Episode 293 - Eric Balchunas: Spot Bitcoin ETFs

24:57Give it time. And 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. So institutions like volume, advisors like low fees, and they each both like some of the other. They have both in spades. So the stage is set. The wholesalers are going to do their thing and just wait. So 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 Wenmoon degenerates who just can't wait a couple of weeks.

25:36They just need like 10 % every day. And they're not accounting for like the Bitcoin went up 60 % in the lead up to this. You kind of have to factor that into the whole thing. You're still up, what, 80 % in a year, even with the sort of 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. So that's part of it. The other thing is you got to like maybe chill a little. You know, you're up 80 % even with the sell-off. You've doubled the Qs. And the Qs had its best year since the 90s. So there is a little bit of like high expectations from some of the crypto people.

26:08They 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. And 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. And 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 months. I'm telling you, as somebody who's seen thousands of ETFs launch and has seen this industry defy odds all the time.

26:45The ETFs are powerful. They're disruptive. They gather assets. This is where all the fish are biting. All the advisors love ETFs. So 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 months. They're going to look really dumb. You mentioned the difference between the newborn nine and GBTC. Within the newborn nine, how are these ETFs trying to differentiate from each other?

27:23Yeah. So 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. So 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. So 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. And he's a fan of BlackRock otherwise.

27:58So they peeled him off. So 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. So I don't think they've done any advertising. They've got like all these wealth managers all across America who manage Boomer money. And so all they got to do is put a little of the portfolio into this and they have flows just like that. So that's sort of 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 wild putting laser eyes on Ben Franklin and stuff.

28:32That's a weird one. So the problem with that, I get it. It's fun. And I like the Twitter takeover. Like 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, is going to get crypto on their own or already has it. So I think BlackRock probably has the right approach, which is, look, our audience, you guys probably watched this from afar.

29:08You 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. So are any of the newborn nine really leading the way with debt sales over the others? So Fidelity and BlackRock are really neck and neck. They both are toying with$3 billion. And there's a little bit of a drop off. And then ARK and Bitwise are sort of real close in third, fourth place, respectively. But even like Invesco, VanEck, they have over$100 million already. Any normal ETF that comes out and gets$100 million within two weeks is a blockbuster.

29:46So we've already had like six, seven of them in blockbuster category. So 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 loss leader for a little while. And they're really into crypto and they have products in Europe. So 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.

30:17but 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. So 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.

30:50But 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 a day. So it's interesting. Normally, the first one out is the liquidity king because they had their market for them. This is a race. So I've never seen a tie like this so close. I do think iShares probably edges out over the next year. I'll tell you why. Because Fidelity doesn't really have any big liquid ETFs. iShares has like 50 of them. And they're known amongst the trading crowd and the institution. So I think their branding and work in this area will pay off in the end.

31:24And I think IBIT becomes like 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 is probably two to one odds at this point. So the heavy favorite 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 bips cheaper, they're I don't care. The liquidity is most important to me. You talked about earlier the benefits in general of ETFs. What do you think being allowed in an ETF wrapper does for Bitcoin? One of my metaphors is when the Beatles went on iTunes, the Beatles held off.

32:01They wouldn't go on iTunes for like five or six years as iTunes got popular. So younger people would not listen to the Beatles. I mean, it was that simple. They finally went on and all their albums went to number one. I mean, it was like, just like that, everybody bought their album. So this is a similar thing. It's just reversed. It's the older people who will think about buying it just because it's 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. And ETFs to me are bridges.

32:34They're bridges from any world and they're convenient. So 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. Like that shouldn't sell, but one of them has over a billion dollars. You make something just an inch more convenient and people will buy, everybody's lazy. So 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.

33:10So this is what that means. It puts Bitcoin into the preferred vehicle and as Michael Saylor called it, the plumbing of the traditional finance world. And that is powerful. And 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 interesting. ETFs are 30 years old, but they're both kind of 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.

33:45And so it's not just that it's a vehicle you can get anywhere because you can get mutual funds anywhere. Mutual funds are kind of dying. That's why I kind of 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. So 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 sort of antithetical to, I don't know, an ETF, or at least it seems that way to me. How do you think the advent of the spot Bitcoin ETFs affects Bitcoin's identity?

34:21That's a really good question. I've been thinking about this because when the filings first came, especially BlackRock, I'd see my comments, like 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 over Bitcoin over to Larry Fink? So 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 Kathy Wood and a senator from Wyoming.

34:59And 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. So 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 had the same kind of politicians from both sides. Generally, a lot of things are run the same way.

35:37But Bernie was like, I want to upend everything. And Bitcoin's a little got that vibe, right? It's outside of the whole system. It's not like messing it up from the inside. It's like outside. whereas you would say the current politicians are like let's make incremental changes from the inside and so to me going into black rock 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 you know have a chance of being a currency because a currency i don't think can be that volatile so 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.

36:13So 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 was like, he's being asked by Andrew Ross Serkin, like, what's the pitch here? What's good? He's like, you know, if you don't trust your government, I was like, wow, this is crazy. So this is going to take us a couple years. And I think we're gonna look back and go, how wild was that? Like, those moments were like the early days of this whole thing. And then the same day, you see a clip of Jamie Dimon 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 ETS probably make up one to 2 % of all ETF assets eventually, which is pretty good.

36:53We're talking 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. And there's two worlds colliding, TradFi, DeFi, but also culturally, There's a culture collide and a generational collide. And I feel as a Gen Xer, I'm generationally in between all of those worlds. And so 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 like a little boomer, more boomer. He's a little more crypto-ish. But the two of us together could go in between the worlds.

37:31And it's really interesting. And one of the things that I thought about the crypto world I liked so much was the people and the memeing and the sense of humor. And I really think that TradFi culturally could benefit a little from this world. And obviously, there's certainly things you could benefit from 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. So who do you think is the biggest benefactor of this collision as you describe it?

38:04Well, if you own Bitcoin, you're probably one benefactor, right? Because an ETF is a portal and 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. So that's a good opportunity for them. So I think the issuers would win for sure.

38:39The 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. So the good news is compared to what FTX was doing, they had patches on baseball umpires and places they shouldn't even be. There was like the NBA stadiums were being completely bought off by the crypto. And I was like, that's weird. You won't see that kind of like insane intermediary gouging. The ETF industry is clean and it's lean. So yes, these issuers make some money, but they're going to make a lot less than the SBF types who lost their minds and charged a ton as the middle people.

39:19These 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. But so 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, ETF trades at a one basis point spread. And 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.

39:57I thought it'd be 50 right now, but that's amazing. And the ones on the market that we knew about in Canada, they're all over a percent. Biddo here was 95 basis points. GBTC was two. So now you have a better version for four times cheaper. It's good. So 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. You mentioned the Wen Moon people. Can you talk more about how the price impact of spot ETF starting to trade compared to the predictions from the crypto community or some parts of the community?

40:36Yeah. 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 when the Cointelegraph intern said BlackRock's approved and that turned out to be a lie and it went up 5%. It never went back down. So you 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 rumor and sell the news. So 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.

41:09I'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. So I don't know where assets will be. It depends on where Bitcoin is. But flows, there's been, we'll say 1.5 billion net and then total 7 billion into the newborn nine. So I'll just go with the 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 of the micro strategy in like three days.

41:47Everything's relative. The sign behind me is my book, Bogle Effect. That's about Vanguard. Vanguard takes in$15 billion every couple of weeks. So 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. So where will Bitcoin's price be? I don't know. Because Bitcoin ETFs right now only own, even with GBTC, own 3 % or 4 % of all of Bitcoin.

42:27But 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. So they're right around where they are 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.

43:02It 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 so i don't really see any point where the etfs are like the tail wagging the dog of price and i had to argue with a lot of the wind 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 i said they're gonna improve in fact i had it right they're like but why is the price down I'm like, dude, ETFs were net buyers. They're$1.5 billion net buyers.

43:41It would have been worse without them. So 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. And so that said, let's say they contributed$7 billion. The price could still go down. I'm telling you, we've seen this in the stocks. And they could also see outflows as the price goes up. There was a two or three days already where they had a negative daily. The newborn nine token less than GBTC lost and the Bitcoin went up just because GBTC's price was going down. So it seems 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.

44:22So that's why I think the market, there's just so many player types. I couldn't begin to predict the exact amount the ETS will dictate that. You mentioned Vanguard. What do you think of Vanguard's decision to not allow the spot Bitcoin ETFs on their platform? 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. 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.

44:56It's green, yellow, red. and green is the equivalent of G or PG movie. Every Vanguard ETF is green, okay? A lot of issuers have yellow, like even BlackRock has some yellow, but like Vanguard and Schwab are the only pure rated G issuers. And so it's not a shocker. Now, they do allow gold to trade on their platform. So I did call them about this because like, well, gold's a commodity. And they said, well, Bitcoin has no use case. That's when they wrote that thing. And it was really a little bit of a middle finger to Bitcoin. Now, whether they're playing some offense to signal to older people, If you think this is all bull, come to us because we hate this too.

45:31Maybe. 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 the right decision. I don't like the nanny state aspect of it, but it is on brand. And somebody said, oh, this is their Bud Light moment. And 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.

46:07Like remember Two Live Crew? It was not a good record. But because it was banned in Walmart and other big stores, it like went to number one because all kids my age were like, I have to hear what's on this thing. And so I think that being banned by Vanguard actually, it kept the press cycle going. And it made it a little like rebellious. So 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. You mentioned your book on Vanguard and on Bogle. What do you think Bogle would think of Vanguard's decision to exclude Bitcoin?

46:41Oh, he'd love it. He was asked about Bitcoin two years before he died. He said, avoid it like the plague. But remember, then he riffed right into commodities. It wasn't personal. He said, with a commodity, it's just with someone else to pay for it. With stocks and bonds, you get dividends, cash flow. there's more than just the price. There's actual cashflow being sent back to you from all the value getting created by a company. He was like, you know, you're investing in a company and a bond is IOU. So you get a coupon. So he just didn't like the concept of commodity. Buffett was a little like that too, but he's not everybody.

47:11A lot of people like the idea that you can have different things in your portfolio. I wrote a book on him and 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 like the leader in international funds. So he would crap over all kinds of stuff Vanguard offered. So join the club. I mean, he was savage towards everybody. He hated ETFs. So 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.

47:47Everything else 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. And so I acknowledge all that in my book. But honestly, what would have made his head blow off more is the GameStop. So this would have been less bad than that. That he really would have, his head would have exploded, I think. Yeah, that's funny. How do you think we'll see financial advisors use spot Bitcoin ETFs and client portfolios? Yeah, so 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 got a favor and you go, oh, I need to go to a new one.

48:30And you'd constantly kind of 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. So 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.

49:07I 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 like the 60-40, again, you are expecting 7-8 % a year annually. There's just not that much to talk about and you got to wait a long time. So I think Bitcoin is perfect to compliment Vanguard. So even though Bogle would have hated this and he wrote a whole book about how Cathie Wood type funds are awful. They'd 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.

49:42Because the more the core gets boring, the more people want some stuff to have fun with on the top and they won't sell it. Because if they have all the serious shit covered in the core, there's no pressure. So 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. So to me, this is the perfect way to do it. And 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 behavioral service to you. So I'm a fan of hot sauce. It's viable.

50:18The 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 a lower sharp 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 kathy this i'm like kathy 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 and i'm like no one is going to agree with that because they're not going to put their kids education on your fund so i actually tell her just be like hey look we have 99 99 % active share to the index, use us to compliment your other thing.

50:58Just in case we're right, some of these stocks could go ahead, 10 baggers. That's how I think it's going to be seen. And if people are smart, pitched. And the reason that's smart is that Advisor probably can't get fired. One or 2%, even if it all goes to shit, it's again, you still have that nice core. So 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. And I'm like, wait, you're all incorrect. Like it's your whole savings. And like, yeah, I'm like, then I'll try to explain why stock and bonds make sense, but I don't know if I'm having any difference.

51:28That's why I'd say I go between the two worlds, but I see it as a one to 2 % like Tabasco sauce. Tabasco, Bitcoin as Tabasco. Love it. Lots of great insights, Eric. Thanks a lot. This has been a really fantastic conversation. Yeah, thank you for having me. Yeah, great. Thanks, Eric. Great to finally meet you. Likewise.

51:51You