leaving. They're stuck in the box, right? Yeah, I mean, yeah.

So you'd see maybe the discount wide in. I don't think there would be spot selling on that. Well, on Polly Market, here's something interesting. The ETF approval by Jan 15 is only trading at 81 cents on the dollar. Isn't that strange? You know, the Matrixport report, um, might be factoring into that. So I suppose we can attribute some of the sell-off this week,

which I guess we kind of came back, but there was a report from Matrixport that said that these will not get approved. Yeah, that one I think was deconstructed as pretty flimsily sourced, surely thereafter, but certainly it coincided with a huge dump and like liquidity flush. hard to say what the cause was. It might have just been that the market was a bit off sides. But yeah, I mean, the most liquid prediction market here only thinks, you know, it's a four-fifths chance, which I'm pretty shocked by. I'm at 99% right now.

I am too. I think there's a decent chance that by the end of the day on Friday or by Monday, we're going to have some clarity on some of these S-1s and then on the back of that, maybe the 19B4s. Yeah, this time next week we'll know. It's getting close to our 500th episode. Our 500th episode might be a Bitcoin ETF celebration. Yeah, well, the 10th is next Wednesday. So as we go to record next week, we will know one way or the other, hopefully.

Another busy podcast week. So Ria sat down with Nitya Subramian from a capsule, company building cross-chain embedded wallet infrastructure. So that was a good episode. Well, light news week as well. Let's dive into the deals first. First one up is PowerPod. This is a shared EV charging network.

They raised a million dollars from water drip capital, future money group, Iotech, and others. Next up we have BRC20.com. Not surprisingly, they're an infrastructure provider for tokens, BRC20 tokens on Bitcoin. They raised $1.5 million from UTXO management and others. I'm not deep in this BRC20 thing, are you? Yeah, so it's kind of interesting. I mean, you know, BRC20s are tokens that exist on Bitcoin in inscriptions format,

but they're not like ERC20s and that they're interpretable by the protocol. The tokens are just bundles of JSON data and you need an out-X protocol interpretation and indexing layer. But they caught on very heavily in Asia in particular. There's one, I think Ordi is trading over a billion dollars in value. So the West kind of missed BRC20s. Like when people talk about inscriptions here, they're talking more about conventional NFTs, not just bundles of text. the east they're very popular. But they're all basically meme coins. There hasn't really been much utility, so to speak, thus far. People are very upset on, on X about ordinals. There is a

complete flame war. There has been for quite some time, and I am not participating in that, and I cannot say up to date on all of the drama that's going on there. Yeah, I mean, there are calls now to filter inscriptions transactions from the Bitcoin core node software but that wouldn't achieve anything I mean that would just mean that people would send the transactions to the miners directly out of band so it is a really weird situation where some hardcore bit corners are describing them to spam but there's no real way to eliminate that from protocol. But there still are concerted efforts actually to literally eliminate inscriptions at the protocol level. But I don't think they'll be successful in that. So the next one up is an entity

called cumulative encrypted storage system. It appears to be a protocol. They raised $8 million from HTX, Infinity Ventures, and others. And lastly, Hive Digital, their Bitcoin mining company raised 22 million. So not a huge deal week, but that's what you expect out of the holiday week. So we talked about it being a pretty light news week. We'll talk about the Bitcoin ETF, but let's talk about the FTX situation here. So the Friday before the new year, right at the end of the day, it came out that they are not pursuing campaign finance violation charges against SBF. So the second trial where we were hoping to get all this information about this bribe,

a Chinese CCP official, the role of Sam Shibuco and all this, whether or not he would be a witness, the role of Barbara Fried, the role of Joe Bankman, it appears that this is all just going away. And this really smells bad. Yeah, I was really scandalized by it. I mean, granted, the government has already succeeded in, you know, locking up SBF, presumably for decades. but there's an enormous, I would say, overwhelming public interest in the actual facts coming to light here. I mean, and apparently the campaign financing had something to do with the extradition from the Bahamas, that they didn't include that in the original charges. Is that right?

Yeah, so the deal with getting him out of the Bahamas was here is what we're charging him with. And the way it was structured was that, okay, well, that's what you're going to charge him with. You can't charge him with other stuff that you're not telling us about. And so it had to be a second trial for administrative purposes, really. But this is just the appearance of impropriety here is extraordinarily high. If you're burying something on the slowest newsday of the year right before the holiday on a Friday at like four. And it involves all these politicians that got money, involves high, high level Democratic donors that are involved with Elizabeth Warren, And, you know, Bankman Fried was one of the largest Biden donors, actually.

So just the appearance here is horrible. And the role of some of these principles, so Sam Trubuko was involved in this Chinese CCP thing. You know, who was the Chinese CCP official? What, how did that all come to pass? Who was involved in structuring it? There's so many open questions there that maybe we'll just never know the answer to. Yeah. And you're right.

Barbara Freed has a pretty central role in this, I think. And I always felt that both of the parents and the family from hell were underscrutinized, even though there were columns about them and things like that. We know Joe Bankman was involved, salaried, intrinsically involved in the structuring of the business, capital raising. He was involved. Barbara Fried had a more nebulous role in FTX. She wasn't not involved. And she is or was a bundler, basically for the Democrats, you know, helping raise money for super PACs, helping move dark money around Washington.

And this was a cornerstone of Sam's political strategy, was donating huge, I think he was the second largest donor in the midterms. Yeah. Moving huge sums of money to D.C. He was always in D.C. lobbying. That was a cornerstone of his strategy. And what we're being robbed of now is a full accounting of what funds went to which politician. Of course, there are Republicans in there as well. And, you know, also an understanding of what her role was, you know, whether she was the architect of this, who came up with this.

And I find it shocking that this trial is being dropped. And it's not for lack of resources. I mean, the DOJ is plenty of resources. It's just a purely political decision to decide not to pursue more transparency on this. And I'm not saying there's evidence of politicians that have been swayed by SBF through the money. You know, clearly Sam's political ambitions failed. You know, we don't, I mean, maybe his sentence will be commuted in the future by someone who did receive the money. But we can't know that now because we don't really.

know who received the money. I mean, a lot of this was not in disclosed donations. It was through super PACs, basically shadow money, and we're just never going to know now. The other interesting thread here is Ryan Salem pled guilty to charges, and those were campaign finance in nature, if I'm not mistaken. So he was the president of the digital markets affiliate based out of the Bahamas. And so he pleads, he's got a sentencing date coming up, but now, Now the head honcho, who he did not actually cooperate against, is not being charged with it. So what happens there? I mean, do they still, I guess he already pled guilty, but if they're not charging SBF for the campaign finance,

is this other guy going to just take a fall for something that actually wasn't prosecuted to the full extent? It seems very strange. Yeah, the whole thing is baffling, and I do think it's very telling that they release the news on, what, the slowest news day of the year? Yeah. I mean, no one was paying attention to it. It was, it did get uptick, obviously, in Twitter, very much did not get uptick in the mainstream press. There's probably folks that are listening to this podcast don't even know what happened

because it was literally buried right before the new year. Just a really weird, weird thing. You know, it'd be like the Epstein files here and this will come out like 10 years later, right? Yeah, I can't really tell if anything interesting came out with the Epstein files. I mean, people have been talking about Stephen Hawking a lot. I don't understand. Was anyone of note actually named in these? How does no one have?

So the files came out, but does anyone have a list? Yeah, no, I haven't seen a list anywhere. It's like, oh, huge news. The Epstein thing came out. And Prince, whatever his name is, Andrews. Like, all right, didn't we all, we already knew that. Literally the only new name that I've seen come out of those files is Stephen Hawking.

I don't even know if that's something people are making up or if that's real. That can't be real. It's all over, formerly known as Twitter.com. Yeah. Well, that was kind of a nothing burger. Yeah.

Disappointing. Well, I can't wait for the Bankman files 30 years from now. I mean, this guy, he's going to be able to write quite a book. I don't know if you probably can't make money on that. But by the way,

this recovery is going phenomenally well. for Mr. John Ray here. Well, he is on track to recover quite a bit. I think people are pretty upset with him at the moment, though, because he's freezing the asset values as of what, November or December 2020. Yeah.

So, I mean, it's just asset, asset prices going up is what's saving him. It's not the billions of dollars of legal fees that is absorbing here. But yeah, the price of these assets go up and you're locked into the petition. date where Bitcoin was trading at like 16,500 or something. And Seoul was in the, you know, the doghouse too. So that's all going up. He's got some clawbacks that are going successfully. He's got that anthropic stake. The venture portfolio, as far as I can tell, not a lot is traded out of that. The Vertein Pirella, Porella Weinstein is it, to sell some of that. And as far as I can tell, There haven't been a couple trades here and there, but that thing has not traded.

I mean, people feel hard done by, though, by their cutoff date being when crypto prices were in the doldrums, right? As they should. I mean, that's not how it actually should work. I mean, you should denominate the claim. I get that by the letter of the law, that's how it works. You convert everything to U.S. dollar value at the time, but people participated in. on FTX with Bitcoin and Eith and all these other assets, that's what they thought they owned. Yeah.

All right. So as we said, by the next episode, we'll know about the ETF. Maybe we won't. Maybe we'll all be wrong. My personal vote, I said this on TV, is that we will find out on the 8th on Monday. That's Monday. Yeah, that's what I think. So more news keeps dripping out.

we got the authorized participant news last week. So Goldman has been named as the AP for several Bitcoin ETFs. JPM is the AP on a few ETFs. We can get it in our jibes at Jamie Diamond. So everything seems to just be clearing all these bureaucratic hurdles and progressing. Yeah, so the JP Morgan one was amusing. I wasn't surprised. They're one of the largest authorized participants in the world.

You know, they either have number one or two market share in that market, I believe, for non-crypto, obviously. But to see them named on the Black Rock filing initially and then a few more after that as one of the authorized participants, the irony is hard to ignore. It's palpable. Yeah. I mean, is it a matter of Jamie Diamond not knowing what goes on in his business? I mean, he must know. Yeah. I mean, he's got to know, look, we're going to play in this space. And, you know, I think he's

largely a politician. I think that he is taking, he clearly orchestrated, or Warren clearly orchestrated that charade of a hearing where Diamond said, if it was my job, I would shut it down. So way to disqualify yourself from Treasury Secretary position going forward. I think that's going to be a real issue for him politically, particularly with the Republicans. So, you know, Not surprising. I think Goldman Sachs will be very active in this market when it's very clear how they can make money. One of the ways is being an authorized participant on these products where they'll have a really nice business. The other way, of course, would be if they could be the custodian for some of these, which has to be something they're thinking about. JPM is one of the largest custodians in the world.

And there's no reason why they wouldn't want to be in a business where you can earn 25, 40 basis points on custodying an asset like Bitcoin. And so I'm sure eventually they'll get there. Probably won't get there under his leadership, as my guess. But I don't think he'll be around much longer, frankly. So today, Ark, Grayskill, and Fidelity filed their 8A forms. That doesn't necessarily mean it's approved. That's something you have to do at some point. So some people mistakenly interpreted that as meaning we're done and dusted, we're approved.

We're not. But look, it's just a constant. drumbeat of new bureaucratic hurdles being cleared. So everything I'm seeing indicates we are progressing towards an ETF. I mean, no doubt in my mind. There's a lot of, there's a lot of interesting subplots here. So let's say that these things get approved.

I need to go back and read these S-1s. We spent so many months talking about surveillance sharing agreements and that being a reason for denying these things in the past that there wasn't like a surveillance sharing agreement. And now I don't think all of these have surveillance sharing agreements. In fact, I don't know if any of them have surveillance sharing agreements in anymore. And so if they don't, and it gets approved, it's clear that the SEC was saying you don't need them, I would think. Like, I don't know why you would have a surveillance sharing agreement in an S-1, and then a final S-1 that gets approved doesn't have one. I don't know why you would take that out unless the SEC was saying

you don't need it. So I think there's all sorts of interesting threads to pull on here around. What was the decision making at the SEC? I'm getting ahead of ourselves, assuming this thing gets approved, but why was the SEC saying you needed these things for years? And then actually BlackRock comes out and does one, and then you don't actually need it. I mean, to be very clear with my position, you don't need them. If you just look at the letter of the law, I actually don't think you need these things. You don't need a surveillance sharing agreement between Coinbase and CME. I don't think that's a prerequisite for this thing getting approved. Yeah, because the thrust of the case by gray scale against the SEC was if you approved a futures market ETF, functionally from a price formation perspective, that's the same thing as the spot market ATF.

So demanding global surveillance sharing seems out of step with the court decision. Right. Yeah, I would agree. I mean, the other interesting thread here is where are these things going to come in on a revenue basis? So from a pricing perspective, you don't have to disclose yet, but you do right before. And so some of these issues have come out. I've seen some in the 80 range, 80 basis points. Invesco and Galaxy have said that theirs will be zero fee until they reach $5 billion of AUM or six months, I believe. I don't know. that's an and or nor actually. Fidelity came in at 39 basis points, super competitive there relative to where others have come in. So do we see like a fee war breakout here? Yeah. I mean, a Bitcoin spot ETF is a costly thing to administer.

So I wouldn't expect the bargain basement fees that you see for, you know, the SPY or things like that. But yeah, fidelity is markedly cheaper than everyone else from what we've seen. At least at the moment. I mean, yeah, it might turn out that there's others that come in lower. But yeah, as you point out, you have to pay a custodian fee. So you can't price this thing at zero perpetually. You'd just be losing money. Yeah, I want to see a prediction market on who is the most of you.

I'm after a year. If I had to guess, I'm just going to go with BlackRock, you know, number one asset manager in the world. I hate to say it despite my fidelity affiliation, but that is my guess. I think fidelity in BitWise will have strong performances. Disclosure, very conflicted with that view. Yeah, we're investors in BitWise and fans of Fidelity. Well, but the other interesting threat is actually you had brought up GBTC,

but let's say they get approved. and let's say that their fee is higher than Fidelity and BitWise and some of these others. I don't know if it will be or not. What happens to all of the GBTC holders that are holding these things in rollover IRAs and other tax-advantaged accounts? Do you have just like a rotation trade that starts to happen out of higher-priced ones into lower-priced ones? If you're in a tax-advantaged account, I think that's going to be a... a consideration for sophisticated investors. So a lot to think about there. Yeah, great question. I mean, the fate of GPDC is still uncertain. We don't know if they'll be in that first batch

and how the conversion will occur is also pretty unclear. If they're not in that first batch, I don't know. Man, that is a miscarriage of justice. Well, I mean, especially because they won the case. But I will say I'm very ready to stop caring about GBDC. I don't know how many years now it's been that we've just been consumed by GBDC. I would say at least seven, seven, eight years now. I've been following it. And I'm ready to retire that. Ready to retire? Well, I've got something else. We can talk about longer tail coins in close-end funds. We can talk about that for the next 20 years. You mean the other gray scale trust products?

Yeah, of course. Those are still going to be popular. I mean, you've got Filecoin trust and Solana trusts and all these things. I mean, there's not going to be an ETF on anything besides Bitcoin and maybe Ether for a while until there's a CME market for some of these other assets. Yeah, and once Bitcoin's approval, we'll be able to talk about the ETH ETF and the additional dimension of staking. and whether they'll be positive carry associated with that ETF and how they're going to manage that complexity. So, that'll be fun.

It's going to be, that'll be fun. Yeah, we'll just move to the next thing, which is ETH. And so we'll talk about staking. We'll talk about the percentage of the aggregate spot volume that's happening on decentralized exchanges and how the SEC wraps their head around what a decentralized exchange is. It's a whole new, I could see our next 200 episodes. So it's a light news week, so I have a story for Brink Nation, which I did tell on Twitter this morning, but I'm also going to repeat it here.

This is not on video, obviously, but can we also tell the story around what type of a shirt you're wearing right now? It's a purple and pink tie-dye. Yeah, no, this is, it's my favorite band, Magdalena Bay. They're really excellent. I highly recommend them. It's laundry day, so I ran out of a shirt. shirts is my last shirt. So, all right. So you were, you had a front row seat for this story, but you forgot it. This is back. Yeah. So you had a vanity license plate that I told,

I forgot we had that conversation. Yeah, this is in the fall of 2021. Because someone asked me today, do we still like Tonxton? Of course we do. We like the cubes. We still like the metal. The metal hasn't changed. It still has the same inherent properties that caused us to fall in love with it in the first place. And what I did was when I moved to Florida, I had to go to the DMV to, I don't know, change my license or something. And they said I could get a vanity plate on my car. And I had about five minutes to decide because I made the snap decision. I said, okay, yeah, I'll do it. So then I asked, Naraj. And I'm like, what should I put on this vanity plate? And he was like, well, it should be something to do with tungsten. And we came up with TNG D-D-D-Y, Tung. Tung.

and daddy. Tongston daddy. What a... What a name. I got the vanity plate because you can only do seven letters. So I got the plate and then pretty much immediately I realized that it could be interpreted as tongue daddy. Yeah, I could have told you that.

It's not a very polite thing to put on your car, my opinion. It's not really the message you want out there. No. No. No. And, oh, I forgot to say, at the DMV, they asked me to explain the meaning because they don't actually want you to put rude messages on your vanity plate. There were restrictions. And so I had to put in writing what I found interesting about tungsten to the DMV.

So I wrote, oh, you know, highest boiling point of all naturally occurring metals, incredible tensile strength, pretty much inert for the most part, many industrial uses. etc. You know, there's a lot of talking points around tungsten. So they approved it. I got tongue tongue daddy, tungsten daddy on my car. And then people would like honk at me and yell tongue daddy at me. It's, yeah, that's tough. That was chaos. And so after two weeks of that, I was so mortified, I sold the car and got rid of the plates. Well, this is the part of the story that just doesn't make sense to me. Do you know that you don't have to sell the car? You can actually just take a license plate off of a car and get a new one.

I didn't want to go through that. I didn't want to go back to the DMV. I don't know if you ever been in the Miami DMV, but it's a catastrophe. So what I did was I swapped the car for basically the same car. So now you don't have a vanity plate? No. We're done with that. And I didn't tell the story at the time.

I thought it would make really good content on Twitter, but I didn't tell it because I didn't want people to identify my vehicle and then they would know that's Nick, you know. So I sat on it and then I just thought of it, I remembered today. And so now two years after the fact I'm telling the story of my catastrophe with my vanity license plate. I think the message there other than vanity license plates can go awry is that, you know, we have not lost faith in tungsten. Yeah, that's exactly right. We still love tungsten, still great metal. I mean, the fact that we get a Wall Street Journal article on Tungsten cubes with Nouraj in his very large kitchen, I mean, that was just a peak moment.

One of the better gifts I've ever received is a Tungsten Cube with my son's initials on it and birthday. These things are very multifaceted. I would actually like to be a bitter in the Tungsten. cube FTX sweepstakes of that huge tungsten cube that they have down there in the bottomless. Yeah, I mean, like say what you want about tungsten, but it's absolutely immortalized in history now is the centerpiece of the doomed FTX headquarters, the 13 inch cube. Where is that, by the way? Yeah. Have they sold that? I don't know. Where's John Ray on us? I don't, it's a very liquid market for these things. It's very shocking that he hasn't tried to, I mean, he must just be betting on a pump. You know, the CMS guy or Dan and CMS still.

buying he bought a tungsten four like the number four and that's probably the first one that's ever been made yeah that's a rare one i like that one so look there's still a underground community of cube enjoyers out there we're not as vocal about it but we still like the cubes we still like the cubes all right that's a good place to leave it i think this i hope everyone enjoys their last weekend without a Bitcoin ETF. That's what I really hope. And I'm not 100% sure that that's going to be true, but I'm 99% sure that that's going to be true. So have a safe and healthy weekend and refresh your Twitter feeds to see what happens with this ETF. See on Monday.