The Breakdown - How Much Will Flow Into BTC Post ETF Approval?

Episode Date: January 9, 2024

NLW explores the last minute questions surrounding the Bitcoin spot ETF. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown 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, January 9th. Once again, it is more ETF hype. 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 of the show notes or go to bit.ly slash breakdown pod. Well, friends, it is getting louder and louder and louder. We have people involved in all of these applications, teasing on Twitter.

Craig Somm from Grayscale wrote dotting some eyes and crossing some tease. Anthony Scaramucci wrote announcement Wednesday, trading Thursday. And with all of this, the Bitcoin market has come alive. During Monday's trading session, enthusiastic bidding pushed the price above 47,000. Last week's Matrixport Fudd has been completely erased, and Bitcoin is back at new multi-year highs not seen since April 2022. In fact, I saw a statistic from somewhere that Bitcoin has only been above this price for around 3% of days.

Now, during all of this trading, liquidations were relatively mild, with just 155 million in short positions forced to close. That's obviously still a meaningful liquidation event, but still much smaller than other big price moves in recent months. Open interest in Bitcoin futures markets increased by around 9% across Monday to reach about 20 billion in notational value. That's broadly comparable to the amount of leverage in the system heading into last week's trading, which indicates that traders have entirely rebuilt their bullish position since

the Matrix Port flush last Wednesday. Elmax Group marketing strategist Joel Kruger thinks that the ETF approvals will be a by the news event stating an approval could trigger a 10 to 15% rally fueled by sideline capital. The flip side, though, he added, if there's no approval, projections hinted a possible correction, but strong support above 30,000 is expected. Now, there is lots of price chatter over on X. Materials indicator writes, Bitcoin ETF speculation is driving this PA and Saturdays just say no to FOMO warning probably did more to fuel FOMO than quell it. Bitcoin ETF speculators aren't going to be happy if an approval doesn't come, but the word on the street is Wednesday is most likely that day. That means you should be prepared for another potential flush.

Whales want to shake out weak hands and buy lower. Hodelnaut writes, I will be surprised if there are no more price shenanigans related to the ETFs. Any previous time when people have been this much in agreement on imminent bullish price action, there have been expectation rug pulls. Don't trade, low time preference. James Van Stratton, the lead analyst at Cryptoslate, wrote, Open interest in Bitcoin has just hit $20 billion in notational value. That's the highest amount since December 2021, over 7% up in 24 hours.

Speculation over spot buying. Now, a lot of where the conversation is also trending is around how inflows might impact price. Raghu Yarla Garda, the CEO at FalconX, wrote, Based on customer conversations, 1 to 2 billion of spot Bitcoin ETF inflows in the first week are priced into Bitcoin at 45K. Inflows could be more with ETF wars beginning this morning.

Now, Coin shares also has a similar model seeing around a billion dollars of inflows at 45,000, but their model also suggests that $2 billion of inflows could be closer to around 51K Bitcoin. Rao Paul from Real Vision points out that the flows in the first week don't really matter. Rao writes, you are still able to front-run all the flows over the next 24 months

and all you do is worry about what is priced in today and if it will correct sharply after the ETF. Don't mid-curve it. Play the long game. Now, there has even been some chatter about whether there will be circuit breakers and what the impact might be. BitPain writes, prediction. Bitcoin ETFs all trigger circuit breakers on first day of trading. Spot markets plus 30 to 50% upside.

Marketmakers don't know what the F to do because they halted trading at plus 10%. Chaos and epical fomo ensue, all-time high by the end of the week. However, Alistair Milney points out, just to clarify that it is only single stocks that get trading pauses for sudden 10% move. It doesn't apply to ETFs, which are paused if the underlying assets can't be traded. Now, yesterday we also covered the start of the ETF war, and that has proceeded right on into today. To recap, on Monday morning, Arkin 21 shares in Van Eck, announced they'd charge 25 basis points on their funds. Bitwise came over the top with a 24-bit fee. BlackRock have

also set their fees at 30-bips. Arkin 21 shares in Bitwise will also waive their fees for the first six-months months or until $1 billion in assets under management. Invesco is also offering a six-month fee waiver but will keep it on until they reach $5 billion in assets. BlackRock who's offering a 20-bips fee for the first 12 months or until they get $5 billion in assets. Bloomberg ETF analyst James Safart tweeted, honestly these fees are so low and the ETFs will trade absurdly tight, penny-wide bid-ask spreads and without any commissions on most platforms. Don't be surprised when the fee war leaks out beyond just the ETFs. Nick Carter agreed that this fee war could have implications for crypto exchange fees tweeting, the cost of intermediated brokerage access to Bitcoin went from $200 to $25,000.

basis points overnight, and the SEC stood in the way of this for a decade. No pure example of a totally misfiring regulator. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if? It invites people in instead of them out. It's on 24-7-365 and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry,

facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, PVI, DBA, Cracken. Now, it's clear that asset managers are engaging in a race to the bottom, with many commentators noting that these fees are likely to be too low to cover operational costs. Unlimited Funds, CIO Bob Elliott noted that Plain Vanilla ETFs typically have costs in the range of 8 to 10 basis points, and that the cost for Bitcoin would likely be much higher. He wrote,

even at 10 bips of profit on the high side, 10 billion of AUM is an industry rounding error at 10 million total profit. We need hundreds of billions to make us worth it for so many reasons. My guess is there will be a lot of shutdown in the first couple years once one or two emerges the winner. But it's not going to be a profit center at all. Probably a loss leader once all in costs are figured in. Caitlin Long, the CEO of Custodia Bank, warned,

when fees are lower than costs, please, please, please ask yourself how the asset manager is making money managing the fund. With no-fee funds, the answer is usually securities lending, a practice that can pose a lot of hidden risks to investors. What's really going on here? Now, Bloomberg's Eric Baukuna has clarified that lending out the underlying Bitcoin is strictly off the table for these ETFs, tweeting, as 33-act guarantor trusts, the Bitcoin ETFs will not be allowed to lend out the Bitcoin, so there's also that.

He dissected the likely game plan for how asset managers intend to make money on these products, adding, here's how. Low-fees attract advisors who control the majority of money in America. That activity attracts traders. Then once an ETF is big and liquid, the issuer will play hardball with the custodian, i.e. lower your fear we're going elsewhere. This is normal life in the ETF Terodome. Now, the glaring implication of these few wars is that ETF issuers aren't aiming for a couple

of billion dollars in assets under management at the end of the day. The numbers simply don't make sense at those levels. The prize instead is likely viewed as something closer to the 57 billion in AUM currently stored in the gold ETF, which comes along with economies of scale and negotiating power to drive down costs. Chow Wang of Alliance Dow tweeted, ETF issuers rushing to cut fees to less than 30 basis points below their cost is everything you need to know about how far they are willing to go to market Bitcoin to the world. Oh, and that's without the king of low-fees ETFs vanguard in the race.

If I were in the cell de news camp, I'd be concerned. Nick Carter added, obvious point, but ETF issuers lowering their fees to absolute bargain basement levels implies massive expectations on their part around AUM. The biggest financial institutions in the world are telling you something. Will you listen? Now, like I said, this continued into today. Bitwise, Valkyrie and Vesco Galaxy and Wisdom Tree have all lowered spot Bitcoin ETF fees ahead of an anticipated approval tomorrow. And yet, Grayscale is still playing a different game. As we discussed yesterday, while the start

of the fee war was anticipated, the big surprise has been that Grayscale declined to slash their fees to enter the competition. Yes, Grayscale will trim their 2% fee to 1.5%, but as discussed, that's five times higher than Black Rock and about seven and a half times higher than the lowest competitors. This has been viewed as a bet that existing GPTC holders would not move their allocations to rival ETFs. Some think that this gamble is unlikely to pay off. Lumida Wealth, CEO, Ram Alawalia tweeted, Grayscale is going to hear the giant sucking sound of AUM leaving the Grayscale Bitcoin Trust and ETH products after it converts. Absurd that fees will go to 1.5% while the market is 20 to 30 bibs. This is a perfectly competitive market, ETFs are commodity products. Why would I

pay 5x competitor fees? Others, however, noted that tax implications of selling a highly profitable long-term GPTC position might cause significant switching costs for existing holders enough to deter massive outflows. That obviously doesn't apply to GPTC held in tax-advantaged retirement accounts, so those holdings appear likely to be the first to flee to cheaper ETFs. Still Masari's Ryan Selkis had a different few tweeting, just a maddening number of bad grayscale takes today. I wish I had time energy to write up the obvious. They are long-term winners and will lose modest AUM for the 1.5% fee, maybe 30% over the course of 2024. Maybe. Maybe. Earlier in the day, Selkis had noted,

the new ETF issuers are racing to the bottom on fees where every billion dollars in AUM leads to $3 to $5 million in annual revenue. Grayscale's head start means starting ARR of $420 million. Grayscale has an insurmountable marketing and cash flow advantage. People still don't understand DCG as a business, and the odds of them moving past the catastrophic genesis blowup approach 100% as the asset class rallies and Grayscale's earnings explode.

Now, in terms of people starting to look for signals that anything might go wrong, yesterday afternoon there was a little panic caused by the SEC responding to applicants' latest filings. Chamber of Digital Commerce CEO Perry Ann Boring tweeted, The SEC just issued additional comments on pending applicants S-1s. This is a delay signal. Yet Bloomberg's James Safar quickly dismiss these concerns, tweeting, One, this is true, comments came back on those S-1 documents with the fees that we all went crazy over this morning.

This isn't out of ordinary. Two, expect to see more amendments tomorrow because of this. Three, that said, I don't think this is necessarily a delay signal. Really, this just shows how quickly the SEC is turning these things around. Borderline unheard of to send over a document to the SEC in the morning and get comments back the same day. If they wanted to delay, the issuers wouldn't have gotten comments back tonight. Finance lawyer Scott Johnson agreed, tweeting,

Yes, it's unheard of. And to remind everyone, S-1s do not need to be complete when 19B4s are approved. Take futures ETFs in 2022. Hashtex didn't even get initial comments until after its 19B was approved. More than anything, these quick comments demonstrate SEC working to put everyone forward for a quick approval and launch. Basically what we now have is inverted commentary. A few weeks ago, we were sifting through documents to find little signs that the

ETFs would be approved and reading every little thing into SEC actions to suggest that things might be going forward. Now, as we look on the precipice, there's a whole bunch of people slanting their social media commentary towards the opposite, towards looking, in other words, for little reasons that ETFs might be delayed. Once again, Eric Baukounis from Bloomberg isn't buying it. He tweeted, BlackRock just refiled their S-1 based on last-minute comments given yesterday. Hard to tell what has changed at first glance, but the important thing is the

unheard of 24-hour turnaround time between filing, comments, and refiling tells us all parties aiming to get this show on the road, Pronto. Now, it is not just crypto people who think that the opportunity of this ETF launch is massive for issuers. Standard Chartered have joined the chorus predicting huge inflows for year one. That bank is expecting to see 50 to 100 billion allocated to spot Bitcoin ETFs this year. Alongside that inflow of fresh capital, the bank is for forecasting Bitcoin's price to hit 200,000 by the end of 2025. Bank analysts reflected in the launch of the gold ETF writing, when GLD was introduced in November 2004, the total stock of above-ground gold was worth around $2.2 trillion, compared with Bitcoin's current market cap of around

$0.86 trillion. Adjusting the $88 billion of gold inflows for relative market caps would suggest $34 billion of inflows to Bitcoin ETFs. Still, the report suggested that that estimate seemed too low, so adjusted upwards towards something that, quote, seemed reasonable. What's more, standard sees ETF approvals as a, quote, watershed moment for normalizing Bitcoin exposure for institutional investors. Analysts wrote, we expect Bitcoin to enjoy price gains of a similar magnitude as a result of U.S. spot ETF approval, but we see these gains materializing over a shorter one-to-two-year period, given our view that the Bitcoin ETF market will develop more quickly. Now, looking to the next big thing, Standard Chartered expects spot Ethereum ETFs to follow closely

behind Bitcoin products, anticipating SEC approval in the second quarter of this year. Whatever happens, financial media is certainly treating the Bitcoin ETFs as the most important story of the moment, with absolute wall-to-wall coverage. During a segment last night, CNBC hosted representatives from several issuers. Ophelia Snyder of 21 shares said the ETFs would allow investment advisors to more comfortably add Bitcoin to their client's portfolios. Arc CEO, Kathy Wood, unsurprisingly, is bullish, dismissing the notion that the ETF launch will be a sell-the-news event.

She said, we're seeing an anticipatory move, but the move of institutions into this new asset class, and that is what we're talking about here, a new asset class, which with another diversifier institutions can increase their returns per unit of risk, I think that's going to be really appealing. Kathy added that a big move would make sense. There's a scarcity value now evolving, she said. It's becoming a scarce asset at 19.5 million Bitcoin outstanding. It can only go to 21, and 15 million of those 19 and a half are in what we call strong hands. They haven't moved their Bitcoin in 155 days. Addressing the minimal fee structure, Kathy said, we're not looking to maximize profitability with this spot ETF. We really believe this is an important moment to help with the democratization

of Bitcoin access. That's our primary motive. Would indeed said that her thinking had changed since the ARCETF was initially filed at a much larger fee, adding, this is a special moment to make a statement that this is a public good, effectively the equivalent of a financial superhighway, a global monetary system. We just wanted to make sure what one of the things we communicated is, we want you to feel you can access this. Basically, when all was said and done, CNBC ran what was essentially a 20-minute infomercial for Bitcoin ETFs on Monday night. One of the striking things was just how outdated all of the fud sounded. The host at various points did a little bit of pushback, questioning whether it was a legitimate asset class, whether it has value, and frankly,

it just sounded so off-base when you have the CEOs of major asset managers in the room, essentially the same effect that that first Larry Fink interview had. It's just very hard to see how this isn't the institutional adoption and legitimization moment that everyone has speculated that it would be. Hopefully by this time tomorrow, when you are listening to the to this show, we have our approval in hands, and we're getting ready to trade on Thursday. For now, I want to say one more big thank you to the sponsor for today's show. Cracken, go to crackin.com slash The Breakdown and see what crypto can be. Until next time, be safe and take care of each other. Peace.