The Breakdown - The Fee War and the ETF Terrordome

Episode Date: January 9, 2024

Final S-1s show Bitcoin Spot ETF competitors competing aggressively around fees. 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 Monday, January 8th, and today we are talking about, of course, the ETF excitement. 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. Hello, friends. Well, listen, I am going to sound like a bit of a broken record this week. It is just ETF excitement all of the time. And frankly, until this thing actually happens, it's just going to be the major thing that everyone is talking about. I think then treat this week a little bit

like a play-by-play in one of the most significant transformational periods in Bitcoin's history. And I'm sure there will be plenty to catch up on once we've got this formal approval and everything actually kicks off. So, what has been going on? Well, the SEC database saw an influx of ETF paperwork on Friday. All of the issuers, including BlackRock, Greyscale, and Fidelity, have now updated their 19B4 filings, presumably to their final form. 19B4 filings, you'll remember, set out the proposed rule changes, which would allow the

ETFs to be listed on exchanges. The SEC will need to approve these forms, along with S1 prospectuses before trading can commence, and finalized S1s poured in early. this morning. Now, on that front, by far the most notable thing was the incredible fee war. Coming into the morning, Fidelity had been the low water market, 0.39%. But by the end of the morning, that was firmly in the middle of the pack. So here's where things stood. Hashtex had a 0.9% fee. Valkyrie had a 0.8% fee. Wisdom Tree had a 0.5% fee. Fidelity-wise origin Bitcoin Trust had a 0.39% fee. But then Invesco came out.

with a 0% fee for the first six months or up to $5 billion in assets under management, followed by 0.59% after that. The I shares Bitcoin Trust, which is obviously from BlackRock, also had a six-month or $5 billion AUM waiver with a 0.2% fee during that period, followed by a 0.3% fee thereafter. Arc and 21 shares had a six-month or $1 billion waiver, with a 0.0% fee during that period and a 0.25% fee after. and Bitwise also had a six-month or one billion AUM waiver with 0.0% during that time and 0.24% after.

The one outlier to all of this was Grayscale, who announced that the fee was moving from 2% where it exists now with the GBTC to 1.5%. Now, 1.5% is five times what the BlackRock fee will eventually be. So what is the logic? Eric Balcunis wrote, damn, the fee for BlackRock's Bitcoin ETF will be 0.3% as per their just filed S1. This is much cheaper than I predicted.

Life just got a lot tougher for everyone else. The ETF Terrordome is no joke. Then after Grayscale came out, Bacunas added, Wow, Grayscale totally defying Tererodome, which they are not natives of, which usually doesn't work out well, but maybe they can afford to

given their massive embedded AUM and volume. Hard to imagine advisors where the big money is, picking a 1.5% ETF when others are sub-40 basis points. Then again, a mutable alpha responded to Eric and said, Thing is, when they have a $20 billion head start, why do they need to compete for the next $20 billion? They are already bearing fruits and it's currently midsummer harvest.

Balcunis added, It's a good point in why grayscale situation reminds me a lot of legacy high-cost active mutual funds. What should they do? Cut to 30 basis points to compete with Vanguard and instantly kill all your margin, or just milk it till the bitter end. The point being that because grayscale Bitcoin trust is converting from a trust to an ETF, they're the only ones that have existing assets under management.

Effectively, then, people are thinking that they're betting on other people's inherent laziness and the ability to keep that cash cow going, at least for a little bit. Now, another vector of competition around all of this is how people will market these things. It's not just a fee game, there's also a brand question. We've, of course, already seen video advertisements from multiple issuers, but some are taking a different approach trying to promote their crypto credentials. Notably, Van Eck has announced that they will be donating 5% of profits to Bitcoin development organization Brink. In a Twitter thread, they wrote, we're not Bitcoin tourists at Van Eck. We're in it for the long haul. That's why we made

an initial 10K donation and signed a pledge to donate 5% of our Bitcoin ETF profits, if approved, to support Bitcoin Coredebs via Brink for at least 10 years. Your tireless dedication to decentralization and innovation is the cornerstone of the Bitcoin ecosystem and we're here to support it. Vanek made a similar pledge when their Ethereum futures ETF was launched in October, pledging to donate 10% of profits to Ethereum Core developers via the Protocol Guild. Now, all of these issuers currently expect approval sometime this week. One source noted that this round of amendments does not mean that approvals are guaranteed, but said that they were optimistic. BlackRock went on record with Fox Business to flag that they expect an approval on Wednesday. The current state of the rumor mill is that SEC commissioners

plan to hold a vote on the applications on Wednesday, which would pave the way for trading to commence on Thursday or Friday if approved. Now, one question you might be asking yourself is, is anyone still skeptical? I would say less skeptical and more braced for pain, might be a better way to describe it. Back on January 3rd, Marty Bent wrote, Mentally prepping for the Sunday night emergency statement from the Treasury that identifies Bitcoin as a national and financial security risk in an attempt to nuke the ETF approval. Now, of course, that didn't happen, but you get the gist.

In terms of what a denial might actually trigger, James Safard and ETF analyst at Bloomberg wrote, One, Ark withdraws with assurances about March approvals. Two, Gensler goes nuclear and SEC denies using new resources or ignores the court, knowing they'd end up back in court. Three, Biden administration comes down and does something to stop this. I don't think any of these things are going to happen if that's not already clear enough. Lorishin said, agreed. If they made everyone jump through all these hoops only to kill it at the vote, it would be a

terrible look for the agency. If they managed to come up with a legit reason, it would need to be asteroid about to hit the Earth level of concern. Now, still, that didn't stop some from trying to derail the process. In a last-minute comment letter, non-profit lobbyist Better Markets have called the Bitcoin ETFs a, quote, grave threat to investors. The letter was filed on Friday, the final day for public comments on the Franklin Templeton and hashtag's applications.

It claimed the ETF would unleash, quote, a speculative, volatile and socially useless financial product on tens of millions of American investors and retirees. The letter focused on market manipulation, claiming, the potential for fraud in the spot Bitcoin market is so great that the rules of an exchange cannot permit the listing and trading of a spot Bitcoin ETP and still be consistent with the requirement that the exchange's rules be designed to prevent fraud and manipulation to protect investors in the public interest. Better Market CEO Dennis Kehler added some additional context tweeting, it's important to understand that the court in the Grayscale case merely said the SEC

insufficiently explained the basis for rejecting the Bitcoin ETP decision. Our letter details how the SEC can and should better explain it and correctly reject it again. As you might imagine, inflammatory statements were littered throughout the letter. By way of one example, quote, the approval of spot Bitcoin ETPs would be a historic mistake, almost certainly leading to massive investor harm. The crypto industry will almost certainly flood Americans with marketing propaganda suggesting that the SEC's action legitimized crypto,

giving false comfort to retail investors. The SEC must not facilitate the financial carnage that will follow if the crypto industry is allowed to repackage, out of an air of legitimacy to, and widely disseminate a financial product that is little more than a socially worthless gambling chip. Now, if you're thinking this letter sounds a lot like it could have come from the desk of Elizabeth Warren, you are not alone.

While Better Markets claims to be a nonpartisan organization solely focused on investor protection, the lobbyist's web page features ringing endorsements from Warren herself as well as Gary Gensler. Alongside consistently lobbying against the crypto industry, Better Markets have also been a vocal opponent of political prediction markets. Zero Knowledge Consulting founder Austin Campbell noted how unhinged this last-minute letter seemed, tweeting, am I crazy, or did Better Markets just publish Screed, replete with typos, urging the SEC to literally ignore a federal judge in the law and do whatever they want anyway? Still, some were concerned. Bit refilled data analyst Matt Alberg wrote, the fact that Better Markets, a special

interest connected to Elizabeth Warren, expended significant resources to put this letter together in the 11th hour, makes me think we may yet get rugged. If ETF was a foregone conclusion, why would they go through the effort of putting this out last minute? Still, finance lawyer Scott Johnson was completely unbothered. He waited until the clock struck midnight on Friday to point out, as a technical matter, they didn't even submit the comment to the only two apps, Franklin and hashtags, that were accepting comments as of yesterday. They simply copy-pasted the application from their August letter,

and forgot to include the only relevant ones that would be required to consider the comment. If Gary and Liz had some grand conspiracy here, I think we've underestimated their incompetence. Now, that position that this was not something to worry about got more credence this morning, when something happened that many people took as more of a sign than anything else that this really was truly a done deal. 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.

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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. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc., PVI, BVI, DBA, Cracken. At 1040 in the morning, East Coast Time, Gary Gensler himself. SEC chair wrote, Some things to keep in mind if you're considering investing in crypto assets.

One, those offering crypto asset investments and services may not be complying with applicable law, including federal securities laws. Investors in crypto asset securities should understand they may be deprived of key info and other important protections in connection with their investment. Two, investments in crypto assets can be exceptionally risky and are often volatile. A number of major platforms in crypto assets have become insolvent and or lost value. Investments in crypto assets continue to be subject to significant risk. Three, fraudsters continue to exploit the rising popularity of crypto assets to lure retail

investors into scams. These investments continue to be replete with fraud, bogus coin offerings, Ponzi and pyramid schemes, and outright theft where a project promoter disappears with investors' money. Now, this is a thing that Gensler will often do when the SEC is approving something. It's effectively their big caveat that they're not endorsing it, they're just not denying it. As Eric Weiss put it, tell me you're about to approve the Bitcoin ETFs without telling me you're about to approve the Bitcoin ETFs. Overall, Georgetown Professor James Angel made the point that the SEC has largely made their

own bed when it comes to Bitcoin ETF hype. He said in an interview last week, this is Gary Gensler's worst nightmare come true, due to bureaucratic bungling. If they had just quietly allowed Grayscale to turn its trust into an ETF years ago, we wouldn't be having this talk. There would be a couple of Bitcoin ETFs out there, a couple of crypto-etiffs, and the Crypto-F fanatics would be trading back and forth. But what the SEC is doing is setting up a horse race with the big ETF vendors, with all of their marketing muscles standing there at the starting line waiting for the pistol to go off. The SEC is

unleashing the marketing might of the entire Wall Street all at once. And yet, that begets the question, one that many are asking, are we headed towards a success or a disappointment, and what even would that mean. Crypto ETF launches have been a mixed bag in the past. The debut of the pro-share's Bitcoin Futures ETF in 2021 was one of the most successful ETF launches in history. The fund became the fastest ETF to gather $1 billion in assets under management, achieving that milestone in less than two days. At the same time, the recent launch of Ethereum futures ETFs massively underperformed expectations, with just 20 million in assets after the first week of trading. This time around, it seems that some issuers won't be leaving it to chance. During a Twitter space is on Friday,

Vanek's head of digital assets research, Matthew Siegel said, I heard from a pretty well-placed source that BlackRock has more than $2 billion lined up in week one in new incremental flows from existing Bitcoin holders who are adding to positions. I can't vouch for that, but that's what everyone is doing, just making phone calls and trying to find the folks who can write checks into these products. If $2 billion happened in one week, that would blow away our estimates. We're at $2.5 billion in the first quarter of trading, which we do by looking at the past flows into the first gold ETF and adjusting by the US money supply, and we have a $40 billion market opportunity over two years based on similar analysis.

Bloomberg's Eric Baukunis immediately made the phone calls and stated, I got a second source to confirm Matt's claims that BlackRock has big day one money lined up. He added, it would be on brand for BlackRock. They've lined up and injected big cash into new ETFs on the first day of trading, so it registers as volumes and flows. If it's true, $2 billion would blow away all first day slash week volume or AUM records for an ETF. What's more, Balcutas attached a list of the top 25 ETF launches in history, noting that BlackRock has a habit of juicing their day one numbers. Indeed, BlackRock has recorded 11 of the top 25 ETF launch days. The only funds which have recorded $2 billion in day one

inflows were the I-Share's Climate Conscious and Transition Fund, and X-Trackers Climate Action Equity ETF both launched last year. Now, if the ETFs do trigger a deluge of fresh capital, we could see issues start to emerge with the Bitcoin supply. Commentator Lark Davis did the moon math back in September, claiming that 20 to 30 billion worth of inflows would drain half of the Bitcoin from exchanges at current prices. Exchange holdings are up a little since then with around 82 billion Bitcoin deposited with exchanges currently. Still, the overall point is solid. Davis presented the visual of his epic eight-year bull run following the launch of the gold ETF to drive home his point. Now, the most startling thing about this narrative is that

major asset managers are actually commenting on the hypothetical. Valkyrie's CEO Leo Wald said, theoretically, a company or government could attempt to buy a significant amount of Bitcoin, but acquiring all Bitcoin in circulation is highly impractical and we still have a significant unreleased supply of Bitcoin. Bitcoin's decentralized nature and the fact that many hodlers might refuse to sell at any price create a natural barrier against monopoly. Bitwise CIO, Matt Hogan said, The scarcity principle tells us that the price of a scarce good will rise to meet demand. In other words, if someone tried to corner Bitcoin, the price would rise and rise and rise and

as more and more reluctant sellers were met. Now, at the end of the day, no one knows what will happen when massive new demand hits illiquid Bitcoin supply. According to GlassNode, almost 15 million Bitcoins haven't moved in the past 155 days, which is their metric for long-term holding. That's an all-time high with almost all of those coins in profit. How high Bitcoin's price has to go to bring on additional supply from this cohort is anyone's guess. Now, to the extent that you're looking for someone to throw any amount of cold water on the ETF launch, I think Lin-Alden makes the most salient point. She wrote, to be honest, I think the Bitcoin ETF is the most boring thing about Bitcoin right now.

Whenever I get asked about it, I'm like, meh. Yes, the ETF should be good for price and liquidity since it gives large pool of Waldgarten capital more access to Bitcoin exposure. But in my view, the most important thing about Bitcoin right now is all of the little hubs popping up all around the world. Bitcoin Beach, Bitcoin Lake, Bitcoin Junkle, Bitcoin at Cassi, Africa Bitcoin Conference, Indonesia Bitcoin Conference, etc. As well as wallets and other technologies that help them localize their custody of Bitcoin

rather than keeping it stashed in the giant Binance Honeypot or wherever, and any solutions that help link them all together for payments or that help them trade peer-to-peer or onboard from fiat to Bitcoin in distributed ways. The rise in connectivity of these hubs is impressive and is worth supporting. The point then isn't that the ETF isn't a quote-unquote big deal. It's that it is very easy to distract from all of the other things that are making the actual significant differences in the accessibility of Bitcoin to more populations around the world that need it. I think Lynn is right and it's a great thing to keep in mind. But at the same time, it's hard to deny just how big a moment this week really is, assuming that everything

happens as we think it will. Will Clemente wrote, BlackRock, Fidelity, J.P. Morgan, and Goldman Sachs are all soon going to be promoting Bitcoin to their clients and incorporating it in portfolio construction. You had 15 years to front-run the institutions. A new era for the asset class begins next week. Of course, I will keep you posted about all of the developments as they happen, but it's hard to deny. It's an exciting time, and I'm glad to be here watching it with all of you. One more big thank you to my sponsor for today's show, Cracken. Go to crackin.com slash the breakdown and see what crypto can be. And until next time, be safe and take care of each other. Peace.