Talk Your Book: How We Got a Bitcoin ETF

0:00Today's Animal Spirits Talk Your Book is brought to you by Grayscale. Go to grayscale.com. to learn more about all their various crypto offerings and research. Again, check out grayscale.com to learn more.

0:34Britholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:42Welcome to Animal Spirits with Michael and Ben. It is Wednesday, July 9th, 345 Eastern, and Bitcoin is Bitcoining. It is very close to hitting an all-time high. It's been an unbelievable journey with this thing. As I said to David, unfortunately, for many years, I laughed, And that's okay. Can't go backwards. And at the time, probably was worthy of being laughed at. But people kept pushing, strong voices, strong opinions. And listen, they won. Credit where credit is due. You may not like it, but if you were one of those people who thought it was rat poison, a scam, going to zero malware, whatever, stop.

1:22It's over. They won. So do you remember in March 2020, intraday, at one point, it had fallen 50%, I think, in 24 hours, and it was at like$5 ,000 in the height of the pandemic. It's pretty wild how much it's up since then. And you're right. It is the Rasputin thing where every time it's pronounced dead, it just keeps coming back. You don't hear that anymore. Invest enough so that if it goes to zero, you won't be that mad. I mean, obviously, now that that is off the table, you would think that the exponential gains are likely, I think, in the past, it's hard to imagine a trillion dollar asset. How big is Bitcoin?

2:01Yeah, I'm just thinking crypto in general is over a trillion. It's hard to keep going. So one of the things that we got into this conversation, so we talked to David Lavelle, who's a senior managing director, global head of ETFs at Grayscale. 2.2 trillion, oh my God, my bad. I was not familiar with your game. Is that crypto in total or Bitcoin? No, Bitcoin. Okay, wow. Wow. But he was making the case that, hey, listen, volatility should come down over time. And that makes sense to me too. But obviously, if the volatility comes down, so should the returns. Yeah. From such a high level, duh, of course.

2:38If it kept growing at these levels, it would overtake the stock market and real estate markets in a flash, essentially. Yeah. Which seems, I would say, let's just say that seems improbable. Bitcoin is now 65 % of the total market cap of crypto. But one of the things that I think about when just talking to people outside of crypto, regular investors, normies as they're pejoratively called, even though it's not going to go up 1 ,000 % a year or anything like that, it still has the potential for outsized returns. I guess you don't know this, but it would be highly unusual. I can't imagine what would have to happen for the S &P 500 to double in the next three to five years, right?

3:19Like what would even, I mean, I guess maybe AI something, something. Oh, I could make the case for that. Okay. Three to five years. Yeah, I can make the case for that. But you could very easily make the case that Bitcoin would double and double again without any revolutionary news other than just adoption. Because it's still - I think at the very least, you could say this is a 24 seven asset that has more volatility from a portfolio management perspective, which is the way that I look at things, if you have a highly volatile asset like that, even if the returns are lower, you can still make the case that rebalancing around it intelligently can add to the diversification of your portfolio.

3:56Like you did. Yeah, it makes sense. Yeah, see, I'm rebalancing. I did rebalance. I also think you said it's 65 % of the crypto universe. There was a lot of people just in crypto, not outside of crypto, who were basically saying, listen, Bitcoin is nothing. All these other protocols are going to leave it in the dust and see you later. And I think that's one of the more impressive things to me that, like, listen, Ethereum is digital. What did people call it? I can't remember. Digital Legos? Yeah, or just, it's like, if you were investing in the internet before it started, that's what Ethereum is.

4:27And all these other DeFi protocols, and just wait, these things are way more useful. They're going to supplant Bitcoin. The fact that that hasn't happened, I think, is even more impressive, like, in the strength of its brand as a digital store of value, whatever you want to call it. Well, one of the things we didn't mention with Dave is like, well, what is Bitcoin even? It's a brand and it is a$2 trillion brand. It's very obviously has a lot of believers. Just like gold is a brand, right? Same thing. Yeah. Okay. Anyway, this was a very good conversation with David LaValle. David has been in the ETF world for a long time.

5:02So he comes at this with a much different perspective than a lot of the traditional Bitcoin conversations that we've had. So here we go.

5:13David, welcome to the show. It's great to be here. Thanks so much, guys. All right. You're not 19, which means I'm guessing that you started your career as a TradFi gentleman. So how did you find your way into crypto at Grayscale? Yeah, look, I am a longtime kind of ETF guy. I've kind of sat in every leg of the ETF stool, as I like to say. I've traded these things and built a trading business. I've lived in an exchange and build an exchange business. I've been an asset managers. And when the opportunity arose and Grayscale called me to say, hey, we're going to make this final push to get the Bitcoin ETF over the finish line, I took that opportunity to move from one disruptive technology in finance, which was an ETF, albeit 30 years ago, to kind of the next disruptive technology, which was crypto.

5:59And so it was a marriage of my kind of ETF expertise with Grayscale's kind of crypto expertise that put me in a position to innovate. Now, the joke is that for two years, I was the only global head of ETFs that couldn't get an ETF launched. So, you know, that was a little unsavory as I was kind of battling along and trying to get all the pieces of the puzzle in place. But we certainly persevered. It's been an exciting, exciting run. Yeah, it obviously took longer than most people expected. But now that it's here, from my perspective on the outside, it seems like the rollout of crypto ETFs has gone just great.

6:33Like it doesn't seem like there's been any hiccups. How have you seen that rollout? play out? Yeah. Well, listen, when I was at NASDAQ in 2013 and got my first look at, you know, a firm showing up to, you know, NASDAQ offices and saying, Hey, we want to launch a Bitcoin ETF. So, you know, some people think it's been four or five, six years, you know, it's been a lot longer than that. And so, you know, I think there's been a lot of blood, sweat and tears by the entirety of the marketplace. And you're right. It has been a screaming success by, you know, any measure, but I think most people kind of take a look at the AUM growth and say, wow, like the AUM growth has shown that this has really been, you know, incredible.

7:10And by the way, it has, but, you know, I like to point to a number of different aspects of the market that needed to be put in place. And it wasn't just the AUM growth that just showed up. It was many large scale, um, firms across the entirety of traditional finance that needed to show up and do their job so that on January 10th of, you know, 2024, this actually would functionally work. And that was exchanges. It was, you know, ETF administrators. It was custodians. It was trading firms. It was, you know, liquidity providers, authorized participants. And by the way, we were doing something that had never been done before in the market.

7:47And I think people tend to kind of skip over that part. and it was really an incredibly exciting experience for, you know, kind of the ETF geek in me. And I think it gave a tremendous amount of credibility and validation to the market when, you know, some of the largest banks in the world are on the sideline for so long on crypto and maybe even talking, you know, negatively about it. And then when this opportunity arose, you know, firms showed up with a lot of energy to make sure that it was going to work because there was a real commercial opportunity. And that has certainly proven to be the case.

8:21If Grayscale didn't sue the SEC and win, was that like the final green light for everybody to go? How instrumental was Grayscale in getting this done? And do you guys get enough credit for doing that? I mean, I'll let you guys determine whether we get enough credit for it. People give us credit with some frequency and regularity, and we appreciate that. But it was really a critical, It was a really critical time in the market. I mean, I don't think I need to go through all the bits and bytes of, you know, what was happening and what was transpiring with the last administration in terms of the negative attitude towards, you know, crypto generally.

8:58And it wasn't just the Bitcoin ETF. But Gracie happened to be a firm that had a couple of things that had a lot of conviction and had a lot of desire and had the capital, you know, to really actually, you know, stand up and say, this is right. This is what investors want. And typically I always talk about like when, when there's kind of a disagreement between, you know, industry and a regulator, it's typically that the industry is saying I'm being over regulated. And in this case, it was very unique. And I've talked about it so many times that we were on the same side of the table with the SEC.

9:31We wanted this product to be in a, you know, more sophisticated regulatory regime. We wanted this product to be in an ETF wrapper, which was listed on, you know, the New York Stock Exchange that is a highly regulated organization. And so we were asking to be further pulled into the regulatory perimeter, which is something that I think is another thing that's kind of glossed over. So we're really pleased that we answered the call from all of our investors and that we were able to achieve something that was really monumental, not only for the crypto industry, not only for the ETF industry, but for the entire industry.

10:08The irony that Gensler thought that he was protecting investors from not allowing you all to convert GBTC from a closed-end fund that traded at sometimes wild premiums all the way to a wild discount and was really, through no fault of your own, at the epicenter of the crypto meltdown with all the borrowing and all the leverage. And had that just been converted into an ETF, a lot of the fallout that we saw in whatever year that was wouldn't have taken place. Is that fair or am I manufacturing history? Here's what I would say. ETFs have historically done an incredible job of tracking the underlying assets that the ETF wrapper is holding.

10:53And that was the case for, you know, S &P 500 in the beginning into international equities, into commodities, into currencies, into, you know, all sorts of index based products that, you know, were cutting apart the fixed income market and subsector, the fixed income market and international markets that are hard to access. and then now crypto. And I think that the ETF has proven to do an exceptional job of that with all of the hallmarks that ETFs have brought to every single investor, transparency, cost efficiency, and the like. So we're really pleased to have had the opportunity to really innovate in that way.

11:30Listen, we've been innovating for over a decade. And 12 years ago, the concept of creating a 33-act Delaware grantor trust that held Bitcoin with the ultimate goal of turning it into an ETF eventually was seeing around several corners, not just one corner. And it just happened to take a while to get it into an ETF wrapper. And look, we're committed. We're 100 % committed to crypto. And that's why we are continuing to desire to innovate in the space. Now that we have the Bitcoin ETF, we have an ETH ETF, and a bunch of them, obviously, and there's a lot of money in them. There's more money coming in all the time, it seems like.

12:08So where do we go next with these things? Like what else is coming? I mean, first of all, it hasn't even happened with the Bitcoin ETF set. That's my premise. Well, you think we're just scratching the surface? We're scratching the surface. Let's just use some simple numbers. Okay. The vast majority of the assets that have come into Bitcoin ETFs have been self-directed investors. And the ETF has historically been an incredible building block for wealth managers. So that's your RIAs and that is your kind of global wealth managers, firms like Morgan Stanley and Wells Fargo and UBS and Merrill Lynch.

12:47the process through which those wire house platforms diligence and approve products to be allowed on their platform so that advisors can make allocations has not really matured yet. And so if we take that$30 trillion of a market that hasn't really adopted the Bitcoin ETFs and we say, maybe we get a 1 % allocation, that's$300 billion. That's like nearly three times what is currently in the Bitcoin ETFs. So, you know, I think there's a tremendous opportunity for growth in Bitcoin alone. But listen, I wasn't dodging your question. I was just making sure that we kind of add to what the opportunity here is.

13:29ETFs have long democratized access to asset classes, which typically means you've got an institutional grade exposure that then can move all the way down to the self-directed retail investor. The difference with digital assets, if we have a barbell approach. We've got like self-directed enthusiasts and some of the smartest institutional investors in the world that had allocated crypto. And now we're kind of compressing towards the middle, which is really the advised market or the wealth managed market or the financial professional market. And so that's what we're seeing with kind of Bitcoin. And that's also what we're seeing with Ethereum.

14:03Now, to read through your question is like, what's next? Well, we have seen that there are dozens and dozens and dozens of applications to the SEC for new single token exposures. And everyone's like, hey, what's going to be the next, you know, crypto ETF that comes to market. And I had long been saying that, you know, I thought that it was going to be a multi token product. And, you know, I still think that could be the case. But the reality is, there is, you know, a very swift change in the winds, there was a regulatory headwind that turned into an industry tailwind. And all of that translated into a tremendous sense of urgency for asset managers like us to be developing products and to be putting regulatory filings in to continue to innovate for this kind of next wave of product development.

14:54Did the success of the ETF surprise you at all? Just in terms of how long did it take to hit$100 billion? Like not that long. It was, it was, it far exceeded my expectations. I thought it was going to be huge, but I thought huge would have been 25 to 50 billion. Um, I, I, I really had strong conviction that we were going to be a hundred, 200, 300 billion, uh, in ETF, uh, in Bitcoin ETF assets. Eventually I did not think that we'd be at a hundred billion within the first year. It was really, really remarkable, but I will tell you like what was also remarkable is, you know, how incredibly efficient and wonderfully the market performed.

15:33And, you know, I think that I have long championed ETFs as an incredible, um, disruptive technology that brought tremendous value to every investor with a tremendous amount of fairness because an institution that buys an ETF and a self-directed investor that buys an ETF both have the same exact experience. They pay the same fee. They go to the market to buy it in the same exact way. They have the same access to the same liquidity. And to see that happen with digital assets in the form of Bitcoin was really, really remarkable. And I think another thing is to say, I've innovated in ETFs in a long time and brought different asset classes into an ETF wrapper.

16:17And for the first 15 years of that, it was constantly talking about, well, what's the underlying exposure? What are liquidity characteristics? How does that underlying asset behave? And then how is the ETF going to behave? And in this case, it was all focused on the underlying asset. And the ETF was a point of credibility and a point of resilience that I think was a different kind of way that the ETF innovated, which is really exciting. And it's really delivered for investors. You mentioned the fact that retail was here first. It seems to me like this is the first really big asset where the first mover advantage has gone to retail, not institutions.

16:51Usually, it's institutions get there first. Then it trickles down a little bit maybe to advisors and then retail. This was the opposite. And I remember when the first when Bitcoin first started taking off and the 2017 was the first real time that retail and people got really excited and word of mouth spread. A lot of people said, just wait until institutions get into this. It's in dominance and foundations. And now it almost seems like, yeah, sure, that'd be great. But it seems like it's more about advisors now. And that's like the next big opportunity. Does that make sense to you? Yes. I mean, I can't think of an example where retail has been kind of the greatest driver of that demand profile in another asset class.

17:28We joke all the time that people think about S &P 500 exposure as the most plain vanilla equity exposure. In 1993, when it came out as an ETF, that was an institutional grade exposure. I mean, think about how hard it was to manage to the S &P without all the access to the data that we have right now. So yeah, I think that's a great example. But to answer your question of what's next, it's certainly the advised market. But I don't know, maybe it was two months ago, I was speaking at a conference that was a collection of state treasurers. And there was about$3 trillion in the room and, you know, in state treasury assets.

18:06And they were seeking the opportunity to figure out how they can amend their charter so that they can not only hold cash on their balance sheets, but also hold some Bitcoin. And when talking about like volatility of Bitcoin or, you know, how they would handle the volatility, their answer was, well, it might be volatile, but it doesn't devalue. And their concern around having dollars on their balance sheet is eventually that those dollars are going to devalue. And that will be net negative for their treasury and net negative for their constituents. And so I think that it's absolutely next on the docket for advised market and the advisors to incorporate it into asset allocation for their clients.

18:41But then additionally, it's going to move into the real institutional markets, which is treasuries and pensions and endowments and foundations and insurance companies. It's just a matter of time. One of the things that you don't hear people say these days is Bitcoin is useless or it's going to zero. And I think there's a widespread acceptance that it is now a legitimate investable asset class. And I said to Ben, I don't know when it was, maybe a year ago, whatever, it doesn't matter. Like, what is Bitcoin? What is the use case? And what if the use case is A, it works in terms of just doing what it's going to do with the blocks and the ledgers.

19:16Like that part of it is proven. It's tried and proven and it works. Okay. So that's accepted. And so what is it? It is an alternative. I hate, I don't know how to say other than store of value, because that implies that there's some sort of guarantee or it's not volatile. It is. Obviously, it's – but that's what it is. And it is an asset class and it is a growing part of people's portfolios. And if it's nothing else other than that, people, you'd look for the killer consumer use case. That's not what Bitcoin is. Yeah, no. I think – I'll throw a couple of things. It's the same size. It's roughly the same size as the high-yield market.

19:57It's a bona fide asset class, right? That's just Bitcoin, Right. So there's like a good example when people are like, well, how big is it? You know, what does that matter? That's big. To answer your question and people quickly go to a digital store value because it like makes a little conceptual sense to them. They can wrap their hands about around something being a little more tangible. So this digital, you know, store of value or digital gold, I think Bitcoin means different things to different people. And you said something very, very, you know, very smart, very wise, very, very smart, very wise.

20:28But you alluded to the fact of this use case. And the problem is this is a disruptive technology that its first use case is kind of useless to most Americans. And so think about this, like the internet or a smartphone, right? These are things that came in the market. And I remember getting my first smartphone and saying to myself, this is amazing. I don't have to carry an MP3 player and a phone. This is genius. I didn't look at it and say, this thing's useless because I can't get a car to show up in front of my house whenever I want it and take me wherever I want to go. Right. But the concept of digital money, when you live in a country that has a relatively stable financial system and, you know, monetary policy and currency, it's kind of useless.

21:09It falls on deaf ears. Cause I'm like, well, I have Venmo. What do I need that for? But exactly. But if you needed to, you know, engage in frequent cross-border, you know, money settlement, or you were in a country that you couldn't trust your monetary policy or the currency, obviously you would have a significant use case to it. So I think there's a little bit of this like, ah, this thing's not really useful to me. And so it took a little bit of time to just kind of accept it as an allocation to your portfolio in the form of a digital store of value. When did you get it? Because for me, it took me years.

21:44And frankly, when I first bought it, it was a hedge against me lighting myself on fire because I did not like a lot of what the crypto people were saying. But I thought that there was a good chance that they were going to be right in terms of number go up. And I'm a very, very pity, spiteful, envious person. And I said, I just, I got to protect myself from myself. And then the more I thought about it and the more that there was proof that it was going in the direction, like my thesis, honestly, I'm a dollar lover, but my thesis was there's going to be more demand and supply. And that was really all that I needed to get to have that sort of conviction.

22:23When did it click for you and what was it that did it? Well, the first answer to that is my wife would have told me that I wish it clicked when I first saw it in 2013. She reminds me with somewhat regularity that it didn't click then. Oh yeah, dude. I remember 2013, we were literally cackling, laughing. And for years, unfortunately. I mean, listen, I wrote the rule filing. A lot of people were making fun of it back then, yeah. I know. But listen, I was like happy to write the rule filing and happy to put something in front of the sec and happy to be an innovator when i was at nasdaq building out an etf franchise you know as the david against goliath of the new york stock exchange i just didn't put five grand into it right um uh it listen it clicked it clicked in 2019 2020 when i got this thing in my head of like i'm no you know macro economist But the demand inputs, right, are going to can only increase and the supply is fixed.

23:15It's like just that simple. So the price is going to need to increase. And but the whole concept of volatility and you mentioned it, volatility is only really indicative of the fact there hasn't been full adoption. It's volatile, but it doesn't devalue. and volatility, like the amplitude, right, of the ups and the downs is going to decrease as more and more people adopt. You think so? I do. I absolutely think so. It's not going to be, you know, it's not going to be an asset that doesn't have volatility, but the volatility is going to go from 70 to 50 to 30 to 10, right? It's going to go lower.

23:51And like other commodities, it will have, you know, peaks and spikes of volatility, but overall those amplitudes are going to decrease over time as more and more users adopt it. I hope so. I mean, here's what I always say about like ETFs. When you have an ETF, like whatever, even S &P 500 or high yield bonds or whatever it might be, if you have a non-correlated user base that's accessing that vehicle, so you have retail investors and institutional investors and short-term players and long-term holders, The more diversified the user base is, the more they offset each other because their time horizon of investment and their need to access liquidity is usually against one another.