The Breakdown - Bitcoin Is Actually, Finally About to Have an ETF

Episode Date: October 16, 2021

This episode is sponsored by NYDIG. On today’s episode, NLW looks at the buzz and excitement around a bitcoin futures ETF. The historical moment could be an inflection point for new audiences to get into the asset class. At the same time, there are some who suggest that a bitcoin futures ETF won’t be all it’s cracked up to be.  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Malte Mueller/Getty Images, modified by CoinDesk.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Friday, October 15th, and if you have been alive and on Bitcoin Twitter at all in the last 24 hours, you know exactly what we are talking about. We're discussing whether Bitcoin is actually, finally, about to have an ETF. So we are on the precipice of a monumental moment for Bitcoin. Jill Gunter, who is formerly Jill Carson, congrats on getting hitched friend, tweeted.

Is 2021 the year that all of the Bitcoin boy who cried wolf rumors actually come true? China actually banned it. The ETF may actually get approved. Matt Hogan, the chief investment officer at Bitwise, in an appearance of the president. on CoinDesk's first mover today, said that we've had a series of zero-to-one moments for Bitcoin over the last year. That was before and after Paul Tudor Jones in his great monetary inflation thesis. Before and after Michael Saylor and MicroStrategy put Bitcoin on the balance sheet. Before and after El Salvador made Bitcoin legal tender. And now before and after the approval

of a Bitcoin ETF, or at least a Bitcoin futures ETF. Let's dig into what this actually means, why it matters, where there might be skepticism, and everything else you need to know. First of all, WTF is an ETF. An ETF or exchange traded fund is a type of security that tracks other assets, but is bought and sold on a stock market just like a stock. Basically, ETFs combine the simplicity of buying and selling stocks with the ability to invest against any type of thesis or category. SPY is the S&P 500 ETF, for example, that tracks the S&P 500 index, and thus is a super easy way to get overall exposure to the whole stock market with one single trade. If you listen to this show a lot, I'm sure you're familiar with Kathy Woods Ark and their series of

ETFs that track specific theses, including innovation broadly, as well as subcategories of innovation like health, AI, robotics, etc. You can also, however, have ETFs that track commodities like gold. The benefits of ETFs is their simplicity. The fact that they can be traded just like stocks mean that they are massively more accessible. You can buy them with your IRA, with your basic brokerage account. Investment professionals can buy them for their clients without any sort of special arrangements, etc., etc., etc. Now, Bitcoin has a long history with wanting an ETF. For years, the story was that an ETF would open up the market to institutional investors. This goes all the way back to Cameron and Tyler Winkelvoss trying to apply

for a Bitcoin ETF in 2013. Now, of course, for years, we have been denied. The SEC under Jay Clayton really never gave a Bitcoin ETF serious consideration. However, when new SEC Chair Gary Gensler came in, there was a lot of optimism that that would shift. Remember, people were still in the mindset that, look, this is a guy who taught courses about Bitcoin and blockchain and was focused on investor protections in a sort of way that a regulated product like an ETF seemed like they would help with. But of course, our relationship with Chair Gensler has gotten a little bit more complicated. It became pretty clear, pretty fast that he wasn't just going to be an out-and-out ally,

and in fact, there were going to be some pretty tense moments. That said, over the last month, there has been a bright spot in Chair Gensler's discussion around crypto regulation, which is that he's spoken positively about Bitcoin futures-based ETFs. He's referenced products like that offered by the CME, the Chicago Mercantile Exchange, as having the sort of investor protections and regulations that he actually likes, and so he said was looking forward to reviewing a new crop of Bitcoin Futures ETF applications. Now, the CME is interesting.

CME started offering Bitcoin futures in 2017. In fact, they launched pretty much on the day that the market peaked. Just yesterday, the team at BitWise dropped more than 100 pages of research that they had completed over the summer called Price Discovery in the modern Bitcoin market, examining lead-lag relationships between the Bitcoin spot and Bitcoin futures market. Their key finding was that the CME has consistently led price discovery and Bitcoin against exchanges like Binance, Bitmex, Bybit, Deribit, Ft, Ft, KWB, and OKX. The idea here is that if a heavily regulated venue, like the CME, was leading price discovery, that could answer a lot of questions around the potential

for market manipulation. Now, of course, I have no idea if that's factoring into Gensler or the wider SEC's potential reasoning around allowing a Bitcoin futures ETF. It could also be, as some people have suggested, that they needed something to be approved just to provide a counterweight to what people see as growing anti-crypto sentiment, and this is the easiest, safest option. Either way, let's zoom up to the last couple days. As I mentioned, Gensler has been saying that he's looking forward to these Bitcoin Futures ETF applications, and that has really brought the market to something of a fever pitch. This culminated over the last 24 hours.

On Thursday morning at 819, Eric Balkunis, the lead ETF analyst for Bloomberg, wrote, where we stand. The SEC has a few days left to delay on Bitcoin Futures ETFs. If here nothing, the first ETF filed, ProShares, will be free to launch on 1018 as the 75 days required will have passed. That said, this is an unusual situation, but no news is probably good news at this point. Then yesterday at 2.2 p.m. Eastern, the SEC tweeted, before investing in a fund that holds Bitcoin Futures contracts, make sure you carefully weigh the potential risks and benefits. Check out our investor bulletin to learn more. So either this was another really good piece of evidence that one of these things was going to be approved,

or it was going to be the most painful rugpole ever. Shane Pickens responded to the tweet saying, Commissioner Hester Purse, do you think the SEC would be cruel enough to post this in the middle of the insane rumor fest around a Bitcoin ETF just to taunt us? Could it be based on a predetermined schedule? Hope the social media team has their act together. Then, at 10.30 p.m. last night, Balcunis again, says just in. Bitcoin Futures ETF said not to face any opposition at SEC. according to multiple sources confirming this, pretty much done deal, expect launches next week.

The first two paragraphs of the corresponding Bloomberg piece read, The Securities and Exchange Commission is poised to allow the first US Bitcoin Futures Exchange Traded Fund to begin trading in a watershed moment for the crypto industry, according to people familiar with the matter. The regulator isn't likely to block the products from starting to trade next week, said the people who ask not to be named while discussing the decision. Unlike Bitcoin ETF applications that the regulator has previously rejected, The proposals by ProShares and Invesco Limited are based on futures contracts that were filed

under mutual fund rules that SEC Chairman Gary Gensler has said provide, quote, significant investor protections. So before the end of the month, there are actually a number of these ETFs that are coming up for approval. There's the ProShares Bitcoin Strategy ETF, the Valky Bitcoin Strategy ETF, the Invesco Bitcoin Strategy ETF, and the Vanek Bitcoin Strategy ETF, all with those potential approval dates that happened during the month of October. So you're following along last night.

people are getting more and more excited. We're watching the price go up and up and up. Then this morning, James Seyffart also from Bloomberg writes, there it is. Bloomberg's data team in the process of adding the pro-shares Bitcoin strategy ETF to the terminal. Tigger will be BITO, 95 basis points, less than half of GBTC's 2% fee. This thing is going live next week, either Monday or Tuesday. Balcunis added, Valkyrie just filed an 8A, yet another step indicating that they will be going effective. That said, I'm still waiting on ProShare's updated prospectus to get that home-free feeling. Also, the jockeying between pro-Valky and Invesco for launch dates next week should be epic.

Speaking of Valkyrie, we also got a note from Nasdaq saying that their Bitcoin ETF was approved to list on NASDAQ, which many of my fellow content creators screamed was an SEC approval. It's not the same thing. It's a NASDAQ approval. Very different, but still another indicator of how much this seems to be happening. This podcast is sponsored by NIDIG, and they put out a research newsletter that's one of the best ways to track market insights and track the turning points of Bitcoin adoption. Sign up at nightig.com slash NLW. That's NYDIG forward slash NLW. So, to recap, we've got an SEC chair who's been hostile to a lot of things, but not Bitcoin

Futures, and we've got all these Bitcoin Futures ETFs that are coming up for approval, and the word is that that's actually going to start. What's actually interesting, of course, is the debates. Let's talk about the negative side first, because I think probably the positive side are a little bit more self-evident. But there are a number of arguments that it's not a big deal, or in fact that it's outright bad. One part of this is the idea that there's already access to similar products in the market. On October 3rd, Crypto Profit 15 asked Block Towers Ari Paul, do you think if an ETF is approved, as many expect, it could break up or possibly

end the typical Bitcoin and crypto cycle? Erie wrote, no, a Bitcoin futures ETF isn't that important in my opinion. We already have Bitcoin ETFs around the world and lots of other easy ways for institutions to access. At this point, it's pretty marginal fundamentally. Chow Wang wrote, The Bitcoin ETF isn't a nothing burger, but it's also overhyped. It's a lot easier for both retail and institutions to gain Bitcoin exposure in 2021 than years ago. Also easier to buy Bitcoin than gold when the first gold ETF was approved. We're going to 100K with or without it. Others say, yeah, it's cool, but it's not as cool as a spot ETF. Matt Hogan, again, the CIO of Bitwise, wrote yesterday about how they had applied again for a physically settled Bitcoin ETF. He writes,

why do we think Bitcoin is better than futures? A, costs. It could cost over 5 to 10% per year to roll the futures, plus another 1 to 2% in fees. B, dilution. ETFs can't hold 100% Bitcoin futures due to rules. Most aim for 85%, so 15% is other stuff, even bonds. C, tail risk. Remember USO in 2020? Position limits, liquidity, etc. Things can break. In sum, a futures-based Bitcoin comes with 6 to 12% all-in cost, 15% dilution, and tail risk. Useful for certain investors, but not ideal. A direct Bitcoin ETF avoids all of that. Eric Balcunis, meanwhile, warns that we may be overestimating demand.

He said, the crypto crowd may be overestimating the demand for these ETFs. It's a big step, no doubt, but we see only $4 billion in the first 12 months, and some think that's too high. But that's just 5% of crypto fund AUM, 3% of Bitcoin futures, and 1% of Bitcoin market cap in 1% of all ETF flow. Here's a look at the assets of the Bitcoin futures ETF in Canada versus its physically backed peers. No bites at all. Yes, the U.S. will be different because futures ETFs will be the only game in town for a while.

That's why we're saying $4 billion. If physically launched at the same time, we drop that to less than $100 million. There are other folks in the community going even farther, saying that it's not just about whether a futures or a spot ETF would be better, but that this sort of instrument is actually net bad. Preston Pish writes, by the way, this Bitcoin ETF will suck. The tracking error will suck, the fees will suck, the counterparty risk will suck. Unless you have serious account restrictions on how you can get access to owning Bitcoin,

buy the real stuff, and learn how to take self-custody of it. Ricardo Salinas, one of Mexico's largest billionaires, wrote Bitcoin about to break $60,000. The Bitcoin futures ETF news is actually bad, in my opinion, because what is needed is a real BTC fund, not an easily manipulated futures fund. I've been trading futures for over 40 years. It's all paper-based. Any big bank can post enormous trades based on margin without ever taking delivery. That happens in the gold market today. futures become disconnected from cash. Willie Wu tweeted something similar on October 8th, saying, if a Bitcoin futures ETF is approved,

IMO it will be an expensive way to hold Bitcoin. The ETF effectively outsources the holding of Bitcoin to hedge funds through a chain of profit incentives. Ryan Selkis of Masari goes in on the same theme and points out what he sees as investor protection hypocrisy. The risks of a futures-based ETF is that it will end up being two to five-x more expensive than a spot ETF, and thus great for creators in Wall Street and toxic to the investors'

buying it. My disgust for SEC and Goldman Gary Gensler is at an all-time high. Protect investors, sure. Juthica from Cracken points out something similar, but in a more humorous way, saying, quote, we're going to approve this thing, but it's on you if you don't understand contango. Raoul Paul, Real Vision also points out this Wall Street issue saying this is the old financial market trick. You now have to add multiple new intermediaries who all make profits. The ETF provider, clearinghouse, futures broker, administrator, auditor, law firm, CME, and hedge fund ARBs. Wall Street gets richer, retail investors, lose again. But, of course, if you've been on Twitter, you know that there is a ton of excitement

too. And really at core, this is about opening access to new audiences of Bitcoin buyers. DGEN Spartan tweets, listen to a radio talk show where a guy is explaining how a Bitcoin future's ETF is different from a spot Bitcoin ETF. Yes, an actual radio, not internet radio. We all going to get really rich soon, aren't we? Big Moon Overlord writes, crypto-ETF approvals are so bullish I'm going to puke, and people still think it's a non-story sell-the-news event. You're going to learn soon. While Pratt sees it as helping kill market manipulation tweeting, what's most interesting to me about this SEC Bitcoin ETF approval is that it basically puts a nail in the tether manipulates the market narrative. The SEC wouldn't approve it

if that was legitimate. Of course, like I said, the biggest argument is about more people getting into it. On that same CoinDesk First Movers show that I mentioned, Matt Hogan from Bitwise, again, mentioned that investment advisors have something like 4x the spend of regular retail investors, and this will be the easiest Bitcoin exposure instrument they've ever had by a lot. Mike Alfred wrote about the changing perspective of institutions as it relates to Bitcoin, saying 2017 to 2019, blockchain, not Bitcoin. 2020 to 2021. It may be worthless, but it's not going away.

2022, want to buy my ETF? Some are also arguing that the technical downsides just aren't as bad as they seem. Three Arrow Suu writes, The Contangle on Bitcoin Future. ZTF is not going to be that bad. This is not oil, which is hard to store. Inflows would catalyze a ton of boomers to sell futures and buy spot also for 5 to 10% yield on dollars, which then later makes them understand and participate in hyper-bitquinization. Facts. Look, I think it is incredibly healthy for this space to have as much skepticism as it has excitement about this. I think it shows a maturity in this community that it can talk about all the reasons why this is either

overstated, overhyped, or indeed comes with unintended consequences. But still, you know me, I'm a narrative guy. And I think that the symbolism of an approved Bitcoin ETF, even a Bitcoin futures ETF, is going to be incredibly meaningful. In the short term, in the context of all the other regulatory intrigue going on, this absolutely gives me even more conviction in my thesis that this fall is going to be all about Bitcoin. But in the longer term, it just makes every first move into this space simpler. Yes, the fees suck and they're worse. Yes, the 15% of your funds that are in bonds are worse than just holding spot Bitcoin. Yes, there are new intermediaries that are going to benefit. But the fact that financial advisors now have this tool to allow people to get in, that you can

buy it with your IRA and your only option isn't just the grayscale Bitcoin Trust or some even worse proxy like micro strategy stock. The fact that it's just one degree more normalized is powerful. It is important, and it will be looked back on with historical significance. However, when all is sudden done, my favorite take on this comes from Alex Gladstein. He writes, just another eventually forgettable milestone on the way to global Bitcoin adoption. This is a remarkable and important moment, but, as a quirky internet man once said, in retrospect, it was inevitable. Until tomorrow, guys, be safe and take care of each other. Peace.