The Breakdown - The Push to Accelerate Crypto ETFs

Starting point is 00:00:04 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 Wednesday, July 9th, and today we are talking crypto-eteps. 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.ly slash breakdown pod. All right, friends, a bunch of stories today.

Starting point is 00:00:38 around crypto ETFs, plus a little bit of Bitcoin Treasury. We start with the Trump Media Group who have filed for their crypto-bluechip ETF joining the wave of crypto index funds. Bitwise, Grayscale, Franklin Templeton, and Wreck Shares all have applications to launch crypto index funds in progress with the SEC. Last week, it looked like the Grayscale Fund would convert into an ETF after receiving staff-level SEC approval. However, the regulator hit the breaks at the last moment, sending the fund to the commissioners for review. Report stated the review would deal with listing standards around the altcoins included in the fund. The Grayscale Fund included modest allocations to Solana, Cardano, and XRP, none of which have been approved for individual spot

Starting point is 00:01:15 ETFs. With that lens, the Trump Media Group ETF could be facing even larger hurdles. Alongside Bitcoin, Ethereum, Solana, and XRP, the fund also includes a 5% allocation to Kronos, the former Crypto.com exchange token. Crow is a top 50 token, but it represents just 0.2% of total crypto market cap. Now, Crypto.com is sponsoring the product so it's understandable they'd want to include their own token, but they've included it at a very large weighting, especially compared to an 8% allocation to Solana and just 2% to XRP. The token's inclusion in a so-called blue chip fund led some analysts to attempt to rationalize the decision.

Starting point is 00:01:49 Bloomberg's Eric Balcunis wrote, CT's overall view of coins reminds me so much of quants and the factors. Bitcoin is like value, everyone agrees it's king. ETH is like momentum, decent support. Sol is like size or quality, split. XRP is low-val, very limited support, and Kronos is like dividends. No respect gets dumped on. Now, the last major tokenomics decision from Kronos was to reissue 70 billion tokens that were burned in 2021, increasing the total supply by 230% overnight in March.

Starting point is 00:02:16 Candidly, I can't recall the last time a dividend stock like Johnson and Johnson made a decision like that, but here we are. While the inclusion was slammed by CT, it underscores the need for some standards around crypto-ethefs. SEC commissioners picking and choosing which tokens go live isn't a great solution, but But issuers currently have no idea where the line is. As a result, we're seeing reasonable products language in the SEC's inbox. Nate Garassi of the ETF store commented, Grayscale can't be happy having a stay issued on their approval order. First to market matters.

Starting point is 00:02:44 The SEC holding up Grayscale Digital Large Cap ETF jeopardizes that advantage. Now, the Trump Media Group ETF is still just an application, so the advantage isn't gone. Still, we're six months into the new administration and zero new crypto ETFs have made it through the approval process. Indeed, the only crypto to come to market under this administration is the Rex Ospre Salana Fund, which started trading last week. That ETF went around the SEC approval process by using a unique and less efficient structure, arguably making it a worse product for investors. However, the use of this loophole did light a fire under the SEC, spurring them to get moving on a unified and objective framework for crypto ETF approvals with the goal of streamlining the

Starting point is 00:03:19 process. This initiative has generated a ton of reporting this week, with sources discussing the rationale behind the framework and timelines for it to be implemented. One source told the block, it's actually an initiative by the exchanges going to the SEC and saying, we want these listing standards that we've come up with for you to approve. So that way, every time we have a new crypto-etep-p, so long as it falls within these standards, we don't have to go to the SEC to approve it. We can just approve it ourselves. During a Twitter space is on Tuesday, Bloomberg's James Safart said that he expects a draft

Starting point is 00:03:45 to emerge as soon as this month, with implementation in either September or October. He said, then we'll see the floodgates open on these other assets. But that's what I'm waiting for. Now, while this SEC is certainly more open to crypto-etiffs, Gregory King, the CEO of Osprey funds, isn't seeing a reckless attitude towards throwing open the floodgates, commenting, they're not going to be as cavalier as the man in the White House launching his own meme coin and stuff, but they are pro-business, pro-innovation, and pro-crypto. Later in the day, the SEC contacted asset managers to update their Salonof filings by the end of the month,

Starting point is 00:04:15 sparking another round of speculation that fast-track approvals could be coming. One source told CoinDesk, I think that the SEC has some pressure to approve these quicker than waiting all the way to October, especially with that REC shares product that got approved last week. October is the final deadline to approve or deny the first Solana application rather than kicking the can. Blockworks Ben Strack has different sourcing on the industry who suspects the SEC is waiting until they have their token listing framework up and running before they approve Solana ETFs.

Starting point is 00:04:40 Strach wrote that no one is particularly confident on that timeline, but that, quote, current expectation is for those to come closer to or in October, not sooner. At the end of the day, the second half of this year is poised for a wave of all coin ETFs to come to market, the SEC just needs to decide which ones they're going to approve. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products ranging from single asset to diversify to thematic exposure to crypto and the broader crypto industry. They have long been innovators

Starting point is 00:05:20 at the intersection of tradfi and crypto. And one of the benefits for a lot of us is that Grayscale products are available right through your existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visitgrayscale.com.

Starting point is 00:05:37 Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. Now, a follow-up on one story from late last week, Robin Hood is under regulatory investigation over their tokenized private stock. After OpenAI explained the tokens aren't actually equity and they don't endorse them, regulators are taking a closer look. The Central Bank of Lithuania, which oversees Robin Hood's European arm,

Starting point is 00:06:01 opened an investigation earlier this week. It's still at a very preliminary stage and there's no indication that the products will be blocked. Speaking to Bloomberg yesterday, CEO Vlad Tenav said, they have some questions. They want to make sure that everything is proper because it's a new, innovative offering. We're confident. We think that these are not only important, but they'll withstand the highest form of scrutiny. Regardless of the outcome, Ten of his keen to launch tokenized stocks in the U.S. and the U.K.

Starting point is 00:06:23 once regulations are in place. He said, for tokenization in the U.S., we do believe that the SEC has the authority to make it happen without legislation. The U.S. shouldn't be far behind. The opportunity is too large to ignore, not just for retail, but also institutional. Now, tokenization rules are on the agenda for SEC Chair Paul Atkins, but the agency has a laundry list of regulatory changes to work through. And although OpenAI wanted no part in these products, the same isn't true for the rest of the startup ecosystem. Ten have claimed, since our announcement, I've had a deluge of inquiries private companies that actually want to access retail to have their shares tokenized and be a part of this revolution.

Starting point is 00:06:57 Drew Babasu of Visual Markets tweeted, Want to access retail, funny way of saying private companies are hoping to bypass public market disclosure requirements. Moving over to the Bitcoin Treasury world, Metaplanet has revealed the next stage in their Bitcoin strategy, going on an acquisition spree to fuel further growth. Until now, Metaplanet has executed the micro-strategy Playbook to a T. They've issued equity and debt to fund sevenfold growth in their Bitcoin treasury. But that strategy has natural limits, especially for small firms with questionable underlying businesses. So far, the bet has been that Bitcoin price appreciation can outrun the dilution

Starting point is 00:07:27 of issuing more shares. On the debt funding side, a company with negligible revenue is reliant on being able to roll over their debt in perpetuity to avoid a disaster. Michael Saylor has previously discussed the idea of turning micro-strategy into a Bitcoin bank, earning a yield by lending out their Bitcoin. Metaplanet, though, is contemplating a slightly different approach as the company matures. CEO Simon Gerevich said, We think of it as a Bitcoin gold rush. We need to accumulate as much Bitcoin as we can

Starting point is 00:07:50 to get to a point where we've reached escape velocity and it just makes it very difficult for others to catch up. Then we have phase two, when Bitcoin-like securities or government bonds can be deposited with banks and then they'll provide very attractive financing against the asset. We'll get cash that we can use to buy profitable businesses, cash-flowing businesses.

Starting point is 00:08:06 He said that the first phase of the plan will likely run for four to six years, so it's really early days in thinking about acquisitions. However, when the time comes, he believes it would be better if the acquisition targets are aligned on Metaplanet strategy, adding, maybe it's acquiring a digital bank in Japan and providing digital banking services that are superior to the services which retail now is getting. Gerevich was also asked about prominent short-seller Jim Channos looking to bet against the Bitcoin Treasury companies, calling their growth metrics financial gibberish.

Starting point is 00:08:31 He responded, I encourage people to short our stock if they don't believe in the story. Now, although it's a vague plan, it is still for many refreshing to hear that one of the leading Bitcoin Treasury companies understands that their current arbitrage opportunity won't last forever. Fred Kruger commented, Metaplanet CEO Simon says they plan to borrow against their Bitcoin to buy profitable businesses. In other words, they don't actually believe in Bitcoin. They want to buy more hotels and parking lots. Compliant D-Gen thought that was a wildly short-sighted take, responding, it's hard to outperform Bitcoin with a traditional business model or even justify trying

Starting point is 00:09:00 when the growth of Bitcoin is as high as it is today. This is why Bitcoin Treasury companies are in the gold rush phase right now. Laser focused on acquiring as much Bitcoin as possible, while the rest of the world still doesn't understand. When this hyper-growth phase is over and mass adoption is achieved, however, growth will decrease and Bitcoin will just be the best money on the planet. Once this future arrives, it will be necessary to have a profitable business to earn more money for shareholders. This is obvious, but very forward-looking and hypothetical. Hence the confusion from anyone that has the time horizon and or intellectual capacity of a fruit fly. In fact, this was one of the major takes when the proliferation of Bitcoin Treasury companies began earlier in the year. Back in May,

Starting point is 00:09:35 Marty Bent tweeted, highly profitable operating businesses that roll profits into Bitcoin is way more exciting than pureplay Bitcoin treasury companies. Now, we'll see if MetaPlanic can execute on that pivot in a few years' time, but for now, many are just excited to see that their time horizon extends past this initial gold rush. Speaking of Bitcoin, Bitcoin-focused venture firm Ego Death Capital have raised a $100 million fund to invest in early-stage Bitcoin startups. The firm aims to back Series A rounds for companies with between a million and $3 million in revenue. This is Ego-death's second fund after the firm raised $25 million for their inaugural fund in 2022. Their first fund deployed money into the burgeoning companies form

Starting point is 00:10:09 during the last bare market, invigorated by opportunities unlocked by the taproot upgrade and the expansion of the Lightning Network. Fund 2 has already made their first investments. Rucksum of Bitcoin Exchange, rely a Bitcoin savings tool, and breeze a Lightning Payment Service. Crypto Venture has frankly been a bit of a wasteland over the past few years, with very few funds deploying into early-stage projects. That goes double for Bitcoin-focused capital, which became extremely scarce after an explosion of activity in 2023. Now, $100 million is relatively small compared to the monster funds being raised in AI or even the crypto funds of last cycle, but still impressive for a Bitcoin-only fund. The goal of EgoDeath's fund is to provide scaling capital to the ecosystem,

Starting point is 00:10:46 with founding partner Nico Lichuga commenting, while there are a number of Bitcoin-only VC funds investing at the seed stage, there was no Series A-focused fund to support the rapidly developing ecosystem. Jeff Booth and Indy Pitt are the other founding members, while Preston Pish and Lynn Alden have joined his general partners for the second fund. The investment thesis is explicitly not about Bitcoin treasury companies. The firm also doesn't invest in hardware wall, or Bitcoin mining. Instead, they're looking for startups that are building out Bitcoin's financial and application layers. Lin Alden said, we're investing in businesses that treat Bitcoin not as a trade, but as infrastructure, something to build on, not bet on. Lachuga added, we're in Bitcoin,

Starting point is 00:11:21 investing in true companies that are only solving real world problems. We see Bitcoin is the only decentralized and secure base to be able to build on. Congratulations to the folks at EgoDeath Capital for closing the fund, and I look forward to watching the portfolio take the next step. For now though, that is going to do it for today's breakdown. Appreciate you listening, And until next time, be safe and take care of each other. Peace.

The Breakdown - The Push to Accelerate Crypto ETFs

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