The Breakdown - Canada's Bitcoin ETF is Soaring: Is A US Bitcoin ETF Next?

Episode Date: February 23, 2021

Today on the Brief: Welcome back to the price rollercoaster The latest from China’s digital yuan trial A 3-week sprint to a stimulus package Our main discussion: Canada’s first Bitcoin ETF. NLW discusses: ETF 101 Pros and cons of a bitcoin ETF History of bitcoin ETF proposals  Early performance for Canada’s BTCC ETF  Implications for a US BTC ETF in 2021 -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- 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=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

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 nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Monday, February 22nd, and today we are talking about the first Canadian Bitcoin ETF and why it is absolutely crushing things right now. First up, however, let's do the brief. First on the brief today, the roller coaster is back. Bitcoin got up to over $58,000 this weekend before a huge 15% down move all the way back under 50,000 hitting 47,000 on Coinbase Pro before rebounding to around 53,000 at the time

of this recording. Now, I've seen a bunch of narrative interpretations pointing to Yellen comments from this morning or pointing to rising U.S. bond yields, but in this circumstance, I'm just not buying it. Since we broke 30,000 at the beginning of this year, we've had exactly one significant pullback. Otherwise, it has been a straight shot up. Now, regular listeners will know that I spend a lot of time thinking about narratives, but they're not in terms of these micro movements and short-term movements. They're much about the broader patterns and cycles that Bitcoin and other assets find themselves within. I do think that we've seen a few indicators that specific individual news, a la Tesla, can actually

shift the market one direction or another, but right now it feels to me like we've just been rising so fast that there was inevitably going to be a little bit of a pullback. Also, there could be a specific reason to be cheering for that pullback. Imagine that you're one of these firms that over the last few months has decided to allocate to Bitcoin, but you're staring at a price that's up about 100% where it was. at the beginning of the year. It seems entirely plausible that you're waiting to pull the trigger into at least some move down, some retracement, some pullback. That, of course, is wild speculation, but just another reason to not be stressed when things moved down in the short term. Next up on the

brief today, an update on China's digital yuan and its relationship with private fintech companies. We've been following the testing and the rollout of the digital yuan and the significance is a couple different pieces. There's first significance in the context of China trying to create an alternative to the U.S.-led global financial system, but there's a second context as well, which has to do with the relationships between private fintech companies in China and the Chinese government itself. Indeed, it seems increasingly clear that step one in creating that alternative system is consolidating power at home. What we saw late last year when China stepped in and stopped the Ant Financial Group's IPO and really reshaped the way that that company was designed

are all a part of that larger battle. Today, Bloomberg is running a story about how China is pulling in two of the biggest fintech companies to its digital yuan trial. The article is titled China enlists Ant-backed MyBank in expanding digital yuan trial and here are the key lines. My Bank's service will soon be introduced to the People's Bank of China's Digital Yuan app, people familiar said, requesting not to be identified because the matter is private. Tencent-backed to Wee Bank will also participate one of the people said. The e-wallets from the two firms will have exactly the same function as those from the six state-owned lenders in the trial, said the person. Adding the two banks to the pilot will help China's central bank expand its influence and user

coverage in its push to establish the first national digital currency from a major central bank. When the People's Bank of China first announced its plans, it was viewed as some as a government move to reclaim the 293 trillion yuan, about $45 trillion, payments industry from Ant Group's AliPay and Tencent Holdings' WeChat pay. So again, I think there are two really important dimensions to keep watching here. The first is the geopolitical battle, U.S. versus China, but then there's also the question of public versus private money within China itself. Finally on the brief today, a quick stimulus update. Now that the Trump impeachment trial is over, focuses squarely back on the stimulus. The top article on Bloomberg today reads,

Biden's $1.9 trillion stimulus plan enters three-week dash in Congress. The focus on Democrats is getting this done before unemployment benefits expire on March 14th. In the House, the substance of the bill is largely locked in, with Bloomberg saying, quote, there's no sign of a rebellion by the few remaining Democratic deficit hawks imperiling the bill on the floor. Now, key aspects of this $1.9 trillion plan include $422 billion for direct stimulus checks to individuals, $246 billion for supplemental unemployment insurance, $350 billion for state and local governments, $160 billion to combat the coronavirus, including vaccines, testing, and tracing, $130 billion to reopen K-12 schools, and $7.25 billion for small businesses via the Paycheck Protection Program.

For the Republicans, big issues in this are one, that big payment to states, and two, an increase of the national minimum wage to $15. Obviously, given that this is the central fiscal battleground right now, people across different sectors of the economy, but certainly in industries like Bitcoin and gold, et cetera, are watching to see what happens. For me, I'm also interested in seeing just how the conversation is shifting. Are we seeing some mass turn to spending or is their pushback on that? It certainly seems to me a little bit like the deficit hawks are getting louder, so we'll just have to see what that means over the next few months in terms of how it impacts the Biden administration's ability to do what they want to do. With that, let's shift to

our main conversation. The first Canadian Bitcoin ETF is absolutely crushing. Let's start this by getting super basic for a second in case you're not familiar with some of this terminology. An ETF is an exchange traded fund. It is a type of security that tracks an underlying set of other assets. Could be an index of stocks, it could be a basket of commodities. It's similar to a mutual fund except that ETFs are traded on exchanges day in and day out, just like a stock would be. In practice, ETFs are often a good way to get exposure to a thesis or a sector without necessarily holding the underlying. For example, SPY is an ETF that tracks the S&P 500, so if you think in general stocks will go up and you want exposure, that's an approach. Another example that many of you will

be familiar with right now are ARC investments ETFs. ARC is run, of course, by former breakdown guest Kathy Wood and has some of the most popular ETFs in the world right now. Last week, in fact, three of ARC's ETFs were in the top 10 of net flows, the ARC Fintech Innovation ETF, the ARC innovation ETF, and the ARC next generation internet ETF. Indeed, five of the seven are in the top 20 year-to-date flows, and the two that aren't are still in the top 10% at 86 and 128, which is pretty remarkable considering that these are surrounded almost entirely by people like BlackRock and Vanguard's very generic ETFs like Vanguard S&P 500 and I shares. That's BlackRock's 7 to 10 year treasury bond ETF. But let's talk now about a Bitcoin ETF and let's start conceptually.

Why would a Bitcoin ETF be good for the space? The short answer is that it could better integrate the asset into existing financial markets in a way that could be good. make it more available to more different types of people. Historically, many of the advocates for Bitcoin ETF have argued that it was a way to bring in a new wave of particularly institutional investors. CoinDesk did a 101-style piece on Bitcoin ETFs and hear their pros of their pro-con reasons for an ETF that they list. One, no need to go through the process of having to store crypto safely yourself. Two, buying an ETF through an online broker is significantly more secure, faster and less prone to outages than purchasing digital assets directly from a crypto exchange.

Three, there are much clearer tax implications and guidance for traditional financial products than digital assets. And four, stock exchanges are more liquid than crypto exchanges, so it's much easier to buy and sell ETFs. One of course that they don't list here, but that many Bitcoin ETF advocates believe is that because of all of the increase in the convenience of buying, it would mean more people piling in, which would create positive upward price pressure. Looking for the best way to stay on top of your investment game, nexo.io has you covered in three easy steps with their high-yield savings account for digital assets. Step one, create an account at nexo. Step two, transfer assets to your secure nexo wallet with no minimum or maximum limits on funds deposited.

Step three, sit back, relax, and earn up to 12% compounding interest paid out daily on your crypto and fiat. Your passive income made simple. Get started at nexo. There are, of course, however, a number of downside. So again, let's start with this CoinDesk write-up. First, ETFs can only be bought and sold during market trading times, whereas crypto markets run 24-7. This means that if the price of Bitcoin moves sharply, you could potentially have to wait hours before you have the chance to offload or buy up more. Two, it's free to hold your own Bitcoin, but ETFs charge management fees.

Three, buying ETFs requires you to complete know-your-c-c-customer K-YC checks, but Bitcoin can be bought anonymously peer-to-peer, and four ETFs require you to trust third-party custodians. There are additionally some obvious ones for Bitcoiners here, mostly in the form of not your keys, not your coins. For many, ultimately, where they land on this question of whether Bitcoin ETFs are good for the space as a whole, comes down to what the trade-offs are. Interestingly, one perhaps surprising Bitcoin ETF skeptic is Tyrone Ross. Tyrone has been on the show a number of times. He's a financial advisor, who also is the CEO of on-ramp invest, he works with other financial advisors and is a big proponent, obviously, of Bitcoin

and crypto assets in general. For him, summing up a lot of his different tweets, podcasts, etc., is that the point of Bitcoin is about sovereignty, more control for individuals who have traditionally been excluded. In November of 2018, Caitlin Long, another person who has been historically skeptical of Bitcoin ETFs summed up Tyrone's comments on a panel saying, quote, the Bitcoin ETF is not the savior of Bitcoin. It's the opposite of what got me interested in crypto. Why would we go back to the system that's caused all the problems in the first place? And following something I also mentioned, another con that I'm not quite sure we spend enough time on is that while positive upward price pressure could certainly be a consequence,

the further disconnect between the underlying asset and the product means that it's just as likely that more of the players are only playing casino games around the price. In other words, there's no reason to think that it wouldn't be some of the opposite force where a Bitcoin ETF made it easier and more likely for people to bet against the price of Bitcoin at any given time. Free marketers will say this is just proper price discovery, but it is something we should note. And also, at this point, we need to get into an important distinction, which is physically settled versus cash settled.

A physically settled Bitcoin ETF would mean that Bitcoin is actually held and exchanged. Having to actually purchase, hold, and exchange the Bitcoin itself is where physically settled Bitcoin ETF advocates see positive spot price pressure coming from. Cashbacked is something different entirely. In 2019, Charlie Shrem wrote an article on this and called Cash Settled Bitcoin ETFs, quote, the evil cousin of a physical Bitcoin ETF. Here's what he wrote. A cashbacked Bitcoin ETF could be catastrophic for the Bitcoin market, especially if it is approved before any physical Bitcoin ETF is approved. This is because cash-backed Bitcoin ETFs essentially print paper Bitcoins and that artificially inflates the Bitcoin supply, which can apply downward pressure on

Bitcoin's spot price. A more direct impact of a cash-backed Bitcoin ETF is that it would divert investment away from spot markets. There could be tremendous capital invested into a cash-backed Bitcoin ETF, and it would do nothing to increase Bitcoin's price. It would actually cause Bitcoin's price to be lower long-term, since investors would buy the cash-backed Bitcoin ETF instead of actual Bitcoins. To sum up, Charlie is arguing that when it comes to a cash-settled Bitcoin ETF, the two big problems are the artificial inflation of the Bitcoin supply and the diversion of investments that would go to the underlying asset. Now let's get a little historical. Bitcoin ETFs have been part of the conversation since the Winklevoss twins filed for the coin Bitcoin

ETF in 2013. That was the first of dozens of proposals that have been rejected. Former SEC Chair Jay Clayton presided over something like nine of these rejections, which contributed to the broad impression of him as not such a friend to Bitcoin. The biggest concern the SEC expressed was around market manipulation. Specifically, they believed that offshore exchanges that weren't regulated by the U.S. were too big of a problem and led to too much potential for price manipulation. When Clayton announced his early departure late last year, many thought it would mean a better chance for a Bitcoin ETF in 2021. SEC Commissioner Hester Purse has been a dissenting voice on Bitcoin ETFs throughout Clayton's

tenure as chair. Just this month, she did an interview that reiterated again her position that the market is ready for a Bitcoin exchange traded product and that if the U.S. didn't give investors an option soon, they'd find other less legitimate ways. So with that, let's jump to last week when the first North American Bitcoin ETF was approved. The approved ETF was the purpose Bitcoin ETF. ETF with the ticker BTCC. It was approved in Canada and is now trading on the Toronto Stock Exchange

as of last Thursday. And man, did it come out with a bang? It's on more than 400 million of trading volume in the first few days, 421.8 million to be exact. For some context, I'm going to read a number of tweets from Bloomberg ETF analyst Eric Balcunis. The Canada Bitcoin ETF BTCC traded 200 million shares on day one, a ridiculously high number, definitely smashes Canadian record and would likely rank in top five all time among US ETFs too. Most ETFs are under 20 million. Now another tweet. This is just wild. The Canada Bitcoin ETF was the most traded ETF in the country on its first day. I've never seen that. It would be like an ETF here trading more than SPY on its first day. And this is just the CAD class. USD class was 11th most traded. Another tweet. Canada Bitcoin

ETIF BTCC traded 350 million today, a 40% jump from yesterday defying typical day-toot drop-off, and 3x more than any other ETF. Unreal. Proportionally speaking, this is equivalent to about 5 billion in volume in the U.S. or about 7x more than GBTC. Also, BTCC will likely reach $1 billion in assets by the end of next week. The biggest ETF in Canada is only $8 billion. The second biggest is $5 billion. I wouldn't be surprised if this passes one or both of them in the next couple months, barring a nasty sell-off, which is possible. Final tweet from Eric for now. Stunning, the Canada Bitcoin ETF BTCC has already collected 421 million in assets in the first two days, crushing our estimate. Proportionally speaking, it is the equivalent of a US ETF taking

8 billion in first two days. If it were to keep up this pace, it will be the biggest ETF in Canada in 20 days. Obviously shows that there is clearly a ton of appetite for Bitcoin in this. space for a Bitcoin ETF specifically. And interestingly, now that other Canadian ETFs are being approved, a second started trading just 24 hours after BTCC, and a third was just approved this week, it shows how much first mover advantage matters. The first mover purpose Bitcoin ETF, this BTCC that we just kept talking about, was trading 26 times more than evolved Bitcoin ETF that came just one day later. Now, going back to our pros and cons. One thing to note on the purpose Bitcoin ETF is that it is a physically settled

ETF, i.e. the ones that we tend to like. Gemini custody secures the Bitcoin and clears every transaction. One thing that this certainly does, especially seeing the difference between BTCC and evolves Bitcoin ETF, is that it very much increases the stakes on who will be the first Bitcoin ETF approved in the US. In total, there are about 10 companies trying to get approved right now with the latest entrant being Nidig, who filed with Morgan Stanley named as a participant in that SEC filing. So the question I think becomes is does the Canada ETF put more pressure on the U.S. to approve one? Maybe. It certainly is more precedent, but that said, the U.S. doesn't really care about precedent from other markets. I think that the biggest factor in a Bitcoin ETF approval

is going to be how incoming SEC chair Gary Gensler and the current commissioners think about it. On that, front, you have at least someone who has considered and has been spending a lot of time watching Bitcoin, even teaching a course at MIT about it. I don't have any real predictions around the exact timing or who's most likely to win, other than it feels like the bigger the player, the more likely to cross that threshold. And second, it would be very surprising to me if it wasn't a physically settled versus a cash-settled ETF. For now, though, it's going to be fun to just watch and see how things continue to go and grow in Canada. these newer competing ETFs have a chance to overcome the one-day lead that BTCC seems to have

parlayed into a major advantage. We will have to wait and see. But for now, I hope this episode was useful. I hope you're having a great beginning of your week. And until tomorrow, guys, be safe and take care of each other. Peace.