Episode 293 - Eric Balchunas: Spot Bitcoin ETFs

Image from BenBella Books 

Eric Balchunas is Senior ETF Analyst at Bloomberg Intelligence, where he leads the ETF and passive fund research and contributes to Bloomberg Opinion. He is a frequent speaker at industry events and conferences, as well as the co-creator of the Bloomberg podcast Trillions and Bloomberg TV’s ETF IQ. Eric is author of The Institutional ETF Toolbox. He lives in Philadelphia with his wife and two boys.

After a year and a half hiatus from discussing Bitcoin, we felt compelled to explore the implications of the US Securities and Exchange Commission's approval of 10 spot Bitcoin ETFs for trading. In this episode, we dive into the recent news surrounding Bitcoin and its entry into the mainstream investment landscape through spot Bitcoin ETFs. To help us unpack this topic is Eric Balchunas, a seasoned ETF analyst at Bloomberg Intelligence and host of the Trillions Podcast. Eric brings a wealth of knowledge on ETFs and offers valuable insights into the intersection between traditional financial markets and the cryptocurrency space. Join us as we discuss the implications of Bitcoin ETFs trading on regulated exchanges and the impact on its overall anti-establishment identity, the intricacies of approved cash creation and redemption limitations, what Bitcoin ETFs are backed by, the transparency and potential vulnerabilities of Bitwise, and the complexities of navigating anti-money laundering aspects within Bitcoin transactions. You’ll learn how financial advisors are likely to leverage spot Bitcoin ETFs, who stands to benefit the most from Bitcoin ETFs, the broader implications for the investment landscape, why Bitcoin is like Tabasco sauce, and more! Tune in for a captivating exploration of Bitcoin's journey into the mainstream investment arena, with Eric Balchunas.

Key Points From This Episode:

(0:04:29) Reasons that Canada officially embraced Bitcoin sooner than the USA.

(0:05:55) Why spot Bitcoin ETFs took longer to be approved by the SEC than futures ETFs.

(0:07:54) Which ETF regulations have changed to allow a spot Bitcoin ETF.

(0:09:42) Approved cash creation and redemption limitations.

(0:12:46) What spot Bitcoin EFTs are backed by.

(0:17:15) Bitwise: how it demonstrates transparency and the potential for sabotage.

(0:19:38) How authorized participants will deal with anti-money laundering aspects of Bitcoin transactions.

(0:21:31) How spot Bitcoin ETFs have been trading relative to their net asset value.

(0:22:42) The amount of value flowing into Bitcoin ETFs.

(0:27:23) Differentiating Newborn Nine ETFs from one another.

(0:31:57) Benefits of Bitcoin being made available through an ETF.

(0:34:21) The impact spot Bitcoin ETFs have had on Bitcoin's identity.

(0:38:04) Who has benefited the most from the adoption of spot Bitcoin ETFs.

(0:40:36) Comparing spot ETFs starting trade to what was predicted by crypto enthusiasts.

(0:44:36) Vanguard's decision to not allow the spot Bitcoin ETFs on their platform.

(0:48:19) How financial advisors will leverage spot Bitcoin ETFs.

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore: Welcome to episode 293. This week, we are talking again for the first time in what? A year and a half, Ben, talking about Bitcoin and the news, the recent news, after a whole lot of back and forth and a whole lot of drama. The US Securities and Exchange Commission permitted 10 spot Bitcoin ETFs to begin trading a few weeks ago. This was pretty big news, so we thought there's some lessons in this, so we reached out to someone who we've both followed for a long time, Eric Balchunas. Eric joined us today.

Eric's a senior ETF analyst at Bloomberg Intelligence, where he writes about those research and articles and feature stories about ETFs for the Bloomberg terminal, and also, bloomberg.com. He is host of the podcast, Trillions. He is also the author of the 2022 book, The Bogle Effect: How John Bogle and Vanguard Turned Wall Street Inside Out and Saved Investors Trillions. It's pretty fun to meet Eric after following him and we've mentioned him many times on this podcast. But with that, Ben, why don't you give us your perspective, especially given all the research you did in 2022 on Bitcoin and crypto in general?

Ben Felix: Yeah. I mean, Bitcoin has gone mainstream now, I think, officially, is it’s trading spot. Bitcoin ETFs are trading. We saw the flows that have gone into them, which we talked to Eric about. One of the questions that I asked Eric, which I think is pretty interesting to think about and so does he based on his answer, is how does this affect Bitcoin's identity, because Bitcoin, its conception was this ideologically motivated currency outside the reach of regulations and governments. If you read the original paper, that was its purpose. Now, it's trading on regulated exchanges and you've got people like BlackRock and BlackRock's leadership talking about why Bitcoin is good to invest in, so that's very different from, I think, what Satoshi Nakamoto had intended, or that group had intended, whatever it was. 

They came up with the idea when they wrote the original paper and coded it. Interesting evolution for Bitcoin. It's also interesting that we've had spot Bitcoin ETFs in Canada for quite a while now. While this is a big deal in the US, it's less so in Canada, and, I don't know. I think a lot of people, Bitcoin pumpers thought that there'd be a big price increase if this happened. That has not happened. Prices have gone down. Eric thinks based on our conversation that long term, it'll have a positive price impact, which makes sense if it increases access and interest.

Great conversation. I mean, Eric, he called himself a tourist in crypto, but he's got deep expertise in ETFs, and that's really where we focus the conversation, so really interesting conversation.

Cameron Passmore: I was just going to say, Ben, even if you not have an interest in crypto, Eric's explanation of creation and redemption and some of the nuts and bolts and the plumbing around ETFs, he is a very good communicator. If nothing else, you’ll learn about the ETF features and how they actually operate.

Ben Felix: Well, this is the thing. We had to do a crypto series, because we heard from our audience that they didn't want to hear about crypto. We got very strong feedback. We did a couple of episodes on crypto. But I wanted to explore it, so we did a separate series. But now, Bitcoin's trading on the exchanges in ETFs, which again, isn't that new. But being in the US and being a spot ETF instead of a futures ETF, I think, makes it that much more mainstream. But like you said, we could have had this conversation just about the mechanics of ETFs and it would have been almost as interesting, but with the addition of talking about the relationship between that and Bitcoin, I think, makes it a really unique conversation.

Cameron Passmore: He was awesome. Okay, let's go to our conversation with Eric Balchunas.

***

Ben Felix: Eric Balchunas, welcome to the Rational Reminder Podcast.

Eric Balchunas: Great to be with you, guys.

Ben Felix: Great to have you here. Eric, there's all this news about the spot Bitcoin ETF in the US. But Canada's had this for a while now. Why was Canada so far ahead?

Eric Balchunas: You guys have liberal regulators. I don't know why exactly, but Canada has been famous for getting products out quicker. The first ETF ever launched actually came out of Canada very quickly. In my first book, I researched this heavily. I talked to the guy from the American Stock Exchange, Steve Bloom, and he said, we had Toronto down here and we showed them our design for SPY and they went up and did something similar, but they only had to wait a year. We had to wait four years.

Canada has this history of just getting out early, whether it's the first bond ETF, the first ETF, obviously, and then the first cannabis ETF, you also had first – there's a couple of other ones. I'd have to go back. But it's not a shocker that you had spotted Bitcoin before us, too. It's just the way it is. It's a bigger market down here. There's more CYA. A lot of investors are like, do-it-yourselfers, so they can buy anything. They know how to get their hands on stuff. I don't know if everybody in Canada is rushing out to get the latest thing. But here, you put something on the market, an ETF, and grandma can get it. They have to be careful.

But in this case, there's probably a little politics involved. That would be my reasoning. Now, why your regulators are a little more liberal? I don't know, but I identify with that, I think, sometimes. You just want to just put disclosures in there and let the people choose. I think they should have approved it years ago.

Cameron Passmore: That's really interesting. Why did the spot Bitcoin ETFs take so much longer to be approved by the SEC than the Bitcoin futures ETFs?

Eric Balchunas: Yeah. They shouldn't have, to be honest with you. But the answer was really that the futures ETF, where the futures are regulated by the CFTC. Gensler had comfort knowing that the thing it holds is regulated. Spot, Bitcoin, the Bitcoin way out there he thought was the Wild West. If you do a spot Bitcoin, you're holding something that he thought was Wild West. Whereas, the futures were controlled. Everybody knows, the futures are riffing off of the Wild West, and that's what the court found to be inconsistent, and that's why they lost in court. That was the reasoning for him to approve futures and not spot. If you really think about it, that doesn't make much sense. But look, he's a Democrat and he is generally more into regulation. He's also a lawyer. I think that's really what was behind it.

Ben Felix: He's pretty sharp on crypto, too, right?

Eric Balchunas: Yeah. No, he taught an MIT class on it. When I first saw he got appointed, I went and googled his feelings on this. I watched some of the class. It was really good. He knew his stuff. It seemed like, he was even into it. Now, I don't know if that changes once you become SEC Chairman. He probably has meetings with Elizabeth Warren and all of a sudden, his tune changes, I guess. That's probably what went on there. Maybe after he gets out, he can be give an honest interview and tell everybody what went on in his brain, that would be very interesting to hear.

The other guy who was just on their last, I believe his name is Jay Clayton. After he left, he went to a firm that had some stuff to do with the crypto industry. I think that is the same deal. I think when you put the SEC Chairman head on. There's just got to be other pressures that we don't see that I have some empathy for. He may in his heart say, “This is fine. But as this person wearing this hat, I have to have this other view.”

Ben Felix: Yeah, it's interesting I watched all of his crypto lectures. I agree. He gets it and it did seem like he was into it. Has anything actually changed in ETF regulations to allow a spot Bitcoin ETF?

Eric Balchunas: No. The only thing that changed was that the SEC got sued and lost. They found that the decision to not allow spot and allow future was arbitrary and capricious. Two of the judges of the three were Democrats. That was a big deal. When they 3-0 was the vote. When you lose Democrat judges, okay, that's clearly a issue they probably overstepped on. That was it.

Now, there's other theories on well, Gary could have went out and said, “Well, let's make custody the new issue.” He probably could have prolonged this. I think he had some opening there. Not a lot, but he could have done it. You could argue the PR and everything was more politically untenable after the court loss, but he could have done it. But Blackrock filed and Fidelity filed. I sometimes think those firms being in the mix may have given him some peace of mind that, “Hey, this isn't just grayscale. There's a lot of other firms, a lot of firms that we can trust and know what they're doing.” Maybe that gave him some comfort and peace of mind that, “Okay. I'll just do it because I trust these firms.” That's what I would have thought if I were him.

But we'll never know, because what's weird is they did the vote and it was three to two, but Gary was the deciding because there's two Republicans they voted to approve. In the past, Gary was with the other two Democrats. But Gary was the one who went over. Elizabeth Warren immediately came out and tweeted this nasty tweet about how she hates the spot in Bitcoin ETFs. That's interesting.

Gary, looks like, he stood up for what should happen and listened to the courts and maybe Blackrock being involved helped all that. You have to think it might have factored in. But at the end of the day, if they don't lose that court case to Grayscale, I just don't think this happens, or it doesn't happen in this cycle.

Cameron Passmore: Got an ETF plumbing question for you. What does it mean that the SEC only approved cash creations and redemptions?

Eric Balchunas: Yeah. Let me give you, just real quick. ETFs to me are my whole being. I've had to teach classes on them. When it comes to creation redemption, I used to get scored negatively in that section, because it was boring, didn’t understand. I explained it just by giving you where the idea came from. The guy who started the ETF, his name, Nate Most, he used to be the President of the Pacific Commodities Exchange. He was familiar with this thing called commodities warehouses, where a bunch of commodities would be stored.

For example, soybean oil. You take a bunch of soybean oil to the warehouse, you store it in a locker, they give you receipts, and you can trade the receipts with other commodities people. They're always trading receipts, because it's easier than moving the merchandise around, right? Makes sense? He thought, “Well, if we're going to do this market basket instrument, a way to keep the cost of trading, away from the investors and the fund, why don't we use this commodity warehouse concept? Instead of soybean oil, we'll use the S&P 500 stocks.”

When you get a bunch of receipts and you want your oil, or your stocks back, you take them in and you get it back. That's an in-kind transaction. You're giving me soybean oil for the receipts, or the receipts for the soybean oil. Cash just means that you give cash for the receipts and the person running the locker goes and buys the soybean oil and puts it in there for you. That's the only difference. But everything else is still the same and the key point there is receipts. The receipts are connected to a proportional section of what's in that locker. It could be soybean oil, in this case, it's Bitcoin, but it could be S&P 500 stocks.

The first ETF ever had the acronym SPDR, S&P Depository Receipts. It's still a receipt. It's the same deal. It's just, that instead of handing them soybean oil, you would hand them cash to get the receipt, and then the locker would go immediately purchase soybean oil, put it in the locker. It's the same deal. The investors still receipts the same thing, it's just, who bought the soybean oil? That's the difference. That's it.

The reason the SEC wanted cash only was in that example I just used, the people who are interacting with the custodian, the locker, so to speak, they didn't want them touching Bitcoin. They wanted the Bitcoin transaction controlled just between the issuer, the custodian and the Bitcoin. That way, they wouldn't get any Bitcoin that was used for money laundering. They could isolate who was touching the Bitcoin. Whereas, the first system I mentioned, the in-kind, any of these AAPs and market makers could end up gathering the Bitcoin, the soybean oil and presenting it. That leaves a lot of openness to where the Bitcoin comes from.

Ben Felix: Did your score in teaching that class improve when you started teaching it that way?

Eric Balchunas: Yes.

Ben Felix: Because that was pretty good.

Cameron Passmore: That was pretty good, Eric.

Eric Balchunas: People like the visual of a big warehouse, and it makes sense. Once they lock into that visual, creation redemption became a lot easier.

Ben Felix: Related to that, are the spot Bitcoin ETF units backed by actual Bitcoin? Is there gold in the vault?

Eric Balchunas: Yeah. Yes. I mean, they have to have it in there. I mean, it's in their prospectus. These companies, there's two other things here, which is they don't want to be long or short Bitcoin. They are not in that business. They are not trading. They want to be flat and take a little fee. They're like a vig issuer or a casino. They're not in the gambling business. Sans doesn't gamble. They just want to have both sides play to other take a little bit. They have no invested interest to like, I don't know, not have the Bitcoin.

The other thing is, these companies, a lot of them have hundreds of ETFs, hundreds of mutual funds. They've been around for 40-50 years. They don't want to mess with their brand over a ETF that might be 10-15 billion dollars. They have trillions in assets. This is not worth it. There's multiple reasons why this would never happen. In the gold case, there's always people who don't believe it. They sometimes take someone to the vault. But, I guess, they could take them to gold bars that aren't really – 

At the end of the day, you could lie. But the motivation to lie is so not there. They get sued immediately. There'd be all kinds of repercussions. These are companies have a ton of money, so, of course, suing them would be great. You can definitely clean up. The reason ETFs are so good is because you don't have a SPF problem ever. That's why that locker situation is really great, because let's say, Larry Fink lost his mind, or we didn't know that BlackRock was going bankrupt, that BlackRock could go bankrupt, those receipts would still translate to that custodian. That's called, it’s being transferable.

ETFs are SPF-proof, which is why we wanted them approved from the beginning. But furthermore, Larry Fink just doesn't have the same brain as a young SPF. Different mindsets. In a way, the adults are here. This is an adult operation. Very serious. I try to tell people, “You have nothing to worry about.” Now, they say, “Well, what about the government confiscating the Bitcoin?” Now, that's a whole different story. Would BlackRock work with the government? Maybe. That I get.

Goldbugs used to bring up FDR, confiscating the gold in the 20s. To that, I say, well, you should own your own Bitcoin then. This ETF is not for you. You're at another level, and certain goldbugs are like that, too. They should own a gold, get a safe, store it. There's even a gold ETF, actually, that stores the Bitcoin in Switzerland, to appeal to the people who are worried about the US and the West doing that. We could have some kind of an alternative storage facility for Bitcoin. At the end of the day, if you're that, I wouldn't say paranoid, because it did happen, but if you're that worried, you should just get your own Bitcoin. I just said this.

Ben Felix: Yeah. Hold it directly.

Eric Balchunas: No problem there. I'm obviously a big ETF advocate, but I'd be like, “Just do it yourself.”

Ben Felix: Do it yourself. Hold the Bitcoin and make sure you have sufficient weapons to defend yourself when they come to confiscate it.

Eric Balchunas: Yeah. This brings up the two cases for Bitcoin. One is the government is not to be trusted, the currencies are going to hell, and we could end up in a Mad Max post-apocalyptic thing, where there's dirt roads and whoever has Bitcoin actually, can get goods and services. In that scenario, you got to own the Bitcoin, because that's the whole point.

The other case is that “Hey, it's just this cool new digital gold. It's a store of value and it will help diversify and add some returns to your portfolio.” That, you just use the fund or the ETF. There's no worries there. It depends on where you're coming from, which just makes this such an interesting asset class, because you could go from, “Hey, it's cool,” to literally, Mad Max and everything in between. The more you get to Mad Max, the more you have to buy it. Because otherwise, if we end up in some Mad Max world, the Bitcoin itself would be needed for this as the currency. But in a store of value world where society remains fine, it doesn't matter. Just use the ETF. Who cares? It's a pain to store it. Just outsource it.

Ben Felix: Yeah. Don't lose your keys in the Mad Max version.

Eric Balchunas: Yeah. Well, that's another thing is you got to remember a bunch of words your whole life. I can't remember my Amazon password. When I use a new device and they ask, I can't remember it. I got to change it again. I want no part of that. I'd be the perfect, “Hey, BlackRock. You can do it. I'll give you 25 basis points a year. Happy to do that.”

In general, fund investors overall, they like to outsource. They don't want to deal with this. That could be Bitcoin, or the S&P 500 stocks, or small caps, or China stocks. They want one ticker and they want all that in one shot.

Ben Felix: Yup. You mentioned trust and reputation of the issuer, in terms of how people can be sure there's Bitcoin in the vault, so to speak. Is there any way, like are any of the funds posting their walled addresses, or anything like that?

Eric Balchunas: One has, Bitwise. I imagine we could see some more. But Bitwise is probably one of the most progressive and into crypto of these firms. I don't know if BlackRock – first of all, they don't need to. If they're going to lose a couple of hardcore people who need the address, they don't care. Bitwise is a little more of a smaller issuer, so they're looking for edge. This is a cool way for them to say, “Look, we're not afraid. We understand this.”

If you're really into crypto, Bitwise may appeal to you, because they also donate some to developers, VenExel a little like that, too. Yeah, there's one example. They've already gotten tips, or just people sending them random Bitcoin, which is interesting because it's possible we could get into a world where I don't know, say the ETF has a good year and they all consider themselves part of a community. Maybe they just throw in an extra 1,000 bucks into the kitty and everybody throws in a collective million dollars and they're able to actually offset the expense ratio because that money would just go right into the NAV, and in a way, it would basically kill the fee. It'd be a rebate.

You could have people who's like, “Let's all use Bitwise. We'll all put in a little.” But then, again, you could also argue, don't put in anything. We're going to pay for the fee anyway. We'll consider that our donation. Anyway, it's funny to think about that you could tip an ETF because in the old ETF, there's no way you could do this. You have to be in an AP. Here, the idea that some random person can put Bitcoin in the fund is really interesting. It's weird.

Ben Felix: Yeah, that is. With ordinals, for example, could that lead to any sabotage?

Eric Balchunas: I'm going to say that that's just a little beyond my depth in terms of this. This is where I'm like, “Well, look. Bitwise is smart. They know what they're doing. I would defer to them on that.” That's where the trust comes into play. If you're a Bloomer advisor, you may not trust Coinbase even. You may not trust other exchanges. You may not trust doing it yourself. But you trust BlackRock and you just like, “Well, they've looked at all this with all their lawyers. I trust it.”

I'm a little in the same boat when it comes to some of these things, that the forks and all these. I can't say I'm that native where I can explain it all, but I don't really see a problem with it. Again, the reputational damage would be brutal. They'd have to probably make good on it

Cameron Passmore: You alluded to this earlier, the anti-money laundering. But how will the authorized participants deal with anti-money laundering (AML) considerations when they do Bitcoin transactions?

Eric Balchunas: How will the authorized participants?

Cameron Passmore: Yeah.

Eric Balchunas: They're not touching Bitcoin, so that's the whole purpose. Here's what can happen. Let's say, the price of the bitcoin ETF goes above the fair value. And AP is like, “Okay, there's more demand for the ETF. Let me step in and satisfy the demand.” They'll go to the issuer and say, “I need more shares.” Normally, they'd say, “Give me the Bitcoin.” But in this case, give me cash. They just give them cash, get the shares of the ETF, they flood the market with that. They bought Bitcoin to hedge and they pocket the difference, and that arbitrage happens all the time with any ETF.

The difference here is they wouldn't collect Bitcoin to do the arb. They would collect cash. When you do a creation in ETF, you do the creation of NAV. That's why they would do the creation NAV, sell in the open market here and pocket that difference and that would collapse the premium. That's why the SEC didn't want in-kind creations, so the AP doesn't actually touch the Bitcoin.

Ben Felix: It's the issuer who's actually doing the transactions in Bitcoin?

Eric Balchunas: The issuer and Coinbase. They work together. I believe, they use the over-the-counter markets to get it. That's where you saw some of the wallets updating and people reporting on Grayscale's wallet and stuff like that. That's between the issuer and the custodian, and that's it.

Cameron Passmore: Is Coinbase doing the AML?

Eric Balchunas: You mean at night, just to check if it's there?

Ben Felix: The money laundering.

Cameron Passmore: Money laundering.

Ben Felix: Money laundering and terrorist financing, all the stuff.

Eric Balchunas: Was that called anti-money laundering? Is that the acronym for that? Yeah. Again, I'm a tourist to Planet Crypto, so the country of crypto. But yeah, look, this is asked of Matt Hogan. Again, this is somebody who's further into this. He's like, “Well, look. They have insurance. They also are working with regulators to a degree and BlackRock to avoid that. But at the end of the day, I guess, there's some risk that you could have some of that.”

Ben Felix: All right let's move back toward ETFs and away from our crypto tourism, or at least in that direction. How have the spot Bitcoin ETFs been trading relative to their net asset values?

Eric Balchunas: It's surprisingly good. In Canada when they first started, they were 1% away from the NAV. We call that the arbitrage band, because it's like, how much does the price have to get away before NAP thinks it's worth it to intervene? Well, here, they're only getting to 15 basis points. That's pretty good. You could say, that is a cost. You got to the 15 basis points onto the expense ratio. But 15 either way is pretty good. I mean, for an exotic asset class like this, I'd say, that's better than I thought. I thought it would take us a couple of months to get here. But the US market makers and APs are so good. They're so good at doing this and they're in competition with each other. I give them credit for that. I was very happy to see those pretty low right off the bat.

Again, though, with a cash creation it's not that hard. You get cash, and then you put the Bitcoin in the open market. But they need that price to rise up or below to again, get them motivated. But there's so many of them that, I think, you'll see these premiums be tighter than other countries because it’s just more market makers picking up pennies wherever they can find them.

Cameron Passmore: I've seen your tweets on this, Eric. But can you talk about the magnitude of the net flows into these Bitcoin ETFs?

Eric Balchunas: If you isolate the Newborn Nine away from GBTC, anyone and their mother would be like, “Holy moly.” I mean, it's literally the most successful launch of all time. Let's say, there's 20 stats you could use, it would be number one on 15 categories, even the press attention, the flows. I think we're up to 7 billion in assets from the Newborn Nine. That's ridiculous for two weeks. Ridiculous. It doesn't ever happens.

The volume’s ridiculous. It's not just one big investor put in 2 billion and then that's it, which happened to a couple of ESG ETFs a few years back. This is real, organic volume and growth, where it all gets weird is GBTC converted and it was an unlock, and they immediately saw a couple billion out and they see a 100 million, or 2 every day now. But the Newborn Nine have taken in about 1.5 billion more than GBTC has seen in outflows.

Even if we isolate the 1.5 billion and we say, let's pretend a new Bitcoin ETF launched and it got 1.5 billion in two weeks, again, that's a big hit. That's more than Bido had and it's more than GLD had in two weeks. I don't know what metric you would look at to think this sucks. The other thing is, the GBTC outflows, people are saying, okay it's 1.5 billion net. But I don't think you should compare to all the GBTC outflows, because FTX was a billion, and that money just left immediately. That's not really part of this. That's money that left.

Then the people who are the discount, the prop desks, they weren’t really Bitcoin people. They were arbing that and they're gone. I'd say, only a third of GBTC is actually money that is in play to go in the other ETFs, like people who are leaving to go to them. You really should look at the net new demand as more like 4 billion of the five in my opinion, because the base of GBTC is complicated. A lot of that money came out just for non-investing reasons. It was a trade or FTX legal thing. That's why this whole thing gets a little weird is that, but it doesn't even matter.

Even if it was flat, if it was like, they offset, just wait. The momentum these things have early on is very positive. BlackRock’s got advertising campaigns. Larry Fink is out there saying, this is a new asset class. Fidelity is involved. I mean, that's all you have to do is just trust behind these people who have strong reputations for successful products, give it time. These products already have two things that you need for foundational ETF category growth; volume and low fees. Those are the two most important things for the fish to come bite.

Institutions like volume. Advisors like low fees, and they each both like some of the other. They have both in spades. The stage is set, the wholesalers are going to do their thing and just wait. Anybody out there with the underwhelming take, I just think it's going to look like an idiot. My theory on that is the underwhelmers are one of two people. It's the when moon degenerates, who just can't wait a couple of weeks, they just need 10% every day, and they're not accounting if Bitcoin went up 60% in the lead-up to this. You have to factor that into the whole thing.

You're still up what? Eighty percent in a year, even with the sell-off. You got to look at it that way. In the stock market, people front-run the Fed all the time. It's normal, and they sell the Fed news. That's part of it. The other thing is, you got to maybe chill a little. You're up 80%, even with the sell-off, you've doubled the cues. The cues had its best year since the 90s. There is a little bit of high expectations from some of the crypto people. They need to chill.

Now, on the flip side, you've got some of the more traditional finance people who really don't like Bitcoin. It's against their worldview. They don't like the crypto bros. They just don't like it. I think, they use the ETF launch, they think, “Oh, I've got a little stick here to beat the crypto people over the head with. This will be fun.” They're like, “Oh, this was underwhelming. This launch wasn't as good as people thought.” Their motive is not pure. It's to troll crypto.

The problem with that is that they're going to look like idiots in a couple of months. I'm telling you, as somebody who's seen thousands of ETFs launch and has seen this industry defy odds all the time, the ETFs are powerful, they're disruptive, they gather assets, this is where all the fish are biting, all the advisors love ETFs. The problem with them using the ETF stick is they're using the wrong stick. ETFs are going to prove them wrong. They should just come out and say, “I hate crypto.” Fine, that's a different argument. But to use the ETF as lack of success, you will be proven wrong. Again, all the data I said, I think you are wrong in two weeks. But just give it a couple of months, they're going to look really dumb.

Ben Felix: Hmm. You mentioned the difference between the Newborn Nine and GBTC. Within the Newborn Nine how are these ETFs trying to differentiate from each other?

Eric Balchunas: Yeah. BlackRock’s more like, “Look, it's okay now. It's safe. The bad millennials who wear shorts and can't run a business, they're gone. We're here. The adults have arrived. It's access. It's safe. It's access.” It's a very clean message to the Boomers and Gen Xs. The smaller issuers are being a little edgier. They're saying, “We're crypto specialists, unlike these Wall Street opportunists.”

They're each going to, I think, find their audience. One advisor we talked to on our podcast said, he used Bitwise because they did donate some back. They were more crypto specialists. He's a fan of BlackRock otherwise. They peeled him off. Ark and Cathie Wood has been a bull for a long time. Some people might just reward her for being so bullish this whole time. Fidelity has a massive distribution. I don't think they've done any advertising. They've got all these wealth managers all across America who manage Boomer money. All they got to do is put a little of the portfolio into this and they have flows just like that.

That's how it'll play out. I think the marketing will be varying. I think, the more bigger the firm, the more conservative the marketing will get. Franklin went a little while putting laser eyes on Ben Franklin stuff. That's a weird one. The problem with that, I get it, it's fun. I like the Twitter takeover. In general, these big companies need to lighten up. They have too many compliance officers. They're too afraid to say anything, even their stock picker people. If you meet them in person, they're animated, they're cool, they can't say anything. They just need to lighten up in general.

But the laser eyes, almost too far. The other way, I think. The base of Franklin, just anyone who would think laser eyes are cool, it's going to get crypto on their own already has it. I think BlackRock, probably, has the right approach, which is, “Look, our audience, you guys probably watched this from afar, you saw all these knuckleheads do all this weird stuff, but it kept coming back. It kept coming back and you're intrigued. Well, if you're thinking about it, it's okay now. It's safe. We're here.”

Cameron Passmore: Are any of the Newborn Nine really leading the way with net sales over the others?

Eric Balchunas: Fidelity and BlackRock are really neck and neck. They both are toying with 3 billion dollars, and there's a little bit of a drop-off. Then Ark and Bitwise, they're real close in third, fourth place respectively. But even Invesco, VanEck, they just have over 100 million already. Any normal ETF that comes out and gets 100 million within two weeks is a blockbuster. We've already had six, seven of them in blockbuster category. Even the ones that look like mid of the pack, or mid are great. I mean, only one is like, where I would call below profit level, which is WisdomTree at 13 million. But WisdomTree, they've got other things going on, and they have many products to subsidize this lost leader for a little while, and they're really into crypto, and they have products in euro. I don't think they'll close that.

I think WisdomTree, obviously, wasn't a priority, or maybe they just thought, “Look, we're not going to spend. There's too many people in this race. But when our wholesalers go out to talk to clients and advisors, we just want to have our own product. We don't want to recommend VanEck, or BlackRock. We have our own.”

Somebody asked me earlier in an interview, how many of these will be here next year? I think all 11. I think all 11. Now, what you could find is some wacky things come in and close within a year. You could find something like, carbon credits plus Bitcoin. Or 2.2X leverage Bitcoin. They're going to throw a bunch of crap at the wall. Some of that will just fall instantly into the gutter. A couple of things will make it, but my guess is these original 11 will be here in a year.

One more thing on that. BlackRock or Fidelity. There's only really room for one liquidity king, and they're both trading about 200, 300 million dollars a day. It's interesting. Normally, the first one out is the liquidity king, because they had their market for them. This is a race. I've never seen a tie like this so close. I do think iShare probably edges out over the next year. I'll tell you why. Because Fidelity doesn't really have any big liquid ETFs but iShare has 50 of them and they're known amongst the trading crowd and the institution. I think their branding and work in this area will pay off in the end, and I think, IBIT becomes the big one with the most volume and the options activities around it.

Not to say all the other ones can't be big, make money and have a great life, but I think IBIT’s probably two to one odds at this point, so the heavy favourite to be the liquid one, that if you're a pension plan and you need quick exposure, you would use that. Even if there's one five bits cheaper. They're like, “I don't care. The liquidity is most important to me.”

Ben Felix: You talked about earlier, the benefits in general of ETFs. What do you think being allowed in an ETF wrapper does for Bitcoin?

Eric Balchunas: One of my metaphors is when The Beatles went on iTunes. The Beatles held off. They wouldn't go on iTunes for five, or six years as iTunes got popular. Younger people would not listen to The Beatles. I mean, it was that simple. They finally went on and all their albums was number one. I mean, just like that, everybody bought their album. This is a similar thing. It's just reversed. It's the older people who will think about buying it, just because it's in an ETF wrapper. The SEC approved it, ETFs got a prospectus, they're all 100 pages, a lot of legal lawyers, BlackRock’s trusted. That's what it means. It's now in a trusted environment.

ETFs to me are bridges. They're bridges from any world, and they're convenient. They're convenient. They're cheap. They're easy to trade. They're on every exchange. Convenience is a very underrated benefit of ETFs. Any business, you make something convenient, people will buy it. I mean, there's single stock ETFs. Think about that. That shouldn't sell, but one of them has over a billion dollars. That’s something, man.

You make something just an inch more convenient and people will buy it. Everybody’s lazy. I think, in this case, you got the lazy factor and this is really a pain in the ass to go do Bitcoin for most normal people. They just don't want any part of the wallet and all that stuff. This is what that means. It puts Bitcoin into the preferred vehicle. As Michael Saylor called it, the plumbing of the traditional finance world. That is powerful.

The other thing is ETFs. You could say this thing about a mutual fund, but ETFs also have. They are hot. Every year, they take in way more money than any other vehicle. Bitcoin and ETFs is just ETFs are 30-years-old, but they're both hitting their stride, and they're both younger than most of the things around them. But ETFs, I think, have that mojo right now. They've got a lot of swagger. They are in the zone. It's not just that it's a vehicle you can get anywhere because you can get mutual funds anywhere. Mutual funds are dying. That's why I go back to music. This is like, getting your stuff on iTunes when all you had before were these other harder-to-get areas or vehicles.

Ben Felix: You mentioned Michael Saylor. Bitcoin's conception, like if you go and read the original Bitcoin paper, it was really an ideologically motivated currency that expressed a certain worldview, which is antithetical to, I don't know, an ETF, or at least, it seems that way to me. How do you think the advent of spot Bitcoin ETFs affects Bitcoin's identity?

Eric Balchunas: That's a really good question. I've been thinking about this, because when the filings first came, especially BlackRock, I'd see my comments. You can see it between people and within a person. There's the devil and angel. It's like, number go up, yay Larry Fink. Then it's like, wait a second. Do we really want to hand all our Bitcoin over to Larry Fink? I don't know, man. I'd almost turn over to you, but I do think that the mainstreamification of Bitcoin is probably necessary if you do want some growth on the price.

The other thing is, by getting it familiar with people, I was just on a podcast with Cathie Wood and a senator from Wyoming. The senator was like, “The ETF is going to get people more familiar and then I'll get more tailwind to make real regulation and that will even help even more.” The ETF, I think, can jumpstart a lot of good things that will help it be a very consistent asset class. Now, the more it gets legitimized and mainstreamed, does it lose its appeal amongst those who like that it's punk rock and like that it's outside of the system and a little bit of a middle finger?

I always thought if Bernie Sanders won, would Bitcoin be as big? Because you have the same kind of politicians from both sides, generally a lot of things are run the same way, but Bernie was like, I want to upend everything. Bitcoin’s a little got that vibe. It's outside of the whole system. It's not messing it up from the inside. It's outside. Whereas, you would say, the current politicians are like, let's make incremental changes from the inside. To me, going into BlackRock and these companies is a little antithetical to that outsider thing. But again, if your goal is to have it grow and be legitimized and have a chance of being a currency, because a currency, I don't think can be that volatile.

This could also bring the volatility down if you have more people buying and holding, more people into it, it could help with the volatility as it matures. I don't know is the answer. But I will say, when you see Larry Fink going on Fox and saying, I love this, by the way. He's being asked by Andrew Ross Sorkin like, “What's the pitch here?” He’s like, “You know, if you don't trust your government.” I was like, “Whoa.” This is crazy.

This is going to take us a couple of years. I think we're going to look back and go, “How wild was that? Those moments were like, the early days of this whole thing.” Then the same day, you see a clip of Jamie Diamond calling it a pet rock, and that is just fascinating to me. That's why I spent so much of my mind on this is because even though bitcoin ETFs probably make up 1% or 2% of all ETF assets eventually, which is pretty good, we're talking a 100 to 150 billion, I spent a lot of my mind on it, because of the fascination factor is a 10 out of 10. It is so unique. There's two worlds colliding, TradFi, DeFi. But also, culturally, there's a cultural collide and a generational collide. I feel as a Gen Xer, I'm generationally in between all of those worlds.

It made me feel like, I have an interesting vantage point to work on this, and James as well. He's a little younger. He's probably more into crypto. I'm a little Boomer, more Boomer. She's a little more cryptoish. But the two of us together could go in between the worlds, and it's really interesting. Then one of the things that I thought about the crypto World I like so much was the people and the memeing and the sense of humour. I really think that TradFi, culturally, could benefit a little from this world. Obviously, there are certainly things you could benefit for the blockchain. But just culturally, and just learning the skepticism that younger people have for the 60/40 because I still love the 60/40. I think both worlds can learn from each other. I guess, that's my point.

Cameron Passmore: Who do you think is the biggest benefactor of this collision, as you describe it?

Eric Balchunas: Well, if you own Bitcoin, you're probably one benefactor. Because an ETF is a portal. Through the portal, more people can buy it and that should help long-term investors. That's one. Number two, I think the firms that put one out, they're going to have some revenue products. The BlackRock’s case is a win-win for them. They're like, “Look, we can get a revenue generator. Yet, we can also disrupt, because we can say we're cheaper than Coinbase and we trade cheaper and it's actually, we're disintermediating while making a little money.” That's a good opportunity for them.

I think the issuers would win for sure. The market makers win a little. I think the system, certainly wins a little here. Because anytime you want to outsource something, the middlemen are going to make some money off of it. The good news is, compared to what FTX was doing, they had patches on baseball empires and places they shouldn't even be. There was like, the NBA stadiums were being completely bought off by the crypto. I was like, that's weird. You won't see that insane intermediary gouging. The ETF industry is clean and it's lean.

Yes, these issuers make some money, but they're going to make a lot less than the SPF types who lost their minds and charged a ton as the middlepeople. These are professionally good middle people. They're going to do a better job. But in the end, the loser, in my opinion, is probably some of the crypto intermediaries, the Coinbase commissions. That said, Matt Hogan argues that because the ETF will bring in more people, the pie will grow in general and Coinbase can do other businesses, like custodian and whatnot. I think it's probably a mixed bag for them. But I do know if you have high commissions, you're in trouble. I mean, the ETF trades at one basis point spread. With those, I think the expense ratio is really good. I thought it would take two or three years for the fee, were to get it down to 25 basis points, I thought it'd be 50 right now. But that's amazing.

The ones on the market that we knew about, in Canada, they're all over a percent. Bido here was 95 basis points. GBTC was two. Now, you have a better version, four times cheaper. It's good. Even though I say, the asset managers will win, it's not a lot of winning compared to some other areas of Wall Street that are just ridiculously make so much money for what they do. This is a fair way to win, in my opinion.

Ben Felix: You mentioned the when-moon people. Can you talk more about how the price impact of spot ETFs starting to trade compared to the predictions from the crypto community, or some parts of the community?

Eric Balchunas: Yeah. I mean, again, if your prediction on price doesn't include the run-up, I can't talk to you. Because there were some God candles on the way to the spot. Remember the coin telegraph intern said, BlackRock’s approved and that turned out to be a lie and it went up 5%? It never went back down. You’ve got to count those little nice moments. You have to factor all that in and realize that hedge funds and traders thought, “Oh, this is an opportunity to buy a rumour and sell the news.”

I think, when you get rid of the selling the news, I don't know, in terms of price targets, there's a lot out there. I'll go with what we can predict, which is our flows. Flows are important because they're just pure money going in that wasn't there. Assets can go up, or down. Because of flows plus market appreciation. I don't know where assets will be. It would be dependent where Bitcoin is. But flows, there's been, will say, 1.5 billion net, and then total 7 billion into the Newborn Nine. I'll just go with a 1.5. What net will we see by the end of the year? I'm saying, 10 to 15 billion. Again, that's pretty good especially relative to the size of Bitcoin.

That guy, Fred Kruger, who I like a lot, he just put something out saying that the Newborn Nine are going to own more than MicroStrategy in three days. Everything's relative. The sign behind me is my book, Bogle Effect. That's about Vanguard. Vanguard takes in 15 billion dollars every couple weeks. Certainly, 10 to 15 billion is big relative to Bitcoin, and it's going to help obviously, because that's a lot of money. But in the scheme of all of Wall Street and all asset management, it's not that much money. Like I said, Vanguard takes in 200 to 400 billion a year. So, 10 to 15 billion would be really great for that asset class, but not a tremendous amount.

Where will Bitcoin's price be? I don't know. Because bitcoin ETFs right now only own, even with GBTC owning 3%, 4% of all of Bitcoin. But that number is going to be interesting to watch. Where does that go? Does that get to 10%, 15%, 20%? The higher it gets, the more it'll be interesting to watch this play out. Now, in stocks, ETFs own about 9% of the stock market. ETFs own 1.5% of gold above ground. They own about 5% of all bonds. They're right around where they are with gold bonds right now. If they double, triple, they go up to where they are stocks.

Then at some point, they grow beyond where we're used to seeing them. That said, there's been a couple of cases in ETFs, where an ETF would own a lot of one stock, because of interesting dynamics. It happened with the Tanger Factory outlet was 50% owned by ETFs at one point. Even with that high ownership, the stock moved pretty independently of flows, because other people trading it have an impact, too.

I don't really see any point where the ETFs are the tail-wagging the dog of price. I had to argue with a lot of the when moon degenerates on Twitter because they were like, “Oh, dude.” They came back to me like, “Dude. Mr. ETF man, you lied.” I'm like, “I didn't lie. They're giving me proof. In fact, I had it right.” They're like, “But why is the Bitwise price is down?” I'm like, “Dude, ETFs were net buyers. They're 1.5-billion-dollar net buyers. It would have been worse without them.”

I told them, it's coming from your crowd, dude. I don't know who it is. But it's not the ETFs. They're actually contributed so far. That said, let's say, they contributed 7 billion. The price can still go down, I'm telling you. We've seen this in the stocks. They could also see outflow as the price goes up. There's a two three days already where they had a negative daily, they like, the Newborn Nine took in less than GBTC lost, and the Bitcoin went up. Just because GBTC's price was going down. It seemed like the market right now is riffing a little more off of GBTC's slowing than they are about the other dynamics, but that'll change. That's why, I think, the market, there's just so many player types. I couldn't begin to predict the exact amount the ETFs will dictate that.

Cameron Passmore: You mentioned Vanguard. What do you think of Vanguard's decision to not allow the spot Bitcoin ETFs on their platform?

Eric Balchunas: It's on brand. Again, as somebody who wrote a book about them, Jack Bogle didn't really like commodities in general. He likes stocks and bonds because the money works for you and there's investment return. That said, Vanguard doesn't allow leverage ETFs to trade. They're like a family-friendly kind of. That's their thing. They’re like, we have a rating system that we do all ETFs and we base it off of movies. It's green, yellow, red. Green is the equivalent of G or PG movie. Every Vanguard ETF is green, okay. A lot of issuers have yellow. Even BlackRock has some yellow. But Vanguard and Schwab are the only pure-rated G issuers. It's not a shocker.

Now, they do allow gold to trade on their platform. I did call about this, because like, well, gold is a commodity. They said, well, Bitcoin has no use case. That's when they wrote that thing. It was really a little bit of a middle finger to Bitcoin. Now, whether they're playing some offence to signal to older people, if you think this is all bullshit, come to us, because we hate this, too. Maybe. I just think it was a very low-risk decision because their base is just not going to be that into this.

Now, I wouldn't do it if I were them. I'm a fan of Vanguard. I wrote a book about them. I think Bogle’s great. I would have more faith in our own investors to make their right decision. I don't like the nanny state aspect of it. But it is on brand. Somebody said, “Oh, this is their Bud Light moment.” I said, no, it's not. First, you're not going to impact Vanguard flows. I mean, it's just too big right now. But to me, it reminded me more of Walmart not carrying rap CDs in the late 80s. Like, remember 2 Live Crew? It was not a good record. But because it was banned in Walmart and other big stores, it went to number one, because all kids my age were like, “I have to hear this on this thing.” I think that being banned by Vanguard, actually, they kept the press cycle going and it made it a little rebellious. It actually, I think, fit within Bitcoin’s outsider status and it was a gift PR-wise, even though it seemed to piss most people off.

Ben Felix: You mentioned your book on Vanguard and on Bogle. What do you think Bogle would think of Vanguard's decision to exclude Bitcoin?

Eric Balchunas: Oh, he'd love it. He was asked about Bitcoin two years before he died. He said, “Avoid it like the plague.” Then he riffed right into commodities. It wasn't personal. He said, “With a commodity, it's just what someone else would pay for. With stocks and bonds, you get dividends, cash flow. There's more than just the price.” There's actual cash flow being sent back to you from all the value getting created by a company. He was like, “You're investing in a company. A bond is the IOU, so you get a coupon.”

He just didn't like the concept of commodity. Buffett was a little like that, too. But he's not everybody. A lot of people like the idea that you can have different things in your portfolio. I wrote a book on him. Bogle didn't like half the – Vanguard did. He didn't like their smart beta products. He didn't like value. He didn't like growth. He didn't like international. He said, “International sucks. You don't need it.” Well, Vanguard is the leader in international funds. He would crap over all kinds of stuff Vanguard offered. Join the club. I mean, he was savage towards everybody. He hated ETFs.

The fact that he said that is on brand for him. At the end of the day, he just came to this nirvana pure thing of just buy the total market index fund and wait 50 years. Everything else is a distraction. It's almost like a Buddhist finding that perfect moment of nirvana. But most people are just not built like that, or wired like that. I acknowledge all that in my book. But honestly, what would have made his head blow off more is the GameStop. This would have been less bad than that. That he really would have – his head would have exploded, I think.

Ben Felix: Yeah, that's funny. How do you think we'll see financial advisors use spot Bitcoin ETFs and client portfolios?

Eric Balchunas: Yeah. I think, as hot sauce. To me, I think, the portfolios have changed. Used to be, you chase the five-star manager in the 90s, like the Fidelity, like Peter Lynch. But then Peter Lynch shot a favour and you go, “Oh, I need to go to a new one.” You constantly go in between hot managers, and that was your whole investing. Now, Vanguard killed all that. Now, people buy low-cost index funds for their core, 60/40. You can get the whole thing for four basis points. It's beautiful, but it's boring. You got to wait 30 years as they compound. So, people get bored.

I think that the advisors and retail will use this in what I call the hot sauce bucket, which is stuff that is very different than what you already have in your core. This is where Ark lives. This is where thematic ETFs live. This is where Robinhood account lives, stock trading. I think Bitcoin lives there. It's something to make sure you don't have FOMO later. It's something to give you a little shiver from time to time, because the 60/40, again, you are expecting 7%, 8% a year annually. It's just not that much to talk about and you got to wait a long time.

I think, Bitcoin is perfect to complement Vanguard. Even though Bogle would have hated this, and he wrote a whole book about how Cathie Wood-type funds are awful. They're shooting stars. They’d come up and then come down. But I wrote a piece saying, Cathie Wood’s survivability is because Bogle actually won. Because the more the core gets boring, the more people want some stuff to have fun with on the top. They won't sell it, because if they have all the serious – covered in the core, there's no pressure. You could have more diamond hands, actually, in the Bitcoin so it has a bad run. Well, okay fine. It's down 30%, but it's not the main thing.

To me, this is the perfect way to do it. If the hot sauce occupies you enough that you don't touch the 60/40, so it can mature and compound over 30 years, then it's actually done a behavioural service to you. I'm a fan of hot sauce, it's viable, the flows show things to go either dirt cheap, or shiny objects. To me, that's where it lives. Other people will say more serious things, like at lower Sharpe ratio. It's an alternative. But I just don't think it can enter alternative status quite yet. It's too volatile. It makes gold look like a money market fund.

I tell Cathie this. I'm like, “Cathie, just say you sell different brands of hot sauce.” Because she's like, “The index fund is dead. Who wants to invest in all those dumb companies?” I'm like, no one is going to agree with that, because they're not going to put their kids’ education on your fund. I actually tell her. Just be like, “Hey, look. We have 99% active share to the index. Use us to complement your other thing. Just in case we're right, some of these stocks got 10 baggers.” That's how I think it's going to be seen. If people are smart, pitched.

The reason that's smart is that advisor probably can't get fired. 1% or 2%, even if it all goes to – it's again, you still have that nice core. When I talk to the crypto people, I try to explain, you're not going to take over the 60/40, and you probably shouldn't. Because they're all in. I'm like, “Wait. You're all in? It's your whole savings?” I'm like, yeah. Then I'll try to explain why stock and bonds make sense, but I don't know if I'm having any difference. That's why I try go between the two worlds, but I see it as a 1% to 2% like, Tabasco sauce.

Ben Felix: Tabasco. Bitcoin as Tabasco. Love it. Lots of great insights, Eric. Thanks a lot. This has been a really fantastic conversation.

Eric Balchunas: Yeah. Thank you for having me.

Cameron Passmore: Yeah, great. Thanks, Eric. Great to finally meet you.

Eric Balchunas: Likewise.

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