We’ve Just Taken The First “Imperfect, Flawed, Messy, But Exciting Step” To A Bitcoin ETF Utopia

We’ve Just Taken The First “Imperfect, Flawed, Messy, But Exciting Step” To A Bitcoin ETF Utopia
Andrew Rummer

over 2 years ago7 mins

This is the transcript of an audio interview with Eric Balchunas, senior exchange traded fund (ETF) analyst at Bloomberg Intelligence. Tap the 🎧 button above to listen to the podcast.

Last week, after a wait of more than eight years, the first ever bitcoin ETFs hit the US market. The ProShares Bitcoin Strategy ETF (ticker: BITO) launched on Tuesday and took in more than a billion dollars of investor cash in just two days. It was joined by the Valkyrie Bitcoin Strategy ETF (ticker: BTF) on Friday and further bitcoin ETFs – including from Ark Investment Management and VanEck – are expected to hit the market before the end of the year. 

Notably, however, all these US ETFs are based on bitcoin futures contracts rather than actual, physical bitcoin – because that’s all US regulators were willing to approve. And – as our analyst Stephane Renevier explained in an Insight last week – that means over time these ETFs will lag behind the price of bitcoin in a bull market due to the need to pay to roll over future contracts every few months as they expire.

To help unpack all this, and examine the impact of these new products on the wider crypto market we’re joined today on Insights by Eric Balchunas, senior ETF analyst at Bloomberg Intelligence

Eric began by explaining to Finimize’s very own Andrew Rummer what the addition of these new ETFs to the market actually changes in the world of crypto investing. 

Eric Balchunas: So it's tough because obviously, if you are an investor, you can get bitcoin exposure on an exchange. Now I will say this though: if you're trading bitcoin, some of the fees on the exchanges are ridiculous. This ETF will charge you 0.01% per trade because it's a penny spread over the price. It means it's a basis point to trade. So that alone I think there's some winners if you're trading bitcoin. You can trade it much cheaper now. That's big. That's underrated. I'm not hearing a lot of that. There's a lot of people slamming it, I get it, but that's one thing. And there's also options on it. Up until this time – unless you were a really big institution – you probably couldn't trade options on bitcoin in a regulated market.

Crypto people have a tough time understanding why a “mainstream” person just doesn't really want to go to a crypto exchange and get a wallet and deal with all that. They don't know what the fees are. I go to this exchange, you don't even know what you're getting charged. They trust ETFs. It's a wrapper they're familiar with. And so this is like a bridge from one world to another. And the ETF is something they're comfortable with and used to. So the ETF will bring in a lot of people. And there's a lot of people who are waiting to get bitcoin in a format that they're comfortable with. 

One of my metaphors on this is when the Beatles finally let their music on iTunes. That probably introduced them to a younger audience, because the younger audience is just not going to go buy a CD or an album, right? So here you have a very hot asset class that is finally in a format that people want it in. And sometimes the format actually trumps the underlying. Like in the case of the Beatles, there's probably many people who didn't buy a Beatles song until they went on iTunes and were able to go into the digital world. And so ETFs are going to continue to bridge and tap into that massive amount of money. I mean, advisors have about $25 trillion in assets. That's a ton of money. And then there's probably another couple trillion of just conservative retail investors – maybe call them Boomers, whatever – that really probably will only get crypto if it's an ETF.

Andrew Rummer: As we record this on Friday, we’ve had three days since the launch of the ProShares bitcoin ETF. Now that the dust has settled a bit, how did the launch compare with your expectations?

Eric: It blew them away, to be honest. I was probably one of the more bullish and optimistic of my peers who are other analysts. In fact, I even got into a bet with one; he took the “under”. I was saying, you know, maybe $4 billion in 12 months. Now, it's already got like $1.2 billion in three days. So it's on track to probably blow away my acid estimate. But what really blew me away was the volume. For an ETF to trade $1 billion on day one is just absurd. I mean, the next biggest opening day was $439 million, which was the Dave Portnoy BUZZ ETF from earlier this year. But then that one traded one sixth of that volume on day two. It was a lot of hype, all his fans bought it, and then it kind of went away.

This one traded more the second day, like $1.2 billion. You never see that. The only time you see an ETF trade more the second day is if it's really catching on – and that happened with QQQ and it happened with GLD. So it's a very good sign to see an uptick on the second day. And if you add the first day and second day together, you get about $2.3 billion in volume. That is just about three times more than any other ETF launch in history. So I'm not sure what else to say: that data speaks for itself. And I'm surprised because I thought that the fact that it tracks futures instead of spot would deter more people. But now that I look back at it, I think that the eight years that people have been waiting for this just built up a bottleneck. It's almost like when you strike oil and it just shoots out of the ground. I think it just tapped into some really pressured demand. 

Andrew: Obviously this launch has been big news for anyone interested in crypto and, I guess, finance and markets more broadly. But even after these ETFs took a couple of billion dollars from investors, that's a tiny fraction of bitcoin’s $1.2 trillion market cap. How big a deal are ETFs for crypto really – and where do you see this market heading in future? 

Eric: My main takeaway to crypto people is that this is one step on a road that will ultimately lead to, I don't know, the Vanguard Total Crypto Market ETF – which is physically-backed, and charges 12 basis points, and is highly liquid. Once you get there, it's game over. You're going to have so many people opt to use that: because it trades at a penny spread, there's no roll costs, it's cheap to own. And it's basically what ETFs have done to stocks, bonds, gold. It's gonna happen to crypto. It takes a couple years for all this to play out. Usually the first product isn't the most perfect one. You need a little bit of a fee war to play out. In this case, we need the physically-backed ones to be approved. 

So let three or four years pass and you'll see: you'll be in an ETF utopia. You're going to have a couple of bitcoin ETFs that are highly liquid and cheap, a couple of ether, potentially another crypto that's popular, and then a basket. I think the crypto basket will be the really big one. Because when we look at the stock market and the bond market, the big ones are the basket ones – the ones that hold a little Treasuries, a little munis, a little corporates. Or, on the stock side, they hold some large, mid, and small. Those are the ones that really sell with that $30 trillion of advisor money. So that's where this is headed. This is the first imperfect, flawed, messy – but exciting – step in that process.

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