What's the next thing?
And for a little while was diamonds and it
was a little bit of buzz around diamonds.
And then the crypto came in,
and now the entire industry is like: "oh my gosh."
This is where the world is going.
And we have to get in it now
and we have to be a part of it.
Let me just pave it a little bit
and ask you about Bitcoin ETF.
The ETF sales are hitting record highs again.
The SEC has once again denied
several proposals for a Bitcoin ETF.
Every time we hear about Bitcoin ETFs in the
news, we see a reaction in the market.
Recently, an April Fool’s Day joke about
the SEC approving a Bitcoin ETF was cited
as a possible reason for the huge price spike.
So why are ETFs so important
to the crypto market?
While Bitcoin was originally designed to be
an alternative to the traditional financial markets,
today Bitcoin actually needs those
financial giants.
And in turn, Wall Street is eyeing crypto as a potential
golden goose and want to get in on the action.
And this is how Bitcoin ETFs might help them.
Institutions are out there to make money too.
And if they see a way to make money, they're
going to go look for a way to participate
in those markets.
This is Hester Peirce, aka Crypto Mom, a commissioner
at the SEC and an outspoken advocate for Bitcoin.
She agreed to speak with us about her personal
attitude toward a Bitcoin ETF, but not necessarily
the views of the commission as a whole.
I think you've seen real interest from institutional
investors at looking at this asset class and
saying: "Hey, this is an asset class that
allows us to diversify our portfolios more."
And so they want to have a way
to invest in this asset class.
One such company trying to build that path
for institutional investors is VanEck, a mutual fund
with over a 60-year history and $50 billion
in assets under management.
VanEck has been filing Bitcoin ETF applications
to the SEC, but so far unsuccessfully.
Bitcoin is widely available today to investors,
but mostly on unregulated platforms.
So platforms, these are trading platforms
that people call crypto exchanges.
And so ETFs bring Bitcoin from this grey area
to a regulated area, so that investors who
are not comfortable investing on trading platforms
can access Bitcoin with more safeties than
securities, things that investors are used
to in the equity and commodity markets.
I think a lot of crypto exchanges
are in some ways conflicted.
They are custodians, traders, index providers,
funds and perform a number of activities that
are not performed by the same
entity in financial services.
So an ETF by design solves all of those problems
that single centralized exchanges face.
So here is the problem: large institutions
can’t buy Bitcoin and crypto the same way
that retail investors do - they need a regulatory
approved mechanism.
But before we get there, let’s explain
what an ETF is and how it actually works.
ETFs are exchange-traded funds that are bought
and sold like shares on a stock exchange,
but instead of investing in a business, the
fund can invest in a variety of things,
such as an index of
different companies’ stocks,
bonds, or commodities like
gold, oil or, possibly soon, Bitcoin.
Essentially, the value of an ETF goes up or
down depending on the value of the underlying asset.
We met up with Richard Keary, who’s been
working in the ETF industry for more than
a decade to find out more
about what ETFs actually are.
Well, an ETF is just the vehicle, right?
It's just an access vehicle
to access the market.
So if the market goes up, you're making money;
the market goes down, you're not making money.
The sponsor of the fund and the owner of the
trust is the one who holds all the Bitcoin.
So in other words when investor comes in
and says: "Okay, here's $10,000."
Then the adviser goes out and buys $10,000
worth of Bitcoin, or put it into his server
which is going to be in a vault,
it's gonna be secured.
And then the investor
is going to be issued shares.
And then he can trade all day long and now
the market with those shares he doesn't have
to go back to the Bitcoin market and where he can
just trader shares up and down however he wants.
So with Bitcoin as the underlying asset, the
sponsor of the ETF will buy Bitcoin from authorized,
regulated bodies called market makers and
hold the Bitcoins in a secure place.
When more investment comes in, the ETF sponsor
will purchase and hold more Bitcoin, and when
investors want to pull their money out of
the fund, the sponsor will liquidate the assets
by selling them back
to those market makers.
In order to facilitate easy entrance and exits,
the fund will rely on Bitcoin futures contracts
to offset their risk.
A fund is basically a pool investment vehicle
that multiple investors can invest in.
And it trades real time on an exchange like
Nasdaq, Cboe or NYSE, so there's real-time pricing to it.
There are larger companies called authorized
participants who buy the underlying Bitcoin
and the ETF issuer swaps
ETF shares to the underlying shares.
That works the same way with the S&P 500
and other equities and bonds.
The cool thing about it is that authorized
participants are encouraged to add liquidity
and buy underlying Bitcoin at every time thereby
increasing the overall liquidity of the ETF.
So there's always a list of market makers
who are ready to buy and sell shares and exchange
it for ETF shares.
And making this process of buying and selling
more seamless than it is to go to an exchange directly.
So an ETF actually, the great thing about
it from a liquidity perspective, the great
thing about an ETF is that it reaches out
to all of the liquidity pools that are available,
plus adds an extra level by virtue
of having an ETF in the market.
By owning a share of the Bitcoin ETF you own
the underlying Bitcoin in a one to one correspondence.
ETFs are a hot market.
They account for about a quarter of the daily
trading volume in U.S. stock markets, sometimes
even reaching to 40%.
Assets invested in ETFs listed globally have
reached $5.3 trillion, with an average growth
rate of about 20% per year.
BlackRock, a leading asset manager, predicts
the global ETF market could double by 2023.
An institutional investor may invest somewhere
within 0.3-0.7%, but less than 1% certainly
to something like a Bitcoin ETF.
There's some investors who are interested
in an early venture type of investing, so
they think about Bitcoin as a technology,
so they use their venture allocation bucket
to put a little bit of money just 0.2-0.5%
of their portfolio value.
Half a percent doesn’t sound like very much,
but just take the 50-largest institutional investors.
They hold almost $42 trillion
in assets under management.
So if just 0.5% of their assets are invested
in Bitcoin ETFs, it means a whopping
$200 billion added to the market, which is even
more than the WHOLE crypto market is today,
so even a fraction of that money can be a
significant game-changer.
But before billions of institutional dollars
will flood the crypto market, the SEC needs
to give their approval for a Bitcoin ETF.
The question of what our official position
is on cryptocurrency is a broad one and there's
no single answer to that.
When someone wants to build an ETF on top
of a crypto asset, we should sort of approach
it in the same way that we would approach
someone building an ETF on top of any other asset.
Unfortunately, we haven't always taken the
right approach in approving ETFs,
even for things like gold.
People who haven't dealt with a regulator
very often, especially a regulator like the SEC,
don't realize how long
things can actually take.
And this is true, as the process for getting
a Bitcoin ETF on the market started all the
way back in 2013, when the Winklevoss twins
first made the proposal.
And, nearly six years later, it’s still
hard to know how much longer the road toward
approval might be.
The SEC has been afraid to push these products
onto the market lest things happen to consumers
that in the end would redound to the regulator
and leave them with egg on their face.
This is David Yermack, professor of finance
at NYU’s Stern School of Business, who has
been teaching courses
on Bitcoin and cryptocurrencies.
We sat down with him to get an academic’s
view on the possibility of a Bitcoin ETF.
There have been a number of concerns about
the underlying assets that typically an ETF
holds liquid securities stocks and bonds,
maybe things like precious metals and commodities,
but crypto assets...
It's not clear to the
regulator what these are.
What assures the security of them, even what
the market price of the underlying asset may
be on a given day, because the trading of
crypto assets is in fairly illiquid markets
that often show very different prices
even at the same time.
Exchange-traded funds have been around for
a long time and we're just now getting around
to proposing a rule to build a framework within
which exchange-traded funds can live.
Until now we've been doing it by exemptive
order which is a very slow cumbersome process,
which makes it very difficult for new entrants
to come in and compete in this space,
and which means that the standards that apply
to each participant are not necessarily uniform.
And so that's a great lesson for people to
know how this exchange-traded funds, which
are so prevalent in our markets now,
don't even yet have their own regulatory framework.
So what’s stopping the SEC
from approving Bitcoin ETFs?
So from the SEC perspective on financial products
on the marketplace, they need to see enough
liquidity that everything gets bought can
easily be sold, that it's a fluid market.
The other thing is price manipulation, that's
the biggest thing SEC’s afraid of, right.
Their job is to protect investors and to keep
markets fair and reliable and trustworthy.
So in order to do that they have surveillance
processes in place today across a variety
of asset classes wherever that trading market
is, they have to have an information sharing
agreement with the exchange
with the product is listed.
And so they can track a trade, an individual
trade, back to the person who entered the original order.
So until that's in place, that's unlikely
that they're going to approve it,
because they're not going to be
comfortable about price manipulation.
So what is the future of Bitcoin ETFs, and
will we see them approved?
Everyone we talked to seemed to believe that
it was simply a matter of time, as investors
at every level are still enthusiastic
about this new asset class.
There's so much pressure for these products
on the demand side that one way or another
the regulator is going to see its way into
finding a loophole or regulation that allows
them to come to the market.
I think there is a great risk to the SEC that
it becomes irrelevant in the long run if people
start raising money through ICOs and crypto ETFs
and so forth and they simply refuse to regulate them.
People will find ways to own them and the
market may go off shore, it may go into the
commodities area.
I think in the long run the SEC, if it wants
to keep its mandate to regulate investments,
will have to find a way to allow these things
into the market.
That's the reality that there's a great demand
for this and that one way or another regulators
eventually get to validate that demand.
I think if we don't make the routes available
to folks they will find another way to get
access to the market.
And this is something that quite
a few people are concerned about.
The SEC has opened up the discussion so that
anyone can comment on it, and some are wondering
why the SEC isn’t approving it, since it
at least provides more safety than investors
buying Bitcoin on unregulated exchanges.
The most common response I get is when there's
a Bitcoin ETF going to be approved and,
you know, again I'm not going to be able to predict.
I do encourage people to come on in.
Talk to me about the
projects you're working on.
Talk to me about the ideas that you have.
Talk to me about the problems
that you're running into.
And it should be noted that not everyone wants
a Bitcoin ETF approved.
Many comments question the “realness”
of Bitcoin and fear that the whole thing is
just a scam.
But, like in a somewhat Chicken or the Egg
scenario, a Bitcoin ETF would actually make
Bitcoin more “real” - at least in the
sense of a store of value.
Actually, I think it's very important to have
proper financial tools for asset classes and
Bitcoin right now is a nascent asset class.
And once an ETF exists that can be thought
of more of a store of value instrument than right now.
A Bitcoin ETF would be a huge deal
for the crypto community.
It will not only bring in new investors with
deep pockets, but it will also legitimize
Bitcoin as a new asset class.
So whether it’s tomorrow, next week, next
month, next year, etc., one thing is clear:
It's definitely when.
It's not if.
It's definitely when.
