What to Expect After SEC Approves the First Spot Bitcoin ETF? | European Blockchain Convention 9

Transcript

3 2 1 Is this on? Great. Good morning everyone. I'm very excited to be on today's panel with my colleagues Maurice, Ave, and Manuel. We're going to be talking about the forthcoming approval of the spot Bitcoin ETP in the US. And I say that forthcoming because I believe it's going to happen. It's not a question of if, but a question of when. And if you followed any of the previous the panels, um the ETP the ETP topic always came up. But let's introduce the panel to start with. Over to you, Manuel.

So, pretty fast and and forward, I work in in Julius Baer. I take care of the investment research within a team called next generation research. Essentially, I have the house view for the asset class in the bank. And I also work a bit on the strategy. I come from Venezuela, the land of arbitrage. I've been hedging domestic currency exposure with crypto for a while. And that's that. Good morning. My name is Ave François. I'm working for Invesco. And I run the blockchain fund out of Abu Dhabi. Before joining Invesco, I worked 20 years in investment in banking industry, including like 8 years around the blockchain digital assets. Thank you.

Good morning. Maurice Mureau. I'm the CEO of Hodl, which is a fund manager in digital assets. We run diversified strategies in digital assets across Europe. And yeah, I'm really excited to be on this panel today. Thank you, gents. Just to complete the round, my name is Kristoffer Rye. I run institutional sales at Uphold. We focus on education and execution predominantly in altcoins. Um just by by show of hands, who actually knows what an ETP is? And and for those of you who know what it is, who believes that the spot ETP will get approved before year end?

Great. Um with that uh positive uh mindset, I'm going to actually ask you guys the exact same question. Maybe just explain what an ETP is to the audience and then what your thoughts are on uh on when it gets approved. Well, I I start with my thoughts. The approval date, obviously I raised my hand, but it's uncertain, right? We have multiple deadlines. The Grayscale deadline was already up um last week, so the SEC, the ball is in the court of the SEC. They have to provide an answer soon. They either reject the Grayscale Bitcoin Trust uh filing to convert to an exchange-traded fund or they on on new grounds, right? Or they just approve the product. On the other hand, we have a

cohort of filings, out of which the first one will be the Arca 21 Shares one with a due date on the 10th of January next year. So, before the 10th of January, I expect we have a definite response on the matter. Uh an ETF essentially will act at the moment physically-backed exchange-traded funds are nothing new, right? So, in Europe, we have some uh assets like these, and in the US, we only have futures-based, so these are derivatives-based. The underlying asset of the exchange-traded fund is the futures contract that you can trade in the CME or in the CBOE. And with that, we have a very large product whose ticker is the BITO and is already

in the market for a couple of years. So, the implications might be large. I I guess we'll discuss that in in a couple of seconds. And uh yeah, the deadline for the SEC at most will be in Q1 '24. I expect an answer before. Yeah, just to add on Manuel, I think one of the key point of the ETF ETP is those product is to enable people to get the exposure on Bitcoin in that case within an infrastructure they're familiar with. So, a lot of institutional and uh professional investors are already uh used to uh trade with a ETF. That means they have already all that set up. So, it's a key enabler for them to get the exposure without the requirement potentially to go um by themselves getting like a a

wallet for their own custody, getting the the Bitcoin directly themselves. So, that's open a wider audience of investors that until now were on the sideline and that will enable them to uh kick in. And that can go up to uh also like all high net worth individuals like accredited investors that also willing to diversify their portfolio. I was a bit surprised that there were a few hands uh for this year's approval um cuz the Bloomberg ETF analysts uh they actually exist um said there's a 90% chance now that the the approval will be this year. And this is not only based on um uh what Manuel and Hervé already told, but um it's also that the SEC is now actively talking to the ETF

applicants um about the product. And this is the first time since uh since I think the the the first uh um application was more than 4 years ago um that the SEC is actually um in the final stage of discussing how the product uh should be. Thank you guys. Um I guess uh to create a bit of a backstory, um if you guys remember last Monday the fake news came out that the Bitcoin spot ETF was approved and the price immediately shot up. So, I would like to ask you guys what expectations you have uh on the price action of Bitcoin and then maybe dive a little bit deeper Bitcoin being correlated to other cryptos, what correlate uh what price

uh reaction you would expect from the entire sector. Maybe I'll start with you. Maurice. Uh yes, um I think we've seen the price action the last 2 weeks after um, the the fake news of CoinTelegraph. The Bitcoin went up uh, 35% since the application of BlackRock. And um, yeah, I think short-term uh, there's a lot of hype around it and definitely will be very interesting to um, to see if that continues when the actual approval will be there uh, somewhere soon. Um, but long-term the effects will be be great. Um, I think correlation we should go to an that's a different subject uh, by itself. Let's do that in a in in a different question, but yeah, it's very interesting to see um,

obviously it will lead to a lot more uh, parties, individuals, institutions um, to actually get access to the Bitcoin via an ETF uh, which will probably increase demands and that with a halving incoming and um, yeah, that that will definitely do price action we've seen in the last 2 weeks. And if I might add for in in my perspective, the big implication of the ETFs is the fact that they are coming at a moment where there is no market depth for digital assets. If you want to trade Bitcoin on a centralized exchange, you might as well be looking at a slippage which will be the difference between the execution and the settlement price of around 40 basis points. Large orders

will break the order books and that's what happened on Monday. On Monday we saw 105 million of short positions being liquidated in a couple of minutes. And that's also the reason why we see this improved sentiment to a large degree. I don't know if it's going to be sustainable in the medium to long run because the market will likely uh, improve in terms of the market depth. At the moment, there are very low incentives for market makers to keep their assets on the exchanges and provide liquidity.

We have 5% USD bills. We can T-bill and chill. And that's also what the hedge funds and all of the other market makers are are are taking about it. So, the one of the main reasons why there's so little liquidity is because Bitcoin is becoming the store of value. Bitcoin is serving a role in a portfolio context providing risk-adjusted returns. And at the same time, Bitcoin holders are accumulating. Around 80% of the total Bitcoin supply hasn't been traded in over a year. Around 70% hasn't been traded in over 6 months. So, with that, a supply squeeze could even be in the making.

Yeah. Yeah, yeah, just a quick remark cuz you were asking what will happen after, but I think it may also start to starting to happen right now just before cuz the market most of the time will price the rumor and you know, buy the rumor and sell the news. So, we start to see this price action for people anticipating that that will happen. We know there are some deadlines as well that coming like early January. So, that's why we are this opinion more by the end of this year that it will be accepted. And then the market is already like a pricing it and it may accelerate. And then after most likely you will see another wave which is really the the use case I was talking about the fact to facilitate the access and you will have more flow coming in for for people to

get the exposure to ultimately if the the liquidity is still a bit missing, that will drive the the price up. That's That all sounds really really positive. But a little bit earlier in the year, we saw the the launch of the Ethereum futures ETPs, which if you look at the assets under management seems to have been a bit of a false start. Do you guys have any thoughts on that? I mean, on the on the 2nd of October, there is one very big positive outcome from this approval of the Ethereum futures based ETFs in the US. And it is that the SEC approved a cohort of products at at same time. In the past, when they approved BITO, they essentially had a kingmaker role. They approved only one product, and following

that, a couple of days afterwards, they approved other products. What happened was that BITO was a first mover, and they were able to gather the most AUM possible. What we saw with the ether futures ETFs in the US, the launch was on the 2nd of October, and we saw underwhelming volumes at best, even though some of the strategies were Bitcoin and Ethereum weighted strategies, market cap weighted, and unfortunately, what we can expect is that investors are not not interested in holding derivatives based ETFs. Anything to add?

I mean, generally, now we're talking a little bit about other products outside of Bitcoin. And what we saw in equities over the last 20 years was the search and innovation in exchange-traded products. It started out with with uh um securities just tracking the Nasdaq or or the S&P 500, and then very quickly evolved into a very creative space where you could track factors and sectors and an ESG-themed portfolios. I was going to ask the panel how you see that potentially be replicated in the digital asset sector.

I'll I start. So, I think what is interesting is to see the more and more overlap between trade five and everything blockchain oriented. So, in the case we're discussing, so if it's ETF, so you're is an enabler like for digital asset to be accessible through the the normal traditional railway. But we also see the other way around ultimately with a tokenization of real assets, which is hot topic right now. And then in that case, like you can tokenize potentially everything, and that using the blockchain technology to make it like an enabler for fractional ownership and others.

So, I think it's just the the tip of the iceberg, and an overall like a willingness for the market to to get involved, to get interest more and more interest again around like a digital assets. It will also will also be good to see um if that is a different product now within the in the track five range that has for example a different settlement period and and all other techniques involved the different custodial um surroundings and that makes it very um interesting to see if they uh while working with a product to see the advantages that the the blockchain have and and that will definitely lead to more products not only on the ETF space but also on the tokenization space I think.

And lastly, in my view, on a portfolio context, your retail investors need a product that brings down the barriers to access crypto. As we all know, we need a very high level of education in order to understand the simplest of of blockchain transactions. The average retail investors are not ready for this yet and the ETFs could in fact spur a new demand uh spree, right? So, people need an institutional grade asset where they can get indirect exposure to the asset class and include them in in their portfolio.

So, there's a demand component as well in my view. No, absolutely. I mean, it's it's a wrapper that's been used in the past. People are familiar with it and I guess one of the key words when thinking about ETPs is accessibility. How do you feel that I mean, this watershed moment and I referred to it earlier as a watershed moment, once we once we have it approved, what will it do for the digital asset space as a whole with regards to mainstream media, um mainstream education, um will people become more comfortable around um trading well well they won't be trading but accessing Bitcoin as part of portfolio diversification. Any any Yeah, I'm really optimistic about this

and uh independently of the move of the Bitcoin, honestly that uh I'm don't really mind about it, but uh having an interest from from the ecosystem is starting to get also is is all the funding everything is coming back because often uh people assimilate blockchain to Bitcoin, which is just one use cases, maybe the most uh visible one. But with the confidence coming back into all these use cases and we start to talk more and more about it on the side combined with with AI, I really believe that also people will uh look a second look again on the on blockchain. That means we also like going on a VC or like the the funding raise, we get more people that want to invest to support like all the the innovation for those

startup and that start to have like a domino effect because if we invest into more of those companies, that means like it's also company working on DeFi, working like all like the different use cases that will help uh overall for the ecosystem. So for me beyond just the ETF and the price action on the on the Bitcoin, that's what is really interesting. It's a new wave of interest, investment on the world ecosystem. And you already see that the questions the SEC um um asks the applicants is that um they need to think about it uh what happens uh when there's a hard fork? How does that relate to your product? They need to describe that so the investors know what happens with the accounting

standards, how is it taxable, et cetera. So um it starts with the the product builders to explain it to the investors um how the product works, but also how the underlying product works and that makes them more aware about um cryptocurrencies, blockchain, et cetera and that will lead to definitely more. But um if it comes to education, I think it's all of us that has have the main job here. Uh this is the the the blockchain conference or convention and um we need to to be the the spokesman um out there to make everybody aware that this is the space that that is evolving so rapidly that everything involved in traditional finance will be in the end uh touching the blockchain some some way or another.

Yeah, I mean, for me and I'm going to be the devil's advocate right here. So, if we have an approval and actually the BlackRock, the fidelities of this world will become the largest holders of Bitcoin if they meet up the necessary interest. So, this poses a governance problem which I evidently don't know the answer to, but something to reflect on afterwards for for everybody here. The same we're seeing with staked ETH with Lido. Like, blockchain governance, especially within the the the tokens, is going to be a very important topic in the next few years.

I think that's a great point. When when talking about the ETPs, one name always pops up and I think in the interest of everyone here in this room, we need to define the Grayscale product, why there's a discount or why there was a premium, and and really what impact the approval would have on on potentially the current holders of Grayscale. If you guys could elaborate a little bit more around that and explain the the complexity of the problem that Grayscale faces. Okay, so for the audience that isn't well known with Grayscale, Grayscale is a trust that gave access I think 2020 2021 in that area.

There were large inflows from US citizens and individuals to buy Bitcoin within a trust structure. The the thing about it is that you cannot redeem. You can sell your trust to somebody else, your your participation, but you cannot redeem and the Bitcoins cannot be sold. So, the Bitcoins are kind of stuck within the product. In the in the bull market, that meant there was a premium. So if you had a Bitcoin trust share and you you could sell it actually above Bitcoin price. But when the bear market started that went the other way because you couldn't get rid of your product and the discount went all the way down to 50% or 53%. So you could actually buy Bitcoin locked

50% cheaper than the spot price. Grayscale didn't saw that that wasn't good for that product. So what they said okay, let's file the application to change the trust into a Bitcoin ETF and or ETP. And that means that the discount now by the chance of that being approved is kind of fading away. I think last week it was 13% or something the discount. So that meant people who bought the the Grayscale trust half a year ago outperformed Bitcoin by some 40% just by the effect of it being transferred to an ETF and then you can sell it and then you can sell the underlying which is also a price risk because I think

Grayscale is one of the largest Bitcoin holders at at this point which means that if we if it is tradable at some point, there might be a lot of people just playing the discount want to get rid of the Bitcoin. I don't know if that is a large effect or not. I think it it might not be that bad but it's definitely something to account for and and see what happens after the approval if there's sell pressure from from that side. I think that was great. The We're we're we're coming more or less to the end but a couple of things we might need to touch upon is because everyone here seems to be trading crypto natively, what are the costs associated if I would get Bitcoin exposure by an ETP? Who who is the custodian? Potential tax treatments if

you guys have any insights on that for the audience? I mean I I can quickly add if you buy a product from any asset manager the ETFs, they will likely be custodized by an entity they designate. They can either do it in-house or they can designate some of the largest exchanges like Coinbase's custody arm as the custodians of these assets. So, they tend to be on the cheaper side than on-ramping. So, the biggest restriction for beginning to trade cryptos is going to be on-ramping. There are not so many access providers that let you get on-chain and do your own custody when you're on-ramping at first. So, you normally have to go via centralized

exchange or you have to go to a third party in order to get on-chain. And this can set you back 200 pips. Uh the expense ratio on average for these ETFs tends to be around 1%. It can go all the way up to 2% and this is for the futures-based ones as well as for the physically backed ones or the spot ones as we know. So, it's going to be for sure a cheap avenue, but you have to bear in mind and as everybody says, not your coins, not your assets, not your keys, not your nothing. So, you have to bear that in mind when you're buying a a derivative product and indirect product and for me that's the most important aspect.

Yeah, and I think account advice it will be very beneficiary. Um within our company with our investors, the most requested document is their end-of-the-year statement they can use for the taxes. So, if if it's in your Yeah, if it's in your normal portfolio, then you can just add add it on with your your portfolio statements and put it in your tax filing. So, I think that will make it a lot easier for a lot of parties as well. Great. Um well, we're we're we're like I said, we're running running towards the end of time. It seems a very optimistic, very bullish panel. Um maybe just just a minute each from you guys, the thoughts um around the Bitcoin price. Will we see a new all-time high with the approval

before year-end uh uh or will we not? I can already sense compliance breathing on my neck, so I'm not going to give an answer on that. What I can say is that if we see accumulation as we have seen in the past few years when most of the Bitcoin supply hasn't been traded in over a year, you know, 80% of Bitcoin supply hasn't been traded in over a year. What's going to happen next year if this carries on? Where are market makers, where are the asset managers going to be able to buy the Bitcoins without breaking the order books? So, might be a supply squeeze, might not be.

There's going to be for sure a demand spike contingent on the ETF's approval. And the prices will for sure also include the halving we have next year, so we might see acceleration in Bitcoin supply growth at the same time as we see a supply squeeze. Yeah, and BlackRock already saw this coming cuz before they put the application in, they took a stake in four of the five largest mining companies, an equity stake. So, they know where to that there doesn't need to be directly involved to buying the Bitcoins from the miners. So, that means less flow on the on the market cuz the miners are the natural sellers. So, it will be uh uh very interesting to see how this uh how this turns out.

And nothing much to add. I think we were quite optimistic about the price action. Not to know where where it lands is is difficult. I don't have any crystal ball, so we'll see. We got 1 minute left. Any pitfalls? Could the SEC still uh um do they have to approve by the 11th of January? Like, are there any any pitfalls uh on the road map? The SEC can do whatever they want. They can reject the product as much as they can approve the product. They have pressure from the US House of Financial Services, which is led by Chair Patrick McHenry on the Republican side. They want to foster innovation. They've seen innovation go to Dubai. They've seen innovation go to Singapore. It's not in the best interest of the United States of America

for this uh space for this innovation to move abroad. So, the SEC, even though they are guided by the house, they might reject the product on new grounds. At the moment, the District Court of Appeals said that they see that the ruling before for rejecting Grayscale's filing was capricious and arbitrary, especially because of the fact that spot markets and futures market have a 99% correlation. So, it is as possible that the uh ETF are also rejected before the 10th of January. Let's see what happens.

Great. Um we have a minute left. Do we have time for questions? Any Anyone? One question from the audience, if there's any topic we didn't touch upon. Maybe better. Um what's your take on the um the potential impact of uh USDT um and somehow the lack of transparency about it in its effect on whether or not the ETF Bitcoin spot might be approved.

Any thoughts? Curveball. Uh the thing is it is indeed a curveball. I think it's out of scope in terms of compliance matters for me because it's also talking about a company that is privately owned, right? And it's also talking about the asset that the company issues. So, I'm nobody to say that they have been transparent or they haven't. I guess you know the answer yourself, and that's the reason why you asked the question. So, I I I just rather give the the question to somebody else. Uh for for me I see it the other way around. I think after the ETF, it's not only the ETF ultimately, it's also all the discussion you have around like how do you treat digital assets in the US, the stable coin, CBDCs. So, that's what will be initiated and then that can have

an impact out of your question. Yeah, I agree. Thank you. On on that note, thank you very much, gentlemen. And I guess the message is buy Bitcoin before the approval. This is not financial advice. Yes. Indeed.