The Breakdown - Ethereum ETFs Go Live!

Episode Date: July 24, 2024

NLW covers the first day of trading of the Ethereum Spot ETFs. Will they live up to expectations? Will they restart the bull market? Plus, Swan shifts plans. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Tuesday, July 22nd, and today we are talking about the launch of the Ether ETFs. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to Bit.L.Y. down pod. All right, friends, today was another big moment in crypto history. The spot Ethereum ETFs went live this morning. Trading commenced across nine products, all battling it out for a place in the

market. The main take across industry professionals is that the launch of ETFs is cementing crypto as an asset class. Crackenhead of strategy, Thomas Perfumo said, I think these ETF products significantly validate the legitimacy of crypto as an asset class. The same people who called crypto rat poison five years ago are now the people who are creating products around it. There is real demand behind this. You can't ignore it anymore. Matt Hogan, the chief investment officer at Bitwise, commented, we've now fully entered the ETF era of crypto. Investors can now access more than 70% of the liquid crypto asset market through low-cost ETPs. Traditional asset management can no longer ignore crypto as an asset class. I think you're going to see effectively everyone embrace this

space. The marketing drive is ramping up, with asset managers figuring out how to explain Ethereum to investors. Over recent months, we've heard a few narratives tested, calling Ethereum, for example, a crypto app store or an internet-native bond. Their investor pitch yesterday focusing on the app store framing by describing Ethereum as a, quote, global platform for applications that run without a centralized intermediary. They focused on smart contract functionality explaining that, quote, while many see Bitcoin's key appeal in its scarcity, many find Ethereum's appeal and its utility. Eric Balcunas emphasized how important these narratives are, commenting, regardless of your feelings about ether or crypto, this kind of first-class trad-fi treatment, translating the benefits into boomer ease and delivering it to the

most preferred investment vehicle on the planet, the ETF, is a major deal. These issuers have over 15 trillion in collective assets under management. Grayscale is taking a different approach, pricing their mini-trust at an ultra-low cost basis of around $3 per share. An Axios report compared this to the price of a Big Mac, writing that it was, quote, designed to beck in at retail investors. As for the success of the products, expectations are still all over the map. Data from Deribit shows that implied volatility has risen significantly over the past week, implying that the ETFs are expected to have an impact on price in one direction or the other. Options bets for this week are focused on the $3,700 price level representing moderately

bullish market expectations for the launch. For a baseline flow number, Bloomberg analyst James Safart is expecting net flows of 3 to 4 billion over the first six months. That would be around 20 to 25% of the size of flows for the Bitcoin ETFs. Research firm Kyko thinks flows will be substantially smaller, pointing to the relative lack of demand for futures-based products. Marketmaker Wintermute is expecting demand to be lower than anticipated. They predict flows will be around half the size of Bloomberg estimates, citing a lack of staking yield as a deal breaker for investors. They believe that smaller flows will still be positive

for Ethereum prices, which they predict will gain 24% over the next year. There's a strong consensus among researchers that Ethereum will be even more sensitive to flows than Bitcoin has been. At the top end, a report from Steno Research predicted between 15 and 20 billion in flows over the first year, which is roughly the same size as Bitcoin ATF flows to date. They attach a $6,500 price target by the end of the year on these flow assumptions. Cipherpunk Holding CEO Leo Wald noted that Summer is always a tough time to bring a new financial product to market, adding, I think the perception can't just be determined in the first few months of trading. I think it needs to be determined after a year. The Ethereum price stumbled a little in the lead-up to the launch, falling by around 3% since a local high-on-sense.

Sunday. BRN analyst Valentin Fornier is anticipating a short-term dip on launch, stating, quote, the hype and inflows are already priced in. As I started recording, Eric Balcunas from Bloomberg had just tweeted, here's volume after first 15 minutes of trading, total of 112 million traded for the group, which is a ton versus a normal ETF launch, but only about half of what Bitcoin's ETF volume pace was on day one, although 50% would exceed expectations in my opinion. Also, bitwise outperforming early. For some more context on these numbers, BlackRock launched a manufacturing theme ETF made last week. It did 300,000 in volume on day one. Etha will have done 100x that amount in its first 30 minutes on the market. Point being that in Balcunus's opinion, when judged against

the norms of ETFs, the Ethereum ETF is once again off to the races. I personally think that we are going to learn a lot about where the market is right now when it comes to the Ethereum ETF. I do think that the narrative space is substantially different than Bitcoin's narrative space. I've kind of always felt that between Ethereum and Bitcoin, Wall Street or Tradify investors who don't particularly care, get pretty full exposure. If Bitcoin is the digital gold thing and Ethereum is the everything else in crypto thing, which I think is the simplest narrative, then by having a little bit of exposure to each, you basically have exposure to the whole sector. That said, we are in a relatively tough moment for launch. A lot of the hype of the early part of the year has dissipated,

and we're in this weird moment where the normal summer dull drums are combining with questions of whether this cycle is either just a really weird one that kind of had a bit of a false start, a really quick one that's over before it almost began, or just something totally different that we haven't seen before. What's clear is that no new group of retail have come in, and so this launch is entirely for existing TradFi investors who might be just looking to round out their exposure to the space. It seems to me that most of the crypto traders on CT tend to think that the launch is a sell-the-news event, and indeed, as I record, Ethereum is down slightly on the day. That doesn't make people nervous, though. Byzantine General, for example, wrote, since we're at equilibrium, I think it makes sense

that we stall here for a bit. Bitcoin also initially dumped when the ETFs went live before going on a monster rally. I expect something similar for ETH, a foe sell the news dump before turbo pump. Now, the big question for a lot of this is how big the grayscale outflows will be. Alex Kruger isn't particularly worried that we're going to see the same type of thing we did with Bitcoin. He tweeted, the discount on grayscale's Eithee trust has been negligible for months. This should translate into diminished cell pressure relative to what we saw with GBT and the Bitcoin ETF. Still, overall, I think the sentiment can be summed up by Paul Gruel from Coinbase who wrote, history often happens gradually, then suddenly, crypto is no exception. The approval of spot ETH

ETFs today is yet another one of those moments. Hello, friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite Regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain

products. It's home to the power users, the devs and the builders. And perhaps more importantly, I will be there. Lake City, the dates are October 9th to the 11th, and tickets are just $499.99. If you want to get 10% off, use code breakdown 10. Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use code breakdown 10% off. Our second story today is a bit more of a bummer, but also still useful to understand in the context of trying to figure out where we are in this cycle. Swan Bitcoin have rolled back their ambitious growth strategy, commencing a round of layoffs and pulling the plug on their mining

business. CEO Corey Clipson announced on Twitter, Swan is unlikely to continue with our managed mining business in the near term. Without the expectation of significant near-term revenue from our managed mining unit, we are pulling our plans to IPO in the near future. Accordingly, Swan is pulling back from our accelerated spending plan for our core financial services business. Unfortunately, this includes staff cuts across many functions. By way of background, the mining division had been incubated in 2023 and came out of stealth in January. It involved. It involved around 100 million in fundraising deployed into the mining buildout, alongside a further 105 million raised last year for venture investments in general expansion. At the time, Swan

promoted the mining operation as the, quote, fastest ever initial deployment of hash rate at this scale in Bitcoin history. In January, Swan disclosed 125 million in revenue for the previous year, and said it had doubled its staff. At the time, they were aiming to go public within 12 months. It's unclear how many staff have been laid off, but many prominent swans have posted on Twitter that they were affected by the downsizing. Corey said that he would, quote, gladly work with each and every one of them in the future and that he was doing his best to find them new opportunities. By and large, the tone of commentary reflected the fact that building a new company is simply difficult. David Bailey, the CEO at Bitcoin Magazine, who has at times

suited with Corey Clipson, wrote just learning about the Swan News, building a company is hard and filled with many highs and lows. Over our 12-year history, we've had at least four or five major layoffs. It's tough, but it's necessary. It sharpens your focus. Swan will come back better, and all those affected will land on their feet. Another common sentiment is surprise, this is happening in a bull market. Haudel Magoo actually had a fairly decent summary, I think. They wrote, for everyone confused why Swan is reducing their workforce while Bitcoin prices near all-time highs, Swan was aggressive with their spending due to the assumption retail demand would accompany the ETF approvals. Unfortunately, that did not happen, and retail demand for

direct spot ownership is still lukewarm compared to expectations. They are making the needed expense cuts in order to ensure their runway until retail demand returns. Hint, ETF flows have not been from retail at large. So a couple things about this. One, it's important to remember that businesses and especially dynamic startups like Swan are constantly in a process of figuring out how to make different types of strategic bets and where to allocate resources. And a lot of times, the businesses that win are those that are able to move fast to make changes when new evidence presents itself. In that way, however painful these cuts might be, it's probably an indication of Swan's ability to continue to evolve and in that

way is a positive signal for the long-term sustainability of the business. Second, I think that ague here is right, and that a part of this story is just the fact that retail has not come back. For what it's worth, this doesn't surprise me at all. If you dug deep with institutional investors, behind the scenes during the period following the FTX collapse, there actually wasn't as much of a freak out as you would have assumed. Dan Tapiero, for example, has said frequently that there was almost no diminishment of enthusiasm when push came to shove among institutional partners and friends that he worked with. Not so for retail. Retail was completely freaked out, disgusted, and turned off by the events of 2022, and there hasn't yet been anything to pull them back.

That's simply the reality of where we are and part of what makes this cycle so weird relative to previous. In other words, a question that might be worth asking is, is a bull market without a new group of retail investors really a bull market at all? Two personal notes on this. First of all, I am extremely bullish on Swan's long-term potential. They've built something very exciting, very quickly, and I'm quite sure they'll be back better than ever. Second, some of the folks that they've had to let go are great, and I would highly encourage anyone who has open positions to check them out. Now, before we get out of here, a couple little follow-ups to stories we've been tracking. The next batch of Mount Gawks distributions appear to have been sent out this morning.

47,500 Bitcoin worth around $3.2 billion were sent to a pair of as-yet unidentified wallets. The working assumption at this stage is that one of the wallets which received over $42,000 Bitcoin belongs to BitStamp. The other transaction was a much smaller $5,000 Bitcoin and could be a smaller distribution partner or a separate BitStamp wallet. If these are confirmed, To be distribution payments, Malkox will have returned around 100,000 Bitcoin to creditors since distributions began earlier this month. That means around 6.7 billion worth of Bitcoin will be credited to user accounts over the coming weeks, and will become available to trade. The cracking distribution should be just about ready, but at this stage, we have no revised timeline for processing

at BitStamp. They had previously stated that crediting individual users could take up to two months. Markets seem much less jittery this time around with a 1% drawdown as the coin started moving. There's still around 3 billion worth of Bitcoin remaining to be distributed, and the current understanding is that this amount is reserved for future distributions with no timeline announcement at this stage. Once the Bitsdam distribution is confirmed, that should be it for the Mount Cox bankruptcy process for now. Then we get to wait to gauge the selling pressure as creditors cash in the Bitcoin they were forced to hold for a decade. Or not. That, my friends, is going to do it for today's breakdown. Some good, some bad, always dynamic. This is the space. And of course,

we have some big events coming up at the end of this week, which should bring a ton of news. For now, though, appreciate you listening or watching as always. And until next time, be safe and take care of each other. Peace.