The Pomp Podcast - #488: Eric Balchunas and James Seyffart on the Bitcoin ETF

Episode Date: February 9, 2021

James Seyffart is an ETF Research Analyst at Bloomberg Intelligence and Eric Balchunas is a Senior ETF Analyst at Bloomberg Intelligence.  In this conversation, we discuss advantages of public market fund structures, Grayscale, Bitwise, institutional interest in Bitcoin, the historical analysis of gold ETFs, and the future prospects of a Bitcoin ETF. ======================= OKCoin.com is the leading crypto exchange for both beginners and experienced users. You can fund your account in under 2 minutes, and get access to the most advanced trading engine, all while paying the lowest trading fees in the industry (0.1%). Visit www.okcoin.com/pomp and open your account today.  ======================= Own crypto in multiple exchanges and wallets? Sync them to CoinStats so you track and manage them from one place. Track 8000+ coins and 300+ exchanges all from the Coinstats platform. Try it for free or go to coinstats.app/pomp and get 40% off your premium subscription. ======================= Remote makes it easy for companies of all sizes to employ global full-time employees and contractors. We take care of international payroll, benefits, taxes and local compliance, so you can focus on growing your business. Learn more about Remote and their new Remote for Startups program at https://www.remote.com. =======================

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to the Pomp Podcast, simply the best podcast out there. Let's kick this thing off. James Seifard is an ETF research analyst at Bloomberg Intelligence, and Eric Balchunas is a senior ETF analyst at Bloomberg Intelligence. In this conversation, we discuss advantages of public market fund structures, grayscale, bitwise, institutional interest in Bitcoin, the historical analysis of gold ETFs, and the future prospects of a Bitcoin ETF. I really enjoyed this conversation with both James and Eric, and I hope you do as well. Before we get into this episode, though, I want to

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You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys, bang, bang, super excited to have both James and Eric here. Thank you guys so much for doing this. Thank you for having us. So maybe let's just get started with each one of you kind of going over your background and then what you guys focus on a day-to-day basis. Sure, I'll start. So my background is I started as a reporter for Institutional Investor in the late 90s, covering derivatives, but then I got put to mutual funds. And so I wrote for a newsletter there. And

then I wanted to go on the other side of the keyhole. So I went to PR for a while. I was jealous PR people seem to have a seat at the table. Like you get to the big table quicker in PR. And I went there and you do, you meet a lot of higher ups and it's interesting. And so I did PR and then I got a job at Bloomberg in PR, which was exciting. Got a little bit interaction with Mike Bloomberg. That was great. And got to learn the company really well. And then I had a near miss in 2001, 9-11, and then went to work down in Princeton. I moved from Manhattan to South Jersey and did a life change. And I worked at a Princeton. The only thing I did there was data. And so I'm this PR guy going into data, which is, I think I'm still the only Bloomberg employee who

made that shift. Normally, people start in data and then go into more exciting areas and move to New York. I did the opposite. But it was what I needed. And I got to learn how the terminal was made. And they put me in the funds data area because I had that background. So I spent 15 years helping to build the Bloomberg Funds database. But I was able to use some of my communication skills in interesting ways down there. And so part of that led to getting data better uh articulating why trends were happening in the data and becoming like an analyst and then etfs were something that was rising around 2005 2006 they got big in 2008 they really started to get big and so i got assigned to cover those and so i built out the database adding etf style fields

and then ultimately i got poached internally from our research group to actually write research and sort of lead an etf research team with uh which has a couple people on it uh including james And so our main job is to write, I call them McNugget research reports. Like, you know, the sell side will write like this huge thing and maybe put it out once a month. We have to run and gun. So we do like McNugget, maybe three little notes a week. If you added up our monthly production, it would look like one of those reports, but

we just put them out quickly. And if we're lucky, they get on top go, they get some reads and it's really premium content for the terminal clients. And then we try to brand it and market it. We do what we have a podcast. Do we do some TV hits? And then that's essentially the job. It's quality production and, you know, getting your name and making noise about what you wrote. You have to sort of do that on your own. And that's sort of what we spend our week doing.

And then the rest of the time is idea flow, which is why we use Twitter and talk to people is getting feedback and trying to get our keep our ear to the ground. So when we write about this stuff, we're we're right on the you know, we want to catch swells before they become waves. And so that's generally, you know, that's my day job in a nutshell. Yeah, so I started in Bloomberg Data right out of college. I started in the funds department covering ETFs and hedge funds. Built up was the main person covering that area when Eric went over to research for the most part. So Eric made that jump, and then I was the one maintaining the database on the data side. So basically, anybody looking for information on ETFs, we were maintaining that information.

And then Eric pulled me over to join him on the research side of things. And I worked with him and actually Mike McGlone, who is our commodity strategist. And in 2017, I had personal interest in crypto. I had been following it for a little bit of time. And McGlone basically decided that he was going to start covering crypto under the commodity side of things because it was getting so big and there was so much coverage. And we needed to have some sort of reference rate to cover it. So me and a colleague at Kevin Kelly helped bring Mike up to speed.

And at this point, he's passed me in actual crypto knowledge. He's on technical sides of things. But so now I primarily write about ETFs with Eric. And there's a few subsets. And one of the subsets I cover is the crypto space. So a lot of coverage on whether or not a Bitcoin ETF is going to come out in these trusts from Grayscale and Bitwise and other things. And so for those that are just listening and not watching, Eric spoke first and James spoke

seconds that you can kind of calibrate whose voice is who. But so what I want to talk about today is basically public market exposure to crypto assets, right? And maybe what I thought we could start with is if one of you could just walk through what is the kind of thought process or the advantages for having just public market exposure in general versus private market exposure or going to some of the crypto exchanges. So kind of having regulated, you know, more traditional public market exposure via either the current products or future products that we'll talk about? What's kind of that argument as to why that's an important part of the portfolio? Yeah, I mean, I'll take a first stab at it and then pass it to James for the crypto angle. But

in general, I would use the word convenience, I think, and democratization. I mean, when you put something in an ETF or a mutual fund, future is a little different. But let's just say mutual funds and ETFs, anybody can buy it. And ETFs in particular, because they trade on brokerage platforms, So just like you can buy Microsoft, you see one of the tickers on CNBC as well. And so I remember when Bill Gross came out with his ETF, he said it so his mom could buy it. So there's a lot of democratization. But the convenience, I mean, crypto is probably an ultimate example of the convenience that

an ETF could bring to it. But even the S&P 500, you know the stocks. I mean, you could replicate that all day and save the nine basis points. But most people are fine paying State Street 9 basis points or Vanguard 3, whatever, to get somebody to do that for them. And so I think that's generally, if I had to just keep it simple, it's convenience, and it's just also an ability to get anybody access. I don't know, James, do you have anything to add or read crypto in that regard? Yeah, I will say the ease of – I mean, people can hold crypto with Square and all that. There's tons of different options to do it.

but that people do lose their passwords is very evident. I mean, there's, I know plenty of people I talk to who think there's no reason to have a Bitcoin ETF, but I also talk to even more people who want nothing more than to have a Bitcoin ETF so they can hold Bitcoin in their retirement accounts and whatnot. And then versus private funds, I mean, the private funds are only available to accredited investors. So that vastly limits the population that can get access to these things in this manner. Nothing is stopping anyone from creating a Coinbase account and getting access to Bitcoin. But just having it in ETF, typing a ticker, buying it, holding it, trading it is just, as Eric said, the convenience factor is through the roof. And can I ask you a question?

Sure. So with the New York Times article said that there's $140 billion that stuck because people lost their passwords. This, to me, is a pretty big reason to have an ETF. I mean, that wouldn't happen, arguably, unless the company lost its password. But is that true, though? Or is that correct? Yeah, I think that it's a little misleading in the sense of the short answer is nobody knows for sure. In that specific article, I think they accounted for a lot of the early Bitcoin that hadn't moved in 8, 9, 10 years as being lost. And every once in a while, all of a sudden, one of the wallets will become active again to suggest that obviously somebody has control of it. So it's easy to kind of overestimate if you just simply look and say,

hey, we're going to include anything that hasn't moved in eight years is obviously something that's been lost. I just don't think that that's necessarily accurate. The problem with kind of refuting that is that you don't have a better answer, right? It's not like, oh, but actually the answer is, you know, X. So I think that is probably a material number, right? It's not zero, but it's definitely not $140 billion or kind of 20% or anything like that. But I think it speaks to just the idea of thinking of remembering passwords. I sometimes struggle to get in like LinkedIn sometimes, like what password do I use for this? But I will say that the general idea, and again, it goes back to convenience. I use the gold ETF.

You could buy gold, but people don't want to pay for the, you know, to insure it or secure it in their house. If you have a safe, you can go the whole nine yards. And there are people who should. I mean, some people get a little touchy with the Bitcoin ETF concept, but I'm like, no one's saying you can't do it on your own. It's just there are certain people who are happy to pay for the convenience. And gold is a great example. That's a $70 billion fund. Gold, by the way, GLD is the ETF that got to $1 billion the fastest and took three days. And that was in 2004. And there's been 1,000 plus launches since. That tells you that I think if a Bitcoin ETF comes out, that stands the best chance to beat that record. Yeah, I absolutely believe if an ETF got approved,

it would not take 72 hours to get to a billion dollars. It might have to be a little bit faster than that. So maybe let's start with James. Let's kind of evaluate not so much the investing merit or argument, but more so just market structure-wise, the current products in the public market. And so the three that come to mind immediately are the Grayscale Bitcoin Trust, the Bitwise kind of crypto top 10 index, and then the 3IQ publicly traded, I think it's called the Bitcoin Fund in Canada. Are those the main three in your opinion, or are there other ones that you kind of pay attention to and spend time on? So Grayscale has a whole slew of them. They have a Litecoin one, they have a Bitcoin Cash one, they have their own digital large cap one.

Um, but Grayscale, and then Grayscale also has ETH, so the Ethereum one. So ETH, GBTC, um, both from Grayscale are two of the two big ones. Um, Bitwise is a new one on the block. It's pretty big as well. And then you said QBTC in Canada, also very big. So those are definitely the main ones we're watching, but we're, we have a, if you have a terminal, you can see some of this stuff. Um, I'll tweet about it, but we're, we're monitoring this constantly looking at the flows, looking at the assets, looking at how much trading is happening, these things. But the market structure is such that we truly believe that the fact that these are operating the way that they are operating should be a reason the SEC should be considering launching an ETF.

So what happens here is, one, to create shares, it's kind of like a hedge fund. You have to be an accredited investor in all of these, or at least the US ones. And you create shares at the value of the underlying assets. So you're getting what's known as NAB, net asset value. So whatever the value of the holdings are. And then you have a lockup period, whether it's 12 months or six months, which can change. But if you're an accredited investor, you create those shares. Those shares then go and can trade on the secondary exchange, OTC, or over-the-counter. And the problem here is that that price where they trade over the exchange could be vastly different from the underlying value of the holdings you're getting. So for example, ETHG,

the Ethereum trust was trading over 200% in December. It's now trading at 3%. So you're seeing these massive swings in the price of these actual trusts that are not in line with that way you have Ethereum. So basically, as Ethereum balloon from December into January, I don't know what the exact percentage is, but it's almost $1,600 now. I mean, your Ethereum trust, if you held the Grayscale Ethereum trust, you're down. You actually went down because of the compression there. Now, as some of these mature, GBTC has matured, the premium has gone down a lot. But there's still significant risk for retail traders or investors to get in and not get a fair price that's equivalent to what they're actually buying. Yeah, I mean, I think the idea that an ETF can

create and destroy shares, it's called the creation redemption process, it's sort of like the flux capacitor in Back to the Future. It really is how ETFs work so well. And they really tap into the power centers and market makers of Wall Street. They're able to arbitrage. Arbitrage sounds like a dirty word to a lot of people, but it's really beneficial. Arb is really channeling the self-interest of people to make money to help it have a price close to the NAV because if it veers away, it'll get arbed. That constant arb is great because if you're like the Kelly Blue Book value of a car is you want to get a price to close that. Bitcoin will go up and down. I think most people are OK with that. They just don't want to get surprised. And there was something called

closed-end funds. I'm sure some people on this have heard of it. But that's why closed-end funds got sort of left on the evolutionary, they're like roadkill on the evolutionary line of funds. Some people use them. There's some interesting things going on with them. But for the most part, they kind of got killed when the ETF came out because they had that problem. And the other thing is this for the SEC and the GBTC issue, I think they had a better case to ignore it when it had like a billion dollars. And it was like, yeah, it's this tiny little thing over there. But we just did the math. GBTC, if it were an ETF, would be in the top 1% in volume, assets, and flows. And this isn't even treading on any exchange. And so people are finding it. Some

people think it's an ETF. And we just think that at this point, now it's become like a big reason that the SEC should consider an ETF sooner rather than later. So either one of you can take this, but basically this idea of trading at a premium, right? Eric, you just described like it would be in the top 1%. And if an ETF was the vehicle of choice, there's a creation and a redemption function or kind of a creation and destruction of shares. These trust structures, my understanding is that they have no redemption function. There is no destruction function. And so what basically happens is if I go and I invest at NAV in the private placement, I put in, you know, a million dollars. They go, they buy a million dollars worth of Bitcoin. I got a million dollars of shares. I

have to hold it illiquid for six to 12 months, depending on the vehicle. And then once my kind of illiquid hold period expires, I can then go sell it in the public market. When I do that, that's where you're experiencing all kinds of volatility on that premium to the NAV. Is that ultimately because there's no destruction function or no redemption function, that's where the NAV is actually being kind of – or I'm sorry, the premium is being created? Is that how that works? Yeah, so everything you said is correct. The only – the one thing – most of the creations from what I understand are actually in-kind. So people are actually going out and buying Bitcoin or Ethereum and handing it to Grayscale essentially, and then they're getting their shares in return.

But this – it's not – there's no redemption. If there was no redemption, that would cause discounts more, but that's also an issue. The real issue is that they can't create shares fast enough. So even if we created enough shares to meet demand so that the price fell in line directly with the NAV today, there's that six-month, 12-month lockup, right? So the shares don't actually meet that demand, whereas an ETF, the shares would be created and then they're available to trade that day. And what happens is the market makers are going to constantly be creating or destroying

shares to keep that price in line. So if the price is higher, they're going to sell the price by the NAV and vice versa. And is it fair to say that that's simply just by using the trust structure, obviously, bitwise, where I'm an investor and then Grayscale, which I know this guy's pretty well. They've essentially chosen these platform kind of products, right, or these fund structures really out of necessity. Like they can't go get the ETF approved and therefore this is the next best thing. And so that's why they're using it. Yeah, absolutely. And maybe I came off a little judgy towards GBTC.

I do believe there's an ETF would be a much better way to do it. But I don't really judge them for it because at least it's a way to trade Bitcoin in a way. That's how much people are dying for this convenient wrapper. And I know some people who are really smart. I can't say their names, but they know crypto and they use this. So if they're using it, knowing all of this in full knowledge, I think that speaks to the demand. And it also speaks to the fact that they're just OK to stomach that. By the way, the premium could work in your favor.

There are times when you could just get an extra 20% return because the premium went up. So it's not like all bad. There is a positive side to that. The problem is just the potential for a nasty surprise in somebody who doesn't know that, where they lose money, even though Bitcoin, you don't want to bet on something, have it work out for you, and then lose money. That makes no sense.

um so look and this is why you see other people launching um these trusts that trade over the counter it's just the only way to do it for now and um you know yeah i guess i'll leave it there james you have anything on top yeah so that i will say bitwise is actually in the process of getting their own bitcoin trust so right now they have the bitwise 10 so the trading otc we don't know the ticker yet for the um the bitcoin version but that should be coming online at otc in the next few months or month or two. The other thing I would say is, as Eric pointed out, GBTC, Grayscale, all these guys are doing the best at what the SEC is allowing them to do. They're trying to give this access. If it were up to Grayscale, I'm sure they would have launched

an ETF already. And the other thing is, the reason they don't allow redemptions, the SEC issued a cease and desist letter. So they stopped Grayscale from allowing their redemptions to occur. So it's not like Grayscale is doing this on their own and they're saying, we're not going to allow people we'll take money out. And GBTC, it really is the best vehicle. If you're a traditional financial brokerage system, so you're an advisor and you want to put your client in Bitcoin, without learning how to deal with Bitcoin, which we can argue how easy or hard that is, this is the easiest way to get access to this in the traditional financial ecosystem. If you want an on-ramp, this is the way to do it. If you're a mutual fund or ETF and you want access to Bitcoin,

GBTC is the easiest way to do it. We've seen it at Cathie Wood from ARK. This is how she got access. And if you have a brokerage account and you have an IRA or retirement account and you want to get access to Bitcoin, I've read about other ways that you can do it. But the easiest, simplest way to do it is buying GBTC. And that's evidence why there is a premium. You could argue there's a premium for a reason, whether it's the convenience or the ability to get access in this way. So we don't want to sound like we're dissing GBTC or any of these products.

They are doing what they're allowed to do. They're doing the best they can. And my understanding is that they probably, if an ETF did get approved, they would just convert the trust into an ETF, right? Like they would just say, hey, look, we know the ETF has the better structure. We would like to have an ETF. We're not allowed to today. This is the best option we have. And so if there is ETF approvals, then we'll just convert into that ETF structure. Absolutely. That would be their goal. And this is where the SEC, if they do move forward and decide to do it, they kind of have a little bit of a conundrum here on who to approve

first. Because if you approved a Bitcoin ETF that wasn't them, you're probably going to have that premium, just people would exit that fund, go into the new ETF. And anyone who was just not aware of what's going on would definitely lose money and like GameStop style in that one. So that's where they probably need to, I guess if I was running the SEC, I would probably allow them to convert at the same time, but then that's not fair because then all of a sudden now they have all this assets where they launched this thing kind of in a way ahead of time. I don't know. the ETF industry is riddled with people who have been benefited from asking for forgiveness rather than permission. We saw it with the pot ETF. I won't go into the details, but I could see that

happening. And just one thing, back to the premium. The premium is bad, and it's at 10% right now, I just looked. But it's been as high as 100%. Now, everybody would go, 100% is crazy, 10% not bad. But we're in an ETF industry right now where advisors are literally, they'll move into one ETF because it's a couple basis points cheaper. So that 10% means a lot. And if you go to Europe, they have ETFs, ETNs and ETFs over there that use the arbitrage mechanism. And they're pretty good. And the percent premium and discount looks to be about 1% up or down. And that's using Europe. And that's an ETN. You imagine US market makers, I would estimate maybe you're looking at 50 basis points. And that's essentially what you're paying the middleman for the arbitrage.

They need to make a little cut like a VIG in sports betting, but that is not bad compared to 10%. So again, that's what we're talking about. Even at 10% premium, if you're talking 50 basis points, you can see the marked improvement on an ETF, especially in an era where basis points in fees are a big deal to most people. Yeah, and as Eric kind of pointed out, hinted at, these companies trying to launch this, they're spending a lot of time and money trying to get a Bitcoin ETF to launch. So they all want to be first or at least near the front.

Now, as far as GBTC converting, two things. One, right now there's no redemptions. So if they allowed redemptions, that would likely limit some of the discount potential that could happen if an ETF is approved. So maybe they don't allow GBTC to convert immediately, but they allow redemptions that could possibly help the situation. The other side of this is I've talked to some people. I'm in your camp. I think GBTC would convert just because they want to have good faith with their investors and their clients and whatnot. But you could argue that they have a good annuity here, right?

The money is not allowed to leave. They don't have to allow money to leave. They have $22 billion of charge and 2% a year right now. That's like a couple hundred million dollars of money that they're taking in every year. So you could argue that why not just launch a Bitcoin ETF separate from GBTC? I personally don't think that'll happen just because of the PR nightmare that would ensue from it potentially from investors. But there's a case to be made that GBTC might not convert.

But I'm in your camp. I think they will eventually. Got it. And so maybe let's talk a little bit just about like, why is the SEC not approved an ETF so far? Is it something that has to do with price, has to do with fake volume, has to do with they just don't want to be the SEC commissioners that are kind of on the hook when an ETF gets approved? Just kind of what's the understanding there? I mean, it's honestly all of the above. I actually just went through and read again, the denial letter they just sent to Bitwise. And I looked at some of the stuff they sent to VanEck, who is another issuer trying to launch this. The main reason that they're denying is oversight and

manipulation. So they're saying there's not enough oversight in the underlying market from regulators to like, if anything does go wrong, there's no way to know exactly how it went wrong or who did X, Y or Z, which honestly, that's the only one on here that I think is like somewhat viable of a reason for them denying it, in my opinion. The other thing that they're worried about manipulation of the underlying market. I just, I can't get behind them saying that after what we just saw with GME. Really? That never happens in stocks. Yeah. I mean, the amount of like manipulation that happens in regular markets, like the fact that that's a reason to deny this is just crazy to me. The other thing they talk about

is the real versus fake volume, which I'm sure anyone who's involved in the crypto space has probably seen Bitwise presentation. But if not, they basically make the case that 95% of the volume in Bitcoin is fake by spoofing and wash trading and all these things. And that is, I mean, if you talk to most people, that's just something that's been accepted in the marketplace. We know a lot of the volume is fake. And the SEC is concerned saying that that fake volume could affect the true market value of the Bitcoin that they're holding, like how they market their NAVs. So basically, they're worried about saying what the actual NAV is, the underlying value of the Bitcoin that's being held, which again, I push back and I say, you're not worried about that

with fixed income products. I mean, not to get too far down the financial hole, but in March, we saw bonds that didn't trade for weeks and days. We saw funds with NAVs basically saying what these bonds were worth completely divergent from what some of the other things were trading at because they simply hadn't traded. If they're worried about accurate NAVs, then they need to do something about fixed income NAVs as far as I'm concerned. Then the other thing, yeah, that's really it. It's all of that, but it comes back to oversight and manipulation. Oversight, I think, is a fair concern because it's a whole hodgepodge of different regulators and whether or not like Coinbase and Gemini are registered with the New York State Department of Financial Services and

all these different things. So I can kind of understand their concerns there, but versus like some of the other products they have approved and versus the way that these other products operate, I just can't, I personally believe they should ultimately approve a Bitcoin ETF under Gensler. I want to jump in on the other products. There's a product that I find, I keep thinking about besides GLD that the SEC approved, which is ASHR. It tracks China A shares, which for a time you could not get. In fact, the ETF was approved when the only way to get A shares was through a broker in Hong Kong. And so the premiums and discounts were pretty wide on this thing. They were upwards of 5%, 6%. And then the Chinese government halted shares. You talk about a market that you could

manipulate. The Chinese government can just shut things down whenever it wants, really. And so there was premiums and discounts there. Over time, though, having the ETF, I think, actually brought attention and market makers to it and helped. And I think that would do the same with Bitcoin. You would be bringing in the richest, best, most well-aware market makers, and they're not going to mess around with exchanges that are playing games. So I think that's almost a way to police the situation or clean it up a little is by unleashing all of those people. But the bigger deal, I think, is PR. All that is what James said is matters. But it's all related to, in my opinion, in PR. There was a big ETF called XIV. I don't know if you, I'm sure you held it and you had

fun trading it back in the day. Maybe you didn't. But a lot of people bought that. It was inverse VIX futures. And it went down like 90% in two days. And it was a big thing. That was in the New York Times. Target managers were trading it. It was sort of like the GameStop incident. And that, I think, spooked them, as well as approving a bunch of 3X ETFs over the years. So I think the application for the Bitcoin ETF came at a bad time. I think the SEC was pulling back. It was liberal 15 years ago, I thought, and now it's become a little more conservative. But there is some new blood coming in now that might change the situation. Got it. Talk a little bit about the institutional interest that you guys believe is out there. And maybe you can caveat it with just kind of the conversations. We don't need names, but just the types of institutions or folks who consume a lot of the content that you guys are creating and the work that you do. And just what you're hearing from folks on Wall Street or at some of these financial institutions in terms of maybe Bitcoin and crypto in general, and then also specifically folks who are waiting for the ETF to get approved, maybe before they actually get the exposure that they're seeking. Yeah, I'll take that one. So I do have some primary knowledge talking with some of our

clients that are interested in this. I have a lot of secondary knowledge talking with people more in tune with the Bitcoin market and some people at these companies trying to launch these types of funds dealing with institutions. But it's definitely wide ranging. I mean, in the news, we've seen Michael Saylor talk about their stuff, different people adding it to their treasuries. I mean, I've personally dealt with private equity funds and family offices asking me questions about these products, these trust products, the US, these grayscale products. And there's people pouring money into them. I mean, GBTC has over $20 billion in assets right now. I mean, that's not nothing. And that's not retail investors. Almost none of it is because

you have to be an accredited investor to invest in those things. But the other side of this is some of the demand in these products also has to do with the way the structure is laid out. I've talked to multiple clients who are institutions that are investing in these things. Some obviously investing because they believe long-term. A lot of them both because they believe long-term, but also because they want to take advantage of those premiums I talked about. So what they'll do is they might create shares in some of these trusts. They'll hedge out the underlying exposure. And basically, all they're doing is betting on that premium and hoping that in six months, they can sell. And all of a sudden, that's a profit. Whatever the

premium is, is the profit they make. Some of them hedge out half their exposure. Some obviously hedge out none, but institutions are flowing to these products specifically because of those premiums for now. So I'd be interested to see how that continues. If an ETF launches, do we stop seeing the flows going or an ETF gets approved? Do we stop seeing flows go into these products the way we have the last year or so? Yeah. Well, one of the other things that I'm personally fascinated by, I have no clue how this would kind of sequentially play out, but obviously all of the public market exposure that we're talking about here is on regulated exchanges based in the United States. And really, it would come from the SEC approval and all the

market structure surveillance, all the things that we've talked about and we know go along these regulated markets. But Bitcoin and other types of cryptocurrencies, there's a kind of almost shadow public market. And what I mean by that is simply you can go on Coinbase, Gemini, BlockFi, Kraken, Binance, FTX, whatever the exchange of your choice is. And you can basically buy in the public market or kind of the open market, these assets. Now, it's not on a US-based kind of stock exchange, right? So you would have to sign up for a different account. There's all the friction, I think, Eric, you were kind of talking about at the beginning. But what does become interesting is if you take something like Bitwise's top 10 index, and now that's a token

traded in the crypto public market, right, kind of on an exchange, but not necessarily just in the public market, you know, in the New York Stock Exchange, NASDAQ, whatever. And so do you guys have any thoughts or any kind of insights in terms of, are there Wall Street investors who are looking at some of these exchanges in the kind of crypto native world saying, hey, look, that's a new version of public market exposure? Or does it feel like most of them either because of regulatory and kind of oversight concerns or security or whatever, they're kind of just sticking to the main US-based regulated exchanges where stocks trade alongside some of these other vehicles that give you kind of passive exposure? It's definitely the latter. I've obviously read

plenty of stories about people trying to tokenize, even calling these tokens ETFs, even though they're obviously not ETFs. It's a specific term. But it might make sense down the line. I mean, you can make the arguments that things are going to be heavily tokenized in the future um i just don't think we're there yet and i think the institutions are more inclined to get things in into the traditional financial ecosystem as they are currently um so it's like an ett right like an exchange traded token yes and i will take a i will take a step back and say that i the the bitwise 10 bit w i i the sec so we didn't really talk about this but gary gensler's a new SEC chairman coming in. I think ultimately, we'll start getting some of these crypto index

products approved on the traditional exchanges that we're talking about. But it's going to be a Bitcoin ETF first, and that's going to have to operate smoothly without hiccups for a certain period of time before they start allowing other cryptos to trade on the exchange. In Europe, they have Ripple and Bitcoin Cash and other products that are ETFs. But I don't think the US is going to do anything with a Bitcoin product, anything beyond a Bitcoin product to start if and when they do launch one. And when you talk about institutions, we look at the players of the people who buy things as institutions, asset owners, those are like pensions, endowments, family offices. And then there's advisors. Some people

call them institutions. I would not. And those have dollar amount changes, but I believe somewhere in the ballpark of $25 trillion. That's who this is for. Because when we look at ETF assets, the top level of those institutions, most of them only use ETFs for liquidity purposes. They'll use SPY as something they can buy or sell real quick, like a pseudo futures contract, something that's liquid and easy to get in and out of. But for long term, they'll usually buy it on their own. They're smart enough and they can do it on their own. And sometimes they can do it cheaper than the ETF. So a Bitcoin ETF to us, the assets would come from the advisors. They would also love the fact that this is somehow in a prospectus. It's official. Gives them a little feeling of like,

OK, I'm covered here. The SEC understands this. The top level, they probably would only use the ETF for its liquidity once it gets liquid, like the way it uses GLD. So that level is harder for us to read because those people are probably already buying Bitcoin on their own. I don't know, James, you have any comment on that? But I just wanted to sort of clarify. And that advisor level, by the way, Bitwise just did a survey, although it's in their self-interest. I think the numbers are close to this, like 63% said they would rather have an ETF. And that was like, I think only 16% said direct. So that gives you an idea of that level. They really like the convenient aspect of it and the way it would just fit right in a portfolio, like a puzzle piece with

the rest of their ETFs and funds. Yeah. The only thing I would add is you talked about GLD being used. GBTC's volume is crazy. GBTC, for an OTC product to be trading as liquid with the spreads as tight as they are, it's also being used by some heavy hitters for sure. And then- Yeah. And if you look at Cathie Wood, I mean, that's what she has used to get exposure. She's in a fund. She's buying that in very small doses. But yeah, the volume still is, what is it, under a billion? It's about a billion. Yeah. So you probably have a little institutional dabbling in that. But if you've got a Bitcoin ETF, I'd imagine you'd see this thing trade $5 billion a day, at least the one. One of them usually gets

chosen as the one. And that's why they're all in a race. Because if you're the one in this case, This is the biggest race for an ETF prize I've ever seen in my life. You know, I use the metaphor of the movie, The Cannonball Run. I don't know. I'm Gen X. I'm not sure if you know that movie, but it's like a race from New York to L.A. And whoever gets there first gets like a million dollars. There's something very similar here, and they know it.

And it could even really affect their business if they get approved or don't get approved. And that race has been, you know, fascinating to watch. how big is the second largest gold ETF? So there's GLD, which is the winner. Do we know how big the second largest one is? Sure. I think it's about, it's pretty big. So see, here's what's going to happen. Here's what happens with all ETFs. The first one that gets approved is probably going to charge, let's just say 1.5%. And it's going to get a bunch of volume. In the case of gold, the biggest one GLD has 70 billion. The second biggest one has 31 billion. The second biggest Yeah, it's pretty good. It charges 25 bps, whereas GLD is 40 bps. So usually the liquid one has

pricing power. It doesn't need to cut fees. The new guy comes in and we call it vanguarding the category by coming in cheap. It's like Walmart coming into town. They'll come in and undercut them. And then what's going to happen is advisors are cost obsessed. So the long-term money will probably go to that one. So IAU is used by more buy and hold, but GLD will still retain the trade crowd because they don't, they're going in short term. The expense ratio is an annual fee. So it means less if you're in it for a smaller period. Yeah. And then, um, if it's, so there also is other gold ETFs that have come in even cheaper than IAU, multiple of them, actually this launch, the guy who launched this state street, who launched GLD actually launched like a mini

version that's super cheap, basically. So they don't take away from the money they're getting on GLD. They have one that charges, I think it's around 15 basis points or something like that. So there's all these games that are being played. And the same thing's kind of happened in the trust space. So I mentioned Bitwise is launching a fund that's going to compete with GBTC. Their expense ratio, they're saying, is going to be about 1.5%. Grayscales is 2%. Earlier last month, we saw Osprey Bitcoin Fund.

It's another trust that's launching. Their management fee is 49 basis points. There's going to be some other fees in there. It's not clear exactly what the full expense ratio is. So management fee is one portion of what the full costs are going to be. But there's already this cost compression coming into the market. And as more things get launched, if an ETF is approved, it's going to bring down the cost that you have to pay custodians like Fidelity and legal fees and all these different stuff to get these things launched. Yeah, it's fascinating to hear that in the gold kind of ETF world, people literally are launching multiple ones and almost competing with themselves as a way to kind of continue to get more and more market share. It's like cannibalization. They're cannibalizing themselves. They don't lose all the money.

Well, it's sort of like we talked about at the beginning, like GBTC, would they launch a new one? Because that GBTC is a cash cow, right? GLD charges 40 bps and it's liquid. And the people who, that liquidity, you can't buy liquidity. It grows organically like a tree. So if you have liquidity, we call these ETFs diamonds. If your ETF trades more than $50 million a day, you are, you're sitting pretty because you don't really have to lower your fees. So what happens is, and iShares did this too, EEM was trading like a ton, charges 69 basis points, and Vanguard started eating away at it with its like 20 basis point BWO. So in order to fight Vanguard, it launched IEMG at about the same Vanguardian fee. So it sort of cloned EEM in order to just deal with the advisor market. That way, it didn't hurt the cash cow over here. And since then, in the clone area, they're in a fee war that's pretty intense. Schwab gets involved. And all of a sudden, the fee war of ETFs that's become pretty famous kicks in.

So I would imagine some of that would happen in the Bitcoin world as well, although at a higher level. I'm not expecting a 10 basis point Bitcoin ETF anytime soon. Yeah, it makes sense. Before we go to wrap up, I ask everyone the same three questions. I've never done it with two people. So I'll just kind of throw it out there and we'll fire away. The first question is just, what's the most important book each of you has read? There's two books I've read twice. I mean, besides the Bible, I'm pretty Christian. And the Bible to me is, if you really read the Bible, there is so much more going on than what you think.

And it's filled with something. There's energy in there. And I really like it. It's like eating health food. Besides the Bible, that's maybe a boring answer. I've read two books twice. One is Confederacy of Dunces, a hilarious comedic book written about a guy. It's all he wrote.

He shoved the book under his bed, and then he committed suicide. So it's this book that got taken. And it's brilliant. I can't believe they've made a movie about it yet, but it's a real fun, funny book about just it's just a great character. And then the other one is Bob Dylan's Chronicles. It's basically a book that takes place from his childhood until right when he hit in 1963 with Blown in the Wind. It ends right there. But it's really his life in New York as, you know, 20, 18 year old and just how he collected the information that ended up going into those lyrics. and it's really a great if you look if you want to know like how to get idea flow going um read that book he tells you how he because you listen to some of Dylan's songs and they're

mind-blowing it's like how did this guy write all this at age 21 and the book kind of lets you into how he did it and it's uh really you can apply it I think it's a great book I love that answer James uh I'll go with something more recent I mean I so two two examples uh Bad Blood by which talked about, uh, what happened, uh, with Elizabeth Holmes and, uh, I'm blanking, but it's Theranos and you could, you just saw the absolute fraud that happened under everyone's noses. And that really just opened my eyes to like how, like easily manipulated and manipulatable things can be. Um, so I, I love that book and I couldn't get enough of it. Um, so I'll go with that one as a recent read awesome okay second question uh it's a little bit more personal

uh and this comes from the folks over at eight sleep they've got like a thermoregulation bed uh that allows you to basically sleep in a really cold environment it's supposed to make you sleep better i sleep with it every night it's amazing uh what is your guys sleep schedule and uh what's really interesting here is like the traditional markets have hours of operation so they kind of shut off and you can you know stop paying attention crypto is 24 7 so what is this something where you guys are sleeping five six hours or are you guys more like eight nine hour sleepers um okay i'll start i i try my best to get eight um i i have this mathematical theory and it's a formula that i think should be it's my equals mc squared if you're well rested two hours feels

like one if you're tired one hours feels like two i i swear to god that should be put into science books because, and the key for me is I need about seven, at least seven to get well rested. So I try to get to bed before 10, 15 as 10, 30, 11 hits, then I get the second wind and then I, and then I'm really messed up. So I, it's like, I kind of have to crash early and reading a physical book is, is how I do that. It really makes me drowsy. I've got, so mine has completely changed. So I used to get seven hours almost like every night when I was going into the office, but I've gotten in this, I guess it's kind of a bad habit since I'm working from home every day where I just don't sleep as much as I should. Or like I'm, I log onto my work computer at night at like 10, 11 o'clock

at night, because something happens on Twitter. I'm like, Oh, I should get this ready to write this out. Um, so my sleep pattern has definitely, I need to solidify it. It's a problem for mine, but I, if I don't get, I can function on six hours for a couple of days, but if I don't get another like nine hour day or seven and a half hour day after that, at some point, I, I just don't function properly and it hurts my work and just everything so yeah i was one of these people who uh barely slept i was flying all around the country doing all this crazy stuff and then eventually i started to sleep i was like oh wow this is what it feels like like being well rested kind of eric's point is a much better way to be uh last question for you guys and you'll get to

each ask me one to finish up is a more fun one aliens are you a believer or a non-believer in aliens i'm a believer they're out there same eric no no question i don't know i i they're nowhere near us i i if they are it's it's in like another multiverse or something like it's because the odds of the sun and the and this hitting a certain planet exactly that i don't know i i'm skeptical i'll say that i think you're right in that they uh one they exist But two is I like the theory that like they're so far away from us and everything that you see in the sky is millions of years old or whatever. So like we'll just never get to that. We'll never communicate. We'll never actually reach them. But the odds from just the expansiveness of the universe being so big is high.

Speaking of which, here's a question if you want to get deep. The question that I love is why is there something rather than nothing? or what is the universe expanding into? Look, if you ask Elon Musk, it's a simulation. And when we all get out of this game, we're all going to be like, damn, we were dumb. I've got two questions for you. One more on the topics and one a little more personal, also on the topic. A lot of crypto guys, like heavy into crypto, don't believe there should be an ETF. They're like against re-hobotification or any of those things. What is your opinion on these funds that are launching? And do you think there should be an ETF approved?

So I think that it's just an inevitable thing. Forget what our opinions are. It's more so just like, of course, there's going to be an ETF at some point. If you go ahead and you look at GBTC or BITW, all of these funds, they serve as marketing functions for the industry. And basically, if you want to get exposure, the lightest exposure you'll get is you'll come into those funds. and then eventually people will say well like what else can i do or how else can i get exposure and you kind of trickle down from that public market fund to something else uh simultaneously actually some people will buy it personally like on the crypto exchange and then professionally try to go get exposure into a fund because they have to uh but i just think that like it doesn't really matter like do we want it or not like it's going to happen um and so it's better time spent like just trying to figure out like what's the impact of that when it does occur uh more so than like somehow advocating like that the sec should prevent it from ever how like of course it's

going to happen the next one is your your twitter habits what percentage so you're obviously extremely intelligent you know what you're talking about what percentage of your tweets which you say are completely trolling hyperization of what you actually think versus versus real thoughts because some of it is out there yeah what's your percentage yeah so the the people that i like to troll uh or like there's definitely some times where i like say something and i know that like a peter shift or like some guy like an absolute aneurysm reading it like just being like are you kidding me uh but no i would say like you know when i really sit down and like behind closed doors if i have a conversation with someone they're like what do you really think's gonna

happen uh like i just probably said 90 like i really do believe that uh we are going to see like a massive massive uh disruption here i liken it a lot to um kind of the analog world we had kind of pre-70s or 80s then we transitioned to this like electronic q-sip world right where every asset is now in electronic q-sip whether it's cash stock you know whatever it is uh and so like we think of that as like a technology transition but really that was the foundation for really the global financial system today right like imagine if you still had an open outcry method on uh the stock market like gamestop robin hood like none of that stuff would happen right and so i think that just like now moving to this digital world is going to be pretty disruptive. The one thing

that I do think people don't spend enough time on is a lot of people like to look at the new technology and then apply it backwards, right? They're basically looking at it and they're saying, hey, how do we improve publicly traded stocks using blockchain technology? And there will be iterative improvements. And I do think that there will kind of be innovation and progress there. But to me, the part that I really, really believe in, I think is more intellectually interesting and probably the part that like you know some people look at it like oh you're just trolling uh is i actually look at it like this crypto native world so what happens to the person who like they never touch a single legacy asset right they literally just they get paid in digital

uh currency they sit and they hold all these tokens that have on-chain cash flow they're streaming payments like kind of like this like utopian world i don't know what the time frame is uh i don't think it's going to happen tomorrow but like 20 25 years from now like i actually think that we're all underestimating how disruptive this will be and so it's uh some element of like by tweeting about it uh i get to say like i told you so 20 years from now or 10 years from now uh but there's definitely a tweet a while where like you know you just fire it off and i literally know there's people freaking out and it just i kind of chuckle to myself and go about my day uh and every once in a while they'll actually email me like that's when i know i really struck a chord

is like when somebody reads something on twitter and then takes the time to go email me and be like, I can't believe you said X. And I'm like, all right, well, that, that hit, uh, that hit the bullseye. So, uh, I'll keep that in the back of my head to reuse for, uh, for six months from now. Yeah. I've read some of your tweets and I'm like, there's no way he actually fully believes this. He's, someone is going to have a stroke. I don't remember one of them. Oh man. I wish, I wish that you, uh, you had one debate the marriage. There are probably, there are probably some, uh, derivative of the have fun staying poor mindset, which by the way, um, here's a question for you. I'm not sure if you'll answer this, but when you think of somebody who is really this

optimistic on crypto and has sort of made their career out of it, when it comes to your, like, when you, you know, I don't, do you have kids? I don't. Well, let's say you had like a couple kids. You start building for retirement. You've got their college fund. Do you put all that in crypto or do you go and you do like a normal 401k with some mutual funds or ETFs or what have you? like, how do you get off that? That's a fantastic question. Uh, I think it's even harder to, obviously if you just say like, Hey, if you're an individual, like whatever, as you start to put more and more parameters on it, you know, so are you married? Do you have kids? What's your risk appetite? You know, what's your current net worth? What income do you have?

How many revenue streams? Like, like you can kind of really play this out as to try to come up with like the perfect solution for an individual person. But I think just in a general basis, uh, the way that I look at it is, um, there's kind of three separate strategies. One is there's definitely speculative bets. So whether you look at Bitcoin as a speculative bet or you look at the 299th token coin market cap, that's absolutely probably nonsense, but maybe it doubles and you get lucky. There's speculation. The second thing is I'm a big believer in the folks who were early to the transition from analog assets to electronic QSIP assets. They were still buying the same asset. They were buying it from the same counterparty, just new technology form factor.

And so there was greater returns for some period of time before they got commoditized. So if you look at something like maybe a BlockFi cash account where you can earn up to 8.6% APY, it's still dollar exposure. Now, there's a little bit of rehypothecation. There's some risk. You've got to underwrite it, all that kind of stuff. But compared to the legacy electronic QSIP dollar interest-bearing account, it's so much better.

It's so much higher return. And so I think that that's less speculation, more just you're being innovative and understanding it. And then the third thing is just like, hey, if everything blows up and like it literally goes to zero, which I think is very, very low probability, but just say like literally all of this blows up, like you better not have 100% exposure, right? Especially as you get older, as you have kids, you have these other responsibilities. And so I think that really finding the balance is kind of on an individual basis, but I just don't see that many people who are older with kids who have a lower risk tolerance. I don't see them going 100%, right? there's a lot of 22 year olds i know just being in the space that they're like 150 percent in like

their entire liquid net worth is in their illiquid net worth is in and their time is invested 100 percent in it so they're like all in yeah i i think i think the debate is out on whether or not this fits into a portfolio i mean one percent five percent whether you're an institution or individual like the debate is out as far as i'm concerned in the quantitative benefits of holding some sort of crypto assets at this point. Um, so yeah, that's one to 5% makes you sound the rational James, right? The, the 99% that some of these, I didn't say that's where I was, but I'm saying at least, at least 1% makes complete sense to somebody for an individual. I'll leave you guys with this, uh, CZ from Binance, the, uh, the founder and CEO of Binance,

uh, for whatever reason, uh, it's come to become this running joke that whenever the price drops and I'll say something like, you know, Hey, I bought more Bitcoin. He'll always respond to me and say, I didn't, I have no more fiat left. He was a former Bloomberg employee, actually. He used to work at Bloomberg. Yeah. Yeah. He's fantastic. Can I just, can I just one quick thing? One more quick thing. All the wall street bets going on. I get the sense that crypto, I find crypto's reaction to it. Interesting. I find two different reactions. One is, um oh you think our market's manipulate manipulatable um that's one which is which we and etfs are kind of having that reaction to it's not us and then the other reaction is sort

of this like oh guys dude we're come with us we're we're we're really on a much bigger kick okay we're looking and i almost feel like you're looking at them as new recruits is that right you guys are trying to short squeeze wall street we just took our ball and we're going to play elsewhere like come play our game our game is way more fun my favorite part is uh um i guess they'd be okay so like obviously the wall street bets moderators uh when all this happened you know they're kind of scrambling to figure out like what happened uh how should they react what you know media is calling them like all this kind of stuff and so i had the opportunity to talk to a couple of them and uh and one of them literally said to me crypto 24 7 question mark like like

like his eyes like lit up he was just like 24-7 markets like let's go it's 24-7 it's got an anti-establishment populism vibe i mean it's kind of a it seems like a home they're gonna it'll be a home for some of them after they sort of maybe figure out they're paying all these trading costs people are holding the bag crypto seems like a natural space for them i think that's what exactly what's going to happen so where can we send people to uh to find you guys on the internet or find more of your work? So, you know, we're on the terminal, B-I-E-T-F, if you have a Bloomberg terminal.

If you don't, where you can find me in the wild is on Twitter, at Eric Balchunas. It's just my name. That one wasn't taken. Shocker. And you can also look up Trillions Podcast, which I co-host with Joel Weber at Business Week, and that's available anywhere.

Yeah, I'm also on Twitter, at JSafe, so J-S-E-Y-F-F. And as Eric said, we're both very active on Twitter. We get a lot of our feedback and ideas. So tweet back at us, send us a DM. We love the feedback. Awesome, guys. Listen, thank you guys so much for taking the time to do this. I learned a lot.

I think everyone else will as well. And we'll have to do it again in the future.