Are the Stars Aligning for Bitcoin? w/ Mike Alfred

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1:31what's up everybody it's ash bennington welcome to real vision crypto daily briefing today i'm joined by mike alfred founder and managing partner at alpine fox mike welcome back always a pleasure to have you on real vision great to be back thank you ash mike we've got a lot to talk about here a lot to talk about in terms of news flow what's happening in the space we're gonna get to all of that in just one moment. But first, I want to take a look at price action. It has been a busy day. Bitcoin, oh my gosh, it's trading back above$30 ,000 right now. On my screen,$30 ,058. Trailing 24 hours, it's off about 1.4%.

2:05Trailing seven days, we're down nearly 4 % trailing seven days on Bitcoin. Ethereum trading right now$1 ,851. Trailing 24-hour basis, it's actually perfectly fought 0.00 % change on coin market cap, trailing seven day basis for Ethereum. It's off almost exactly three and a half percent. One other chart I want to draw your attention to right now,$7 billion in Bitcoin and ETH options expiring. That's what you're seeing on your screen right now. That's what that chart represents. Mike, welcome back to the show. Always a pleasure to have you with us. So much to talk about here today. Where do we begin?

2:45Well, I think today's a story of stealing defeat from the jaws of victory. It looked like Bitcoin was about to put in a pretty nice monthly closed. Keep in mind, it's the end of the quarter. So a lot of asset managers mark to market at the end of the quarter, and that determines fees and other marks that are important. You've got the halfway point of the year, and then you've got this massive options expiration. So it doesn't surprise me that there's sort of this leaked news that the SEC apparently is not happy with these filings. I don't think that should be a surprise to anyone. Like I, from the beginning, have said the BlackRock ETF filing is interesting and exciting and probably puts something into play.

3:29But the idea that they were going to immediately get approval because they're BlackRock, given the SEC's past intransigence, given their positioning, given the fact they're locked in a battle, a death match of sorts with the entire crypto industry. I didn't think that that was likely to happen. And I think what's probably going to happen now is a bunch of these firms are just going to refile their ETF applications with more detail around the surveillance sharing, more detail around which spot exchange they're going to be using. And we're back at the same point again. And so I think you got to look further out and say, okay, this news flow today and the movement in the market today is based on technical factors and in some cases that have very little bearing on the longer term trajectory here.

4:10And it's very clear we're in a bull cycle now. So I think it's sort of inevitable that Bitcoin will be higher in a quarter, two quarters, three quarters. The news flow along the way could be bumpy, right? Like if you think about the last six or nine months since FTX, the news flow has been bearish the whole time. But yet Bitcoin has doubled, essentially doubled off the bottom in November of last year. So I think that sort of climbing the wall of worry setup could continue from here. By the way, a lot to talk about there. We're going to unpack that in just a second. But I just want to invite our viewers to please put down your questions in the chat.

4:42We're going to ask the best ones on the air. Remember, Real Vision members take priority. If you're not a Real Vision member yet, go to realvision.com forward slash crypto to sign off. It's free and will remain so. By the way, this is where you want to watch the latest Ralph Pal's Adventures in Crypto before anyone else. A new episode premieres every Friday. Mike, to your points there. many of them, and they're all good ones. The bottom just fell out of price this morning. The story got broken by Wall Street Journal. By the way, it hasn't been independently confirmed by regulators yet, I don't believe.

5:16This is just original reporting from Wall Street Journal. We have to assume that they probably have it on reasonably good authority to run it as the headline story, at least until the Supreme Court rejected Biden's, the Biden administration's debt cancellation plan for universities. But listen, this is a big story here, And it's interesting. You made some interesting points. Let me throw this out to you. I was talking about this on a show that we did for Real Vision Pro Crypto members at nine o 'clock this morning about the price action. What are we seeing on the screen right there? OK, there it is.

5:46That's the story. SEC calls BlackRock Fidelity Bitcoin ETF application inadequate Wall Street Journal. This is an exclusive report coming from the Wall Street Journal being re-reported there by Decrypt. But, you know, first of all, a couple of points. First, they're claiming, based on the reporting, that the request is that SEC needs more information on this. This is not dead in the water yet. These filings can sometimes be iterative. They can sometimes go back and forth with requests for more information. But the fascinating thing to me on this, Mike, was the narrative flow around this story.

6:19because it seemed that people in the space were absolutely convinced, convinced that the BlackRock ETF, spot Bitcoin ETF would be approved. And I almost wondered, I was talking about this on an earlier show on ProCrypto, was this kind of like a little bit of conspiracy thinking in the crypto space? Because there was almost this tone that I sensed that it was like, oh, the fix is in, right? This is what the SEC wants. And it turns out, guess what? Nope, that's not the ruling we got or apparently are about to get based on reporting from the journal. I don't know. What do you think? Well, conspiracy thinking and wishful thinking are very common in the Bitcoin space.

6:53I don't know exactly what it has to do with, but Bitcoin tends to attract folks who want to believe that there's some vast conspiracy amongst the global elite to keep everybody poor and eating bugs, essentially, and giving them a CBDC where they can control how much meat they're allowed to buy and when they're allowed to spend money. And so I think there's an extension of that going on here was this idea that Gensler is essentially a pawn for the traditional financial services companies to basically block all the crypto native companies from achieving their objectives so that BlackRock and Fidelity and others can swoop in at the end and take the pie.

7:31I just don't see that. What I see is a bunch of crypto native companies that have mostly done things poorly over the last five to seven years. They've lost investor money. they've lost investor trusts many of them have gone out of business they've literally been frauds in some cases and so i think the sec and the cftc in general in the u.s are trying to be smart about making sure that these products when they are approved for the mass market are actually really suitable right and they're actually you know they're not being manipulated under the surface and so i can kind of see two sides to it i don't think there's a vast conspiracy it is true that a lot of regulators end up sort of being captured after they leave their regulatory job, right?

8:13They want a job at Goldman Sachs or they want a job at BlackRock. And so there may be some inherent bias to that regulatory function, but I don't think there's a vast conspiracy here. I think at some point an ETF will get approved. It might be BlackRock, it might be Fidelity, it might be Bitwise, or it might be somebody else. So in your view, it seems as though that that view that sort of conspiracy-like thinking seems to be overstated uh and by the way uh if one goes through is it entirely likely that we'll see a whole spate of them uh get approved at the same time that's what we've seen with the futures side right there's a half a dozen futures etfs like once the door is open it's much easier to go through it's much harder for the regulator to make the case that additional uh you know products should not be on the market if they let won through.

8:58So I think that's where the excitement came from here. BlackRock has a good record, they were like 595 and won. They've had a lot of success doing this, but they're fighting a battle here that the SEC is pretty entrenched on. It's like trench warfare. Again, I don't see a lot of movement in the very short term, but the thing that I noticed when BlackRock first filed is it put in play a lot of other potential outcomes, right? Because you got to remember that GBTC has basically been a shadow ETF for the last seven, eight, nine years, right? It's been around for a long time. And it's basically the largest Bitcoin specific product in the market.

9:40And they took advantage of kind of this regulatory loophole where if they sold the trust privately, they could then sort of list it on OTC on the exchange. It could trade like an ETF. The problem is there's no redemption. mechanism, right? So there's no way to actually ensure that the trust trades at NAV, and that's what these ETFs would do. But Grayscale's in play for sure right now, in part because of the appeals court ruling that I expect to come out over the next quarter or two, where I think the three judges that are ruling on that were pretty pro-Grayscale, if you listened to the last hearing.

10:11So I think there's a reasonable chance. I think some expert came out with like a 70 % odds that Grayscale wins that. But separately, DCG, the owner of Grayscale, has some issues related to the Genesis debt that still are unresolved. And I think at some point they may need to deal. They may need to sell some or all of Grayscale in order to raise capital. And if that's the case, I think the market will view that as being very positive for that discount for that product. So I think BlackRock's interesting, Fidelity's interesting, but more importantly, I think the market can see the finish line. The market can see that in the next 12 to 18 months, something is going to happen in this space, probably something major and probably something that's bullish for Bitcoin.

10:53Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

11:01Gosh, there's really a ton to talk about there around the GBTC story with hooks and to the broader industry in terms of the structural aspects of it in terms of price, in terms of regulatory aspects. Let's unpack that story from the start for people who may not know. First of all, let's talk about the structure of GBTC, how this discount has been built into the price. Talk about the difference between closed-end funds on the one hand and ETFs in terms of redemption and price synchrony. Yeah, so a traditional ETF has like an authorized participant, right? And those units are sort of created as the customer or the buyer wants to buy or sell that product.

11:44And so it's very different than a closed-in fund where you kind of put an asset into a trust in this case, and then you can't really take it out. There's no redemption mechanism to sort of create price parity between the assets that are held in the trust and the price of that trust. And so closed-in funds often trade at a premium or discount based on supply and demand characteristics in a way that a traditional ETF doesn't. And that was good for Grayscale and in a sense for the market for a while, when it was the only product in the market in the US that would allow you easily to get access to Bitcoin in a brokerage account.

12:19And by the way, it traded at a significant premium during those days, a significant. 20, 30, 40 % most of the time for years. And that's in fact what got BlockFi and Three Arrows and some of these firms in trouble because they thought that premium would persist indefinitely. So they would buy the trust at NAV directly from Grayscale, and then they would dump it back onto the market in six or seven months after they kind of got through that holding period, you know, investing that they had to do, basically. And so they would take advantage of that premium. It looked like free money lying in the street.

12:52But then the market turned in 2021. It kind of flipped from a premium to a discount. There was a Canadian ETF. So there's more competition. There were more ways to get access to Bitcoin. And so it went to a discount. And the problem now is that the incentives for the owner and the manager of GBTC are to continue to let the product persist as is because they're earning 2 % of the Bitcoin every year, irrespective of whether it trades at a premium or discount. And they're earning 2 % on the underlying value of the Bitcoin, whereas the customers who own the trust, if they go to sell it, they have to sell it at a discount to the underlying Bitcoin in the trust because that's where it's trading now.

13:30Again, I think that will be closed either through winning the SEC lawsuit and eventually having a path to approval, BlackRock or Fidelity getting approval for an ETF, which would then give potentially a pathway for GBTC to convert, or the sale of the entire company to somebody else where a new manager, like let's say Fidelity, for example, would come in and say, look, we want to keep this product as is, but we want to lower the fees to sort of make this product more competitive. and we think the right fee level is 50 basis points, let's say instead of 2%, that would help lower it. And they could also proactively create a redemption mechanism potentially that would allow that closed-in product to look more like an ETF even before it's an ETF.

14:13And so those are some pathways I see to getting sort of realized value for the current shareholders and the current trust holders of GBTC. But we'll have to see how it plays out. Yeah, a couple of important points to make there. You mentioned this concept of NAV, that of course is net asset value. And what we're tracking here is the premium or discount to net asset value. But it's important that we just use that as an expression to get a sense of where it's trading relative to the underlying price of Bitcoin. But when you actually own this security, by the way, I think I own a couple of shares of this myself, not a lot to minimus, but I think I do own some GBTC in my own brokerage account.

14:56But look, the reality here is that this on a November 21 high was trading about 50 bucks a share. If you own the underlying shares, what you care about is the price. Trading right now at 1888 on my screen, a significant decline from high. Yeah, it's a significant discount to the underlying value of the Bitcoin. I think the value of the Bitcoin right now is like$27, right? So it's not just that the price of Bitcoin went down since 2021. It's that the value of the trust in the publicly traded markets on a supply-demand basis went down even relative to the price. Now, that's flipped this year. The thing to keep in mind, Ash, is because the discount went from the mid to high 40s to closer to 30 % now, GBTC is actually outperforming Bitcoin quite dramatically over the first six months.

15:47As of this morning, when I last looked at it, GBTC was up 130 % and Bitcoin was only up 80%. Obviously, those numbers have changed with this sort of mini drawdown that we've seen. But that could persist and that could continue if the discount continues to shrink. You actually are getting the return of Bitcoin in a sense, plus any reversion to the mean in terms of GBTC trading closer to the value of the underlying Bitcoin. And that's why I recommend, you know, last time we spoke three months ago, and I think even last year, I have recommended it. I, you know, I have 240 ,000 shares, so it's not an insignificant amount of exposure to the idea.

16:26And I don't own it just because of the discount catalyst. I also just think as a broad exposure to Bitcoin, it's not a bad way to do it. Remember, the underlying custodian is Coinbase. Coinbase in the US is probably one of the most trusted custodian. Fidelity might be up there with Coinbase and maybe more trusted with traditional financial services companies. But keep in mind that BlackRock chose Coinbase as their partner. And the reason, Ash, for that is that BlackRock competes with Fidelity in almost every vertical of the traditional asset management business. When they're selling small cap products, when they're selling large cap products, when they're selling bond products, index products, et cetera, Fidelity and BlackRock are maybe friendly in the way they converse with each other, but they are mortal enemies in a sense.

17:09And so it makes sense that BlackRock would choose Coinbase. But I think that makes Coinbase an interesting story going forward because Coinbase is one of the only large-scale independent custodians. BlackRock can't choose Fidelity because they don't want to give Fidelity a leg up in this market when they're competing with them everywhere else. BlackRock does not compete with Coinbase. And so it's easier for them to use them as a custodian. Remember, Grayscale keeps all of the GBTC, Bitcoin, and Coinbase. and MicroStrategy historically has kept all of their Bitcoin at Coinbase. And so there's a lot of negativity on Coinbase right now because of the SEC lawsuit, but the largest players in Bitcoin continue to choose Coinbase repeatedly.

17:51Yeah, GBTC, I'm looking right now in the Bloomberg terminal, trailing 12 months up 56 % year to date, well, just shy of 128 % year to date. Significant move. Yep, and a significant move relative to Bitcoin, which is why it's been such a great trade. And about a month ago, I took the position up quite a bit, not knowing about the BlackRock filing at all, but simply because I view the appeals court decision as somewhat imminent at this point and highly likely, well more than 50 % likely to go in their favor. Again, that does not mean that the SEC has to approve GBTC's conversion to an ETF, but it does mean that there's more pressure politically.

18:31And that's The true end date here, I think, is when Gensler leaves the job. And that could come as soon as like 12 to 18 months out. Obviously, there's some movements from numerous congressional representatives wanting to just remove him proactively. I'm not sure that that will be successful. But these jobs eventually come to an end. These are not jobs you stay in forever. And I think the posture of any future SEC chairman is probably likely to be a little bit softer. it yeah by the way by way of contrast on bloomberg xbt usd pair ttm up 61 percent ytd up 82 so significantly underperforming gbtc precisely as you said mike what else is going on right now for you mike what else are you looking at what else is important i think the biggest thing that i'm watching right now is the infrastructure business building up around bitcoin you know when you think about what the SEC has sort of done to the crypto market broadly is they've made it clear that Bitcoin and maybe Ethereum are probably the only safe places for institutions to deploy capital where there's no risk that they'll be called securities later.

19:40There's no risk where their favorite exchanges will pull those listings and make it impossible to trade them and get liquidity. And so if you want to make heavy duty investments in the infrastructure layer beyond the protocol itself, Bitcoin is probably the safest place to do that. And that's probably why you're seeing the hash rate go nuts, right? The hash rate has exploded higher for Bitcoin over the last six months, even as the price continues to be more than 50 % below all-time highs. And part of that is investments that were made prior to this most recent drawdown. Remember, these are long lead items.

20:15People are buying land, they're building data centers, they're plugging in machines that sometimes take six or 12 months to arrive, right? They have to buy transformers, they have to build substations. And so one of the things that's interesting about Bitcoin is it has this physical world infrastructure component. And the best analogy I can think of for this is sort of the internet data center business in 2002, 2003, you think about a company like Aquinix, which today is one of the largest internet data center providers. That was a$3 stock in 2002. At one point over the last five years, it was like an eight or$900 stock.

20:47And And it was really a binary bet on would the internet be bigger? And so if more people want to use the internet, you need more infrastructure to more bandwidth in order for the consumer internet to thrive. I think the same thing is going to happen with Bitcoin, where these Bitcoin miners, I call them Bitcoin infrastructure providers or Bitcoin data center providers, are going to continue to have to grow if Bitcoin is going to grow. Because unlike these proof of stake protocols, proof of work does require real world infrastructure and real world energy for it to work. and if you look at the stocks this year a bunch of the leading bitcoin mining stocks are up 200 to 300 percent quietly none of the big tiger cub hedge funds none of the traditional asset managers are talking about this space and yet the stocks are outperforming nvidia uh year to date so i think it's a space to watch going forward hey everyone we're gonna take another quick break and hear a word from our partners we'll be right back to the real vision crypto daily briefing

21:42let's just do some questions as they come in desmond lang on youtube wants to know hi mike if the spot etf did get approved under the ssa what would the entity be to trade and clear the spot btc trades um well i mean if if if uh spot etfs approved like the blackrock etf is approved you'll be able to trade it uh in whatever brokerage account you have so you just log into your Fidelity Schwab or TD of AeroTrade or Robinhood, et cetera, and you should be able to trade it. It may trade on different exchanges over time, but the key thing is access. Can you access it from any US brokerage account? I think the answer to that would be yes, if it were approved.

22:26Yeah, maybe he's asking a question about the underlying custody aspect of it. What's the SSA? Go ahead. The underlying custody is going to be, if BlackRock's were approved, it would be Coinbase. Yeah. But I think they'll diversify. I think what will happen over time is, you know, there's a couple of other options. I mean, obviously what a lot of people in Bitcoin would like to see over the next decade is a lot more non-custodial trading, sort of like what Uniswap enables in sort of the Ethereum world. It's one of the kind of downsides of Bitcoin is there aren't a lot of like native applications for trustless trading, right?

23:03And so you can trade some of these other altcoins fairly easily right out of your wallet. And you can't do that with Bitcoin if you take self-custody. So I think some infrastructure around that would be interesting. And I know there are some people working on that. And by the way, to your point about how that could change in terms of a custody basis, the relationship between BlackRock and Coinbase as announced, why wouldn't, if this was a business that seemed productive in the future, why wouldn't BlackRock just build their own digital asset custody services? because that's just not the way that traditional asset managers think.

23:36It's not the way that regulatory superstructure works, right? The whole idea in the traditional financial services market is to separate each one of these business lines. Exchanges should be separate from asset managers, should be separate from custody, should be separate from clearing. And one of the problems in crypto native businesses is they've tried to do the full stack themselves, which means there's no separation and there's a lot of conflicts of interest and there's a lot of risk to the end deposit and the end customer. And so I think BlackRock intends to operate as they do in traditional markets here and not be their own custodian because that's just not the way to keep customers safe.

24:14Yeah, well, fair enough. And it's a good point. Precisely, this is something that we saw, in fact, in the SEC complaints against, for example, Coinbase as well as Binance. The segregation of functionality argument that you made. yeah and look like finance and coinbase are very different beast you know coinbase may do multiple things like like custody for example and exchanges but they're also an audited you know business has been audited even before they went public in the u.s and i think it's highly likely that they're operating on a true one-to-one basis where every coin that you think you have in your account is actually held in custody i don't think that you can make that same you know you could you could you could make the same inference based on the behavior of finance based on the the behavior of of allowing customers to deposit into multiple different entities and then flowing that money through affiliated market makers which is very similar to what happened at FTX I'm not saying that the same thing on is an FTX but but it's much more similar to that type of flow than what you see at Coinbase, where you use a US bank account to deposit oftentimes US dollars and then purchase Bitcoin, for example.

25:32And then that Bitcoin sits in a wallet that you can actually identify in custody. It's not clear that that's what's happening in some of these other offshore unregulated platforms. By the way, I'm Googling while I talk here. I just found a Reuters story from December of 21. So about 18 months ago, talking about BlackRock's custody business, how that works in traditional assets. Here it is. I'm going to read this from the Reuters article. Quote, BlackRock said that Citi will care for about 40 % of their funds, while JPM handles 30%. BNY, Mellon, and State Street each take 15%. So they're literally quite clearly spreading the custody around.