The Pomp Podcast - #693 Bitcoin ETF Deep Dive w/ Eric Balchunas and James Seyffart

Starting point is 00:00:00 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. Now let's kick this thing off. Eric Balchunas is a senior ETF analyst at Bloomberg, and James Seifert is the ETF research analyst at Bloomberg Intelligence. In this conversation, we discuss ETFs, Bitcoin, futures versus spot, ETFs versus trust, Grayscale, the SEC, and future capital inflows. I really enjoyed this conversation with Eric and James and I hope you do as well. Before we get into this episode though, I want to quickly talk about our sponsors. First up is CoinCloud. Did you know you can buy and sell crypto with cash? I want to introduce you to my friends at CoinCloud. More

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Starting point is 00:04:06 and give AG1 a try. All right, let's get into this episode. I hope you guys enjoy this one. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. We have Eric and James, both from Bloomberg, here with us. How are you guys doing?

Starting point is 00:04:39 Good. Awesome. First, let's just start off with James. People on the internet think that you look like Luka Donik. What's up with that? I usually get Kirk Cousins. That's the one I get the most from anyone. All right, just making sure.

Starting point is 00:04:54 I think it was a merger of Luka and, what's his name, the other guy. It was pretty good. I mean, it was real. That one might be Kirk Cousins. Awesome. All right, Eric, let's start with you. Let's talk about a ETF, an exchange traded fund. What exactly is the advantage to these ETFs versus, let's say, the Bitcoin trust that Grayscale has or some of the other kind of fund structures that are in the market? Generally speaking, an ETF is probably the superior wrapper for just about everything. Obviously, you can do a lot on your own. If you do anything on your own, You could buy the S&P 500 stocks on your own.

Starting point is 00:05:29 You could buy gold and store it on your own. There's nothing wrong with that. But, you know, this is a world where consumers like convenience. So you can log on to any exchange, buy the ETF. It has a three, four-letter ticker. It trades on the public exchanges. It's been sort of allowed or approved by the SEC. So you have that kind of comfort.

Starting point is 00:05:48 It has liquidity. You can trade it intraday. And in this case, there will be options on it. That's very useful, helpful. So ETFs generally have just made it easy to democratize investing. GBTC has done all that. The problem with GBTC is it's not really an ETF. You cannot create and redeem shares on demand, which means ARB is not possible.

Starting point is 00:06:13 And when ARB is not possible, you have a price deviating from the NAV. With ETFs, you can create and destroy shares whenever you want. Therefore, if the price gets away, you can ARB that. And then the price gets away. You can arbit. So there's constant arbit going on, keeping the price close to the underlying price of what it's tracking, which is what people want. I mean, that's at the end of the day, they get the coins volatile. They want something that tracks the price. That's it. They just that's the bottom line. And GBTC does not do that. Got it. And James, when you think about, let's say, GBTC, obviously, is traded at a massive premium at times, a massive discount. Is that really the big thing that people are going to drive interest to the ETFs is the fact that the other publicly traded vehicles right now have those discounts and premiums?

Starting point is 00:06:58 And so this won't and that therefore will drive some of the inflows? Yeah, I think that that's definitely part of it. Right now, GBTC is trading at like it's just about 18 percent discount to the NAV. So basically what Eric was talking about in a typical ETF, you can exchange shares for the underlying on a daily basis. So that means if they're the same exact thing, you can always make sure that the price is worth exactly what it holds. With GBTC, you can't do that. So right now the fund is closed, you can't even create shares and there is no redeeming of shares. So that whole mechanism of being able to take the delivery of the underlying just isn't possible. But again,

Starting point is 00:07:34 it's trading at a discount to NAV right now. So if you wanted to buy GBTC and you were expecting it to convert to an ETF, that is a potential premium, if you will, in the returns that you can generate. But as Eric said, over the short term, GBTC tends to trade very closely to Bitcoin price, like over a day. Its correlation, its beta to the Bitcoin market is pretty close. But over the long term, it just breaks down because of those reasons. If you bought it at a huge premium, there's times we're trading at 120% above what it was worth. So you were buying $50,000 Bitcoin when Bitcoin was actually trading at $20,000. So that's the problem. And there are issues with it, But there are what we can get into the nuances of it.

Starting point is 00:08:12 There are also going to be some issues with the futures ETFs as well. So you just kind of need to know the issues with both and understand the pros and cons. I want to just add the number here. If you bought GBTC last year on this date, you would be trailing the price of Bitcoin by 160 percentage points. Now, there's times where you bought GBTC and it actually outperformed Bitcoin. The problem is you don't know. It's got a third element and people generally don't like the third element.

Starting point is 00:08:40 That's why closed end funds have really not, you know, that's an area of the market that's very much like GBPC and they've been largely ignored for the ETF. OK, so let's talk about ETFs in general. Right. We know gold ETF, GLD, massive impact on price. How do you guys think about just whatever the structure of the ETF ends up being? What do we anticipate that impact to be on the underlying kind of Bitcoin price, if any at all? I can jump in here real quick. So I will say one thing. What GLD did is different from what this Bitcoin ETF is going to do. If you were a retail investor, you had no real way of getting access to gold back in the day, like an ETF opened up in a completely new market. Right now, there's Coinbase, there's Gemini, there's FTI, everything, everyone, people have access to

Starting point is 00:09:26 Bitcoin. It's not basically democratizing the entire space. So I would say like equating the impact of the ETF on the gold market to the Bitcoin market is probably a little far-fetched, it's a little bit much. Again, this is also futures, but it's definitely, no matter what people say, people say it's like fake and paper Bitcoin, but really it is, you're buying Bitcoin. So any buying of this is going to be more demand on the actual underlying Bitcoin market in some way. And we can talk about margin requirements for futures, but the answer is that it's going to be positive, but it's not likely to be positive with new demand into the ETF, but it's not going to be the same impact that we saw with gold. And also, that was one of the biggest, best runs for

Starting point is 00:10:05 gold. It launched right before, not long before the 2008 financial crash. There was a whole bunch of other situations going on there with gold. Yeah. And I also think there's a lot of optimism baked into the run in Bitcoin that we've seen. So while a Bitcoin futures ETF in particular, because that isn't even like GLD, that's more like USO. And we know from history that things that track futures in the ETF market are largely generally ignored by advisors, which have $24 trillion in assets. That's the real giant pool of money that ETFs tend to tap into the most. But there's traders. And I think USO has attracted traders. This will attract traders. But I think the bigger issue here, and I think we don't think this won't be like some game changer.

Starting point is 00:10:47 I just saw a call that somebody from, I won't say who it is, but they thought that this ETF where the Bitcoin futures were taking $36 billion in flows in the first year. That seems very overly optimistic. I would say more like $4 or $5. Now, if it was an ETF tracking spot Bitcoin, maybe we'd get to $30 billion, given what we saw at GBTC and up in Canada. But I still think for the futures one, the big news here is that, A, it gives traders something to use. It will be used by traders.

Starting point is 00:11:18 It definitely will. But what it represents is this slow start to the SEC getting comfortable with Bitcoin and crypto. You could see Ether. You could see the physical. You could see people who have active funds that do crypto picking inside an ETF, like an ARK. Down the road we go, and all of a sudden, now you're talking about real assets. But this particular launch probably isn't going to be like some big game changer asset-wise. So that's definitely the takeaway that I've had from conversations with various people in the market,

Starting point is 00:11:48 it is, this is more of a signal and a really positive step forward. But the actual price impact may not be massive as people want. Talk to me about what happened in Canada. So these were spot ETFs related to Bitcoin. And I remember, I actually can't remember which one of the two of you, but you guys were going nuts. It was like your Super Bowl, those two days that those started to trade because it was just massive inflows. And it was like every day they were breaking a new records like what was going on there the what was so fascinating about those and i'll let james jump in because he's done a lot of work on this but i'll just say what what caught my attention is the trading the volume on this etf was like it made it the number one or number two most traded

Starting point is 00:12:31 etf in canada on day one and then day two and then day three i mean it didn't go away there wasn't that initial pop it kept the volume going and it's still i think today a top 10 traded etf that was shocking to me uh that it would get that much attention so quickly the flows did come i think it had like a i don't know two month straight flow streak and then the flows came out but now you know there's a lot of products up there that the market's definitely opened up but it was those early numbers that blew my mind it was something like it traded the equivalent of like what tesla trades in the u.s on day one if you if you account for the size of the market if you if you translate the size of the market. Canada is 27 times smaller than we are. So if you do that conversion,

Starting point is 00:13:14 which is a little loose, but you know, there's something to be said about if you can do that much in Canada, that speaks well to what you could do in the US. But I'll let James take over about the growth after that. Yeah, I would say, I would also say, so I would also jump in and say part of that I think is was demand from the US and around the world. Because as we mentioned, an ETF is a superior wrapper. You can put anything in an ETF. We talk about this all the time. People have been complaining about high yield bonds being an ETF forever, but it just makes the process of trading and holding these things super efficient. But I think part of the thing is, as we saw when these things launched is when GBTC really started going into a discount, there just became a lot more

Starting point is 00:13:54 options. So while a retail investor in the US couldn't go out and buy these ETFs in Canada, institutions probably could that had money in GBTC. So they might have traded out and gone here because it's just a more efficient vehicle. So we talked about the massive demand. I think that showed more that it wasn't just Canada that was accessing these products. So people were going there. And that happens in the US a lot. The US, we basically outsource liquidity. People from all over the world, institutions, they could be in Asia, anywhere, they come to the US to trade in our ETF market because we are so liquid. And that is very important to institutions. So I think that kind of happened with Candidates ETF launch? If Beto, the ProShares ETF, or whichever one

Starting point is 00:14:37 becomes the liquid one, and it starts trading, say, $100 million, $200 million, $1 billion a day, all of a sudden, you're going to get people from all over the world using it. You'll have a Japan pension fund using it to maybe get some quick access to Bitcoin. So that is correct. The US market is so liquid, and no other countries can really produce that kind of liquidity. So we will steal investors from the whole world into this fund again i think a futures fund won't steal as much as say a spot physical will but that's a very good point and the thing there though is there's only like one or two of those per category that get that liquid that they start to get used by everybody and then once they get like used by everybody they become so liquid they almost

Starting point is 00:15:21 start unstoppable and that's sort of what spy is uh em you know there's a couple we call them liquidity kings. And once you get to that spot, that's something you can't buy. I mean, even assets can be kind of bought in a way like you could bring assets over, but liquidity has to grow naturally. And when it does, it's very attractive to people. Talk to us about the difference between the Bitcoin spot ETF and the Bitcoin futures ETF. I know that there's a ton of debate as to whether the spot ETF should have gotten improved first or the futures. We get the future. So what is the key differences between those two structures? I could start. So I'll say like, as we talk about this, the big, the big thing here is it's a move from zero to one. So

Starting point is 00:16:02 like, while we are, we think the spot product would be better for retail investors, probably just because it's less confusing. As we mentioned, this is zero to one for the SEC, which is a big move, but it's not necessarily going to have a massive impact. And the other thing that I wanted to go back to was Eric talked about 24 trillion investor in advisor assets. I mean, even if you take a tiny, tiny sliver of that, that's a lot of money that's going into Bitcoin, whether it's the futures ETF or the spot ETF. But the big difference here is futures, you have to roll every month. So if you're holding the front month contract that expires, so the next one expires on October 29th, you need to sell that contract that's going to expire on October 29th and buy the next contract that is November, which is November 30th, whenever the contract ends. So basically what happens is in a typical market, like with oil and other things, there's storage costs. So that next contract is usually more expensive. That's called contango. So what you're doing is you're selling the lower price contract and buying the higher price. So every time you're losing a tiny bit of money. And that can add up. Over the last year, that was about 36%. So, I mean, it's not nothing.

Starting point is 00:17:07 But we think we expect that to go down. I mean, Eric and I actually had a call this morning with Mike McGlone, who some people on here probably know he's our commodity analyst and he covers Bitcoin as well. And he thinks that's going to go way down. So right now, there's times where Contango is acting more like a commodity that's hard to store, like oil and something like that, that it's hard to get this arbitrage. Because what you can do is it's called a cash and carry trade. You essentially are going to buy spot and sell the futures.

Starting point is 00:17:32 And essentially, you can earn that difference when the futures contract that's coming up is more expensive. But right, it's not that expensive to store Bitcoin and get Bitcoin like it is to go store barrels of oil. So we think it's just going to be armed away eventually. But even still, I mean, right now, we're talking about 10% to 12% on average the last year or two, I think. But Mike McGlone thinks it could go down to half that, 5% to 6%, which again, isn't perfect, obviously. A spot Bitcoin ETF doesn't have any of those roll costs. But for 5% to 6%, for some of these people who are going to be using these products, especially traders and any along that lines. It's not that big of a deal, probably.

Starting point is 00:18:11 And let me add a couple of points here. So if you look at the Pro Funds Mutual Fund that tracks Bitcoin futures, it's basically the prequel to Beto. It's already been out two and a half months. It's given us a nice case study for what Beto will do. It's only missed Bitcoin by about 1% 60 basis points in two and a half months. That's very good. It's way better than we thought. It sort of feeds into McGlone's prediction that the role was only bad going way back and that going forward, especially with the incentive to ARB and how the ETF will bring all this money in, we're looking at, it's probably more optimistic than we originally thought. But still, let's say it's 5% a year. If something costs you 5% a year, that's kind of an annoying high fee.

Starting point is 00:18:54 The other thing is advisors who, you know, it's possible if this thing tracks really well over long periods, it could bring in some of those advisors. But remember, they're once bitten twice shy. A lot of advisors bought BXX and learned the hard way what roll costs are. That's like 40 percent a year. BXX is brutal. USO could be 20 percent a year. So they probably are UNG. There's a couple of them where they probably learn the hard way that anything that rolls futures is it could really you could get the bet right. You could actually bet right on oil or natural gas and actually not win because of the product you chose. That's a big reputational sort of thing that ETFs will have to overcome. That said, the ability to track Bitcoin on a daily and weekly basis is all that will

Starting point is 00:19:38 matter to the trading crowd. And that's a real audience. And that's fine. There are ETFs that are for traders and some that are for long term. The question is, can this one actually build its audience beyond the trading crowd? And that roll cost will be a big variable in that. When you guys think about the grayscale Bitcoin trust, GBTC, it now has been confirmed that they're going to apply to have it converted to the spot ETF. Do we think that just odds have

Starting point is 00:20:05 increased now because futures have been approved, but we don't know much more than that? Or do you guys have other thoughts around that application and the potential for it to be approved? Okay, I'll go. So I think, well, as I mentioned, this is zero to one for the SEC, right? So this is that. And as people have talked about, I mean, a lot of people out there, they talk about no need for an ETF. Their people are mad at Gensler because he's so negative towards crypto. But honestly, he knows his stuff. Like as much as people want to say that he doesn't, he really does know his stuff and he's learning. And I really think that, as we mentioned, I think the spot product is a better product for most people that want to use this. I think they should have

Starting point is 00:20:44 allowed both at the same time and let investors put their money where they want to put their money, right? Let democracy pick the winning structure. But for whatever reason, Gensler chose this. He highlights a few things. So one of the things is these futures products are under something called the 1940 Act. And we don't need to get in the nitty gritty here, but essentially it's a little bit, there's a little more consumer investor protections. There's a little more restrictions on what you can and can't do versus something under the 1933 Act, which is an older act that GBTC, if it converts and these other spot products, which we have a bunch of filings out for, they would fall into that 1933 act. So that's a big difference. But again, I think that

Starting point is 00:21:22 the part of the reason that Gensler went with this first is, one, there's obviously some animosity in Congress. Janet Yellen doesn't like Bitcoin from everything we've seen. So I think this is almost like CYOA, like a little bit of Gensler covering himself, because he can say, hey, we slowed the roll. We went with futures, which are already on a regulated market by the CFTC. I didn't allow it right away. We're taking our time. So I think this is just him. If anything goes wrong, he has all these cushions between him, whether Bitcoin gets cut 70%, people lose their money, which obviously is possible to happen. We've seen it happen plenty of times. So I think there's a whole bunch of reasons why we went this route. But I do think we're going to see a conversion

Starting point is 00:22:01 at some point. I just don't know if it's going to be on GBTC's first try. And a little bit of background. So VanEck, they filed for this. So the whole process for those 1940-act ETFs was a whole different scenario, which is why a lot of people weren't with Eric and I when we were calling for an October approval initially, because they go through a different process where it's just a 75-day period. GBTC and these other physical ETFs, they go through a separate process. There's something called a 19B4 application. They basically need to apply to the exchange and ask for a rule change to allow these ETFs to trade. So that process, that's what you're used to hearing, all this delay or deny or approve. And all the other

Starting point is 00:22:39 filings we've seen, they either delayed or approved. So they go 45-day process, delay or approved, delay or approved, and it adds up to 240 days. And that's after they get this 19B4 application to hit what's called the SEC register. So Bitwise filed one on Friday and it hasn't hit the register yet. But after it hits that register, then you have basically 240 days before the SEC needs to make a decision. And we have VanEck Spot ETF that they filed through the 1933 Act on that 19B4 process and their final date of approval from filing on December 30th of 20, I think around December 30th, depending on the exact date, 2020, is November 11th. So it's a long time before they can be approved.

Starting point is 00:23:18 So even if GBTC applies for this application, it's not that 75-day process. I believe it's going to be that 240-day post-19B4 process. So it's going to be a long time, even if they get approved the first time. And we don't think any of these ETFs that are coming up on this approval window in this quarter are going to get approved by the sec because they were very very explicit in wanting a 1940x product that only holds futures yeah let me um let me jump in here because yes it's a different process it takes longer the heart of the matter though is and the problem for gbtc converting is it would have to convert to a 33x fund and gensler does not like that act he is

Starting point is 00:24:00 really not into it. He likes the 40 Act. It has a myriad of more investor protection. So as James said, it's a CYA kind of act. He feels much more comfortable with it. So the question you have to ask yourself, yes, there's all these other technical delays, whatever, but is when will Gary Gensler get comfortable with the 33 Act? Or is it possible somehow Bitcoin is denoted as security? Because that means it could then go under the 40 Act, because you have to be a security to get under that act. So which of those two things happen? I just don't see either of those things happening in the near term, even with, and then you

Starting point is 00:24:38 add on the other delays. I just, I don't know. I feel like you're going to hear a lot of talk about a conversion, but the question, if you hear anybody say this in your show, ask them, well, are you saying that Gary Gensler is now comfortable with the 1933 act? That's the question they won't be able to answer. all right so i have two questions i got my brother's show they got questions for you guys too first one uh james you said uh when we called for it in october you guys were right are you guys

Starting point is 00:25:07 taking a little victory lap here are we getting a little dancing on graves yeah we i i i i did i have a bunch of those remind me of this in seven days and 10 days oh my god people were saying us we're idiots for calling for this so i'm waiting for those notifications to pop up and just go back like like the tweet yeah i mean um look uh we we felt we had an opportunity here because most people did not agree with us we felt strongly and that's a good time to sort of put yourself out there because if you're right it's a big it's a big payoff reputationally but you know two things one is um we did get four things right we got the fact that approved the first one out pro shares the date we missed it by one day okay fine we said that's fair enough and then the fact

Starting point is 00:25:53 that they wouldn't approve many at once some people were replying with that and i was trying to say i think they should do it but here's what we think they will do so uh it was yes i agree i took a tiny victory lap uh today but you know i don't want to get too into it because honestly what what it really came back to you ever see silence the lambs when um hannibal lecter tells agent starling just look at the case file it really came down to gensler's words he basically was like look um i want to see 40 acts etfs that hold futures i look forward to reviewing them that was the heart of the case and ultimately i think it proved to be true there was some other evidence around that but it wasn't that hard to predict to be honest i think people got caught

Starting point is 00:26:35 up in recency bias they were used to the sec you know their hopes were built up and the sec dash them like lucy pulling the football away and i understand that but in this case there were many different situations and uh variables that led us to uh come out with that call uh which um obviously came true but we were nervous at times there was a couple times where like that little thing over there that could be bad news and we were used to getting the football pulled away but um in in this case it it worked out so my second question is do you guys have a prediction for when the spot ETF gets approved? Do we have like a month where we think that's going to happen? I'll go. So I'll say two things. One, I'm a little more positive on this than

Starting point is 00:27:15 Eric is because he's saying the 1933 act. Again, I think that was more Gensler covering himself and slowing things down, allowing like kind of things to happen a little slowly. I don't think he really has that big of a problem with the 33 act. I think he might just be leaning on as a crutch because as you talk about GLD falls under that 33 act, it's also a grant or trust, which is the same structure as gbtc so there's plenty of these products already out in in the system so i think eventually he'll get comfortable with it i think i think we see one approved in 2022 um that's my guess i'll say q4 i'll give it i'll give it a year from from now yeah a year a year from launch i think yeah well he's going q4 2022 i'd probably land there if i was vegas and forced

Starting point is 00:27:58 to make a book, I'd probably start the over-under November, December 2022, which is about a year. But anything's possible. Again, I don't know what would happen, though, to get Genzer comfortable with 33 Act. I haven't really been able to make that connection. So I'm not ready to go on the record and be as out there with that call yet as I was with this one, because I haven't connected the dots in what would make Genzer come around. And until I do, I'm not really going to say much more than just gun to head. Okay, fine. Maybe a year. All right. What do you guys got? I'll go first. Thanks for doing this guys. So my question would be, we talked about kind of the differences between a futures and a spot ETF relative to institutions, traders, retail

Starting point is 00:28:43 investors, et cetera. And it sounds like in my opinion, and you guys as well, that this may be, you know, opening up the door and getting people more comfortable with the spot ETF. If we were to get a structure like that, whether it's, you know, next year, the following year, etc. Is there any estimates that you guys have seen or you guys are familiar with on kind of how much inflow that could bring into the market? A lot. That would be that look, this is the holy grail, a spot Bitcoin ETF, and then a spot Ether ETF. And then, you know, a spot ETF where Kathy Wood picks the crypto she likes. This is a big deal. This would be in our estimate, possibly $100 billion category after, you know, four or five years. Now, you know, inflation obviously

Starting point is 00:29:23 helps a little bit the price of bitcoin would obviously depend on that but i see uh a torrent of flows into this um especially also as the vanguard effect kicks in what you'll find is that someone will come in like uh i don't know a state street and they'll undercut on feeds so we could be looking at a world in five years where i don't think it'll be from vanguard let's just say a vanguard-esque total crypto market etf for like 15 basis points um and that will sell in a big way and in a deep way um we've seen it happen in the stock market and the bond market with etf so there's no reason to think that after a lot of that uh clutter gets gets put out there you know a lot of product gets put out there they get cheaper they get liquid you couldn't see you

Starting point is 00:30:09 know something close to 100 billion uh after five years or so john yeah and i i'll i'll go real quick and say that there's about nine billion in etfs bitcoin etfs globally more if you include the other ETFs. So it's not like it's a massive thing, but the U.S. is the largest market. The other thing I would say, everyone likes to talk about trying to value Bitcoin based on the gold market, different things. As Eric mentioned, it's $24 trillion in advisor assets. A lot of people talk about putting like 1% to 5% of their portfolio in Bitcoin at this point, even if it's 1% or 0.01% of that $24 trillion. We're talking hundreds of millions of dollars that would flow in. So some of that could be through the futures. Some of it could be through spot ETF that

Starting point is 00:30:50 eventually gets lodged but it's a whole massive pool of capital that uh could enter this uh via this way easier than going through like a crypto account specifically yeah talking about that pool of capital thanks for joining us guys um what is going to be the info for this etf for this future gtf now and are you guys going to put any money into it uh look so i don't actually invest in etfs um i just don't want to have anything in my head that makes me biased so um just an full disclosure, I own like a couple index funds and Schwab ETFs, but they're like the boring vanilla stuff. Believe me, it kills me sometimes not to buy ETFs. Like I really wanted to buy the uranium ETF a couple of years ago. I nailed that call, but I didn't. And so I generally just sort

Starting point is 00:31:33 of stay away from it to be a sort of unbiased analyst. That said, I think, look, I think the future of ETFs could see four to five billion in the first year. And I think the majority of that will go to the one that gets the liquidity. So let's say Beto comes out and it becomes 80% of liquidity, I think it could get 70%, 80% of the assets. But then remember, let's say ARK. ARK is going to put out a futures ETF. They'll be up by the eighth to market. That's not a good place to be, but that's Cathie Wood. She has a lot of name power. A lot of younger people who are into crypto are like her too. So she could actually give this second wind. Then you have Bitwise, and you have all these people that have built-in markets. So while I think a lot of the spoils will go to the

Starting point is 00:32:13 real liquid one that is out first. I do think there is a lot of to be said for some of the ones coming in later. That said, I don't see this as the big sort of watershed moment that a physical would be. So I'll stick to $5 billion after one year. I don't know if James is coming over or under on that, but I imagine under a little. I'm probably under a little, but I guess it depends on how the roll costs play out. I will say, though, Grayscale, while it's basically at 40 billion in AUM right now, 39-ish. It's only had like 7 billion of inflows in its entire life since like 2013 or 2014, wherever it is. So a lot of that is appreciation. So if Bitcoin doubles from here, I mean, those numbers could go way up. So it's hard to say where the asset is going to

Starting point is 00:32:56 be, but I think 4 billion is a fair guess. I'd probably put the over under there. Yeah. I'm going 10 billion and it has nothing to do with inflows. It's all price appreciation. at some point like you know it hits 10 billion is a big variable yeah uh let me ask this question if you guys were evaluating uh the etf that starts trading hold on can i give one caveat here and yes okay there is one thing to watch which is the front month futures market isn't that big so let's say four or five billion came in uh some of these etfs might hit position limits i'll say for now it probably won't be a big deal but let's just say they become too popular you know they get four or five six billion um they may have to start owning other parts of the curve that will dilute

Starting point is 00:33:49 their ability to track spot and that's what happened with uso and when that happened the trading crowd just hated it they fleed uso and they have not come back xiv or svxy there are some exotic etfs when they cut that sensitivity uh it doesn't work out well so this is just one thing to watch is they could it's possible they come a little too popular for their own good and that that could alter the dynamics of this i just want to throw that out there okay when you guys are evaluating the futures etf that's going to start trading tomorrow it looks like um walk us through the pros and cons and then should retail be more interested in this or is this more of like an institutional or RIA type product? Like just somebody sits down and say, okay, this is going

Starting point is 00:34:31 to start trading. How should I evaluate it? And where do I come out on pros and cons of this specific vehicle? I'll jump in real quick. So the one thing we keep talking about the trading crowd, I mean, if you're using an over-the-counter retail account with one of these other providers, I mean, the fees are not cheap. I mean, compared to zero trading fees and ridiculously tight spreads that you're going to get in this ETF, it definitely makes it cheaper. So again, if you're trading, this is actually not a bad way to get exposure, especially you're going in and out because there's no transaction fees and the spreads are tighter. So that's the first thing. And then the other thing is you're basically comparing, at this point, it would be the

Starting point is 00:35:06 futures ETF to GBTC, as far as I'm concerned. And you need to understand the pros and cons of both. GBTC might not track as well, especially with the discounts. Lately, it's been moving exactly in line. Ever since it's got to this discount level, it just kind of moves with Bitcoin, but that's not guaranteed. It's probably going to be way closer with the ETF. But again, you're buying at a discount. So right now it's trading at 18%. So all of a sudden, if the ETF does get approved or GBTC can convert, that's a whole 18% or it's like at 18%, it's like 24% that goes up to meet NAV. So there's that positive. But again, over a shorter term, you're not tracking that closely. And especially you don't know what Bitcoin's price

Starting point is 00:35:43 is going to do over that time. So even if for some reason Bitcoin goes into one of its bear markets and you're holding, even if it comes back to NAV, it was still a bad purchase at that point. So again, I think the futures ETF is good for trading. It should be much closer to spot, as Eric mentioned, as long as we don't hit those futures limits, those position limits. So you just have to weigh the pros and cons. I think a spot Bitcoin ETF would be best for everyone, but that's not an option. Yeah. The retail YOLO Zoomer crowd, I think, is going to take to this, especially because they can now buy call options on it. I mean, this is going to get – because they can't really do that right now, right? So the options market around the one that becomes the liquid one is going to be a big deal. So I think there's a real demand from retail traders. I will say advisors and long-term retail investors probably aren't going to flock to this.

Starting point is 00:36:33 But retail traders who just like juice, they like the meme stocks, this should be right up their alley given how easy and cheap it will be to trade and the options on it. So I can see that whole crowd coming in. And then I can see as it gets more liquid, the bigger institutions using it for like operational purposes and hedging and things like that. But, you know, so I guess that's my answer. I just would warn any retail investor just, you know, this is a trading tool. I wouldn't I wouldn't buy and hold it unless unless you get some evidence that the roll costs aren't that bad. All right. My last question. We have any end of year Bitcoin price predictions. Where do we think Bitcoin itself ends up? You can go first, Eric.

Starting point is 00:37:18 Look, I've been watching Bitcoin. It looks like when Elon and Cashy and Jack Dorsey did that, that, you know, that panel, it looks like it rebounded there. And then it got some lift from the ETF news and some other things. it's been on a nice run i mean i don't know like is a lot of this baked in so it's tough i can't make predictions but i'd say um you're talking end of the year yes um yeah maybe there's some some buy the news or uh buy the rumor sell the news for only a month or two and then maybe there's some more bullish news but or maybe this is just all very bullish and it's actually just unleashing a whole new wave of this bull market um i i just don't know um i can see this going either way so i'll what's the price right now 62 000 okay knowing i never i'm not allowed to make

Starting point is 00:38:07 predictions i'll say 70 we're not allowed we're technically not i have no idea yeah i'm not that's not my forte yeah i would say predictions not bitcoin not not price predictions yeah i would say i so i say a lot of the on-chain metrics that like i've been following but there's plenty of people on Twitter are like, very bullish, obviously, right now, long term holder percentages and all those things. But again, the one thing I'd be worried about is buy the rumor, sell the news type situation, especially after this thing starts trading. So yeah, that's, that's the thing I'd be watching. But there's a lot of certainly bullish indicators right now. But Bitcoin surprises everyone on a regular basis. So there's one thing to be to be said here about the more the ETF,

Starting point is 00:38:48 the more, you know, ProShares has all these salespeople, they go golfing with advisors, they know they just have built they have audiences that they're friends with so the more this the more people have these etfs van eck has one and then it's um you know you're looking at just really tapping into a whole army of of sales people and distributors and distribution um and i think that's worth something that's why i don't know if this is just a quick hit by the news sell the rumor but possibly some of that but i will say that that's why i think this is a much bigger deal then even the people who are a little like i don't know uh negative on the futures element the roll cost this really is a major uh situation because of of what it's tapping into and what it

Starting point is 00:39:33 is sort of like putting into motion which is all of these big asset managers have all of these sales people and they're going to start calling people about this and going you know and talking about it and those people a lot of those advisors in particular over time might you know might be comfortable buying some, but like I said, a physical one would be better for this. Yeah. I'll jump in and say, there's plenty of people out there that think there's no need for an ETF. It's just, we don't need it. We don't want it. Tyrone Ross over at OnRamp, I've been on panels with him debating this. He's against an ETF. He's not a fan. But the one thing I would say is if you're an advisor and you're just going to put 1% of your client's account in your 2%,

Starting point is 00:40:10 what's easier, just buying this ETF and just putting that in the financial rails that you already have on your system? Or are you going to go out and create accounts with all these other crypto providers to put like a little bit of your client's money into these accounts and track it in different areas, which again, on-ramp is trying to make easier. But I think there's just plenty of people that are at these big shops that have these old massive legacy financial systems and putting an ETF in this position just opens up to a giant new pool of capital. I keep going back to that. So that's the huge indicator. It's going to democratize some people's exact access to Bitcoin. In the same way we talk about gold, it's just not as bad because people can get it

Starting point is 00:40:48 regularly on their own. But there's plenty of advisors out there that aren't going to touch Bitcoin until it's an ETF. Yeah, it's not it's not that it's not veto itself. It's that veto is just is a first step. Yeah, I think that's the general takeaway here. I'm not buying the futures ETF unless ProShare sends a salesperson to take me golfing. That's my takeaway from this conversation. That's what I'm buying. They will. I think they will. I'm sure there's somebody that they'll send i'm gonna need a vest and some lunch too awesome all right guys listen thank you so much for uh for taking the time to do this you guys have been all over it uh this is your virtual victory lap from us to you guys uh you nailed it so uh thanks so much for all the hard work anyone

Starting point is 00:41:30 who uh who's not following both of these guys on twitter definitely go follow them uh and then james but also by the way i'm not gonna let you out of here before uh he did the podcast in when February, I think. And I thought I was following him. And I recently realized I wasn't. I follow him. And then he tweets out and he's like, hey, this guy took six months to follow me. Big time. I had to call you out. Awesome, guys. Listen, thank you so much for doing this. We'll do it again in the future. And I think a lot of people are hoping you guys are right in terms of inflows to the ETFs.

Starting point is 00:42:06 Thank you. All right. See you guys. Thanks, Paul. Bye.

The Pomp Podcast - #693 Bitcoin ETF Deep Dive w/ Eric Balchunas and James Seyffart

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