177. Crypto Special: XRP Gets Clarity

To download this e-book , you can click the link in the episode notes or go to wiser investorcom and you'll find it at the bottom of the page . Now on to today's episode .

Doing good , so we had a lot of downloads in our last podcast with you talking about securing your digital life .

You can even use it in your house if you want to , but it's typically intended for spaces that you would consider untrusted and allow you to have a more private connection to the internet .

It keeps you from being a target of attacks and also I guess the other side of it is it helps the current internet service provider , in that case , not to have analytics on you . So what kind of sites you're visiting and all that ? Kind of stuff , yeah , so anyways , we missed that . It's an important piece .

But yeah , I think the big thing is you got to just stay off of , you got to stay off of public Wi-Fi as much as possible . You can't really trust it .

On the crypto edition , there's been a lot of talk over the last probably two years at this point , but certainly the last six months about a Bitcoin spot ETF . We have a futures ETF , we have a futures leverage ETF , but we don't have a spot ETF and to me it feels like it's getting closer .

You're having traditional treadfy players come in and be the sponsors for these ETFs , versus before , it was more crypto focused companies . So you're certainly seeing a shift in that narrative , and not just narrative , but just like that perspective . And does the SEC approve it ? I don't know .

But the last thing on our notes I guess we can jump back to what is an ETF . But BlackRock , the world's largest asset manager , has submitted an ETF .

The SEC asked for revisions we talked about this in our last podcast and then they came back on July the 13th and asked BlackRock , as we said , that they acknowledged that it was received and it started a 20-winded period for comment periods with the SEC . So let's jump back to what an ETF is and how it's structured and how it works , yeah .

So it used to be that ETF meant that you were buying the first ETF , SPY , which is reflection of the S&P 500 .

That was created , I believe , in 1991 , with the intention that active managers didn't know where to put money , so they just wanted to create this security that they could park it in the S&P 500 so they wouldn't miss out on average returns until they have found other investments .

And then it kind of built from there where there's futures on SPY , there's options contracts on SPY . So it started to look more like a real security . Absolutely . Well , it is a real security , but trade a stock at that point . So the benefit ? Well , fast forward to today . The ETFs do not mean passive investing . There's very active ETFs .

There's ETFs that don't actually own anything . Those are called ETN , 16-traded notes , which are less popular here in the US , very popular over in Europe . I've always thought they should call them ETPs for exchange-traded products . That's what they do in Europe .

So the big thing is do you own the underlying asset ? So if the ETF went out of business , do you get it ? Now there's been a few ETFs that have liquidated over the lifespan of ETFs , and it's been very orderly , nothing chaotic about it . But otherwise , theoretically , if an ETF went out of business , you would get delivered the securities .

So if SPY got shut down , then you'd get 500 stocks delivered to your brokerage account right . Right , and hopefully you had a broker that trades for free , right ? If usually what happens is ETFs are really good at price setting .

So , for instance , during the financial crisis , you had a bond market kind of seized up in September of I think that was September of 2008 . And when that happened , etfs kept trading with plenty of liquidity and so people said , oh , etfs are broken . See , the price is way off where the bonds are .

But the problem is the bonds weren't trading , but the ETFs could be traded . So and this is still a great debate if you went to an ETF conference , but bottom line is people were able to trade the ETFs where they couldn't really move bonds for almost 30 days . So in the end , etfs are a pricing mechanism because the market can easily trade them .

So typically , how an ETF gets structured is you're going to have a sponsor or an issuer . So , for example , spy is owned by State Street , so State Street is the sponsor of that . And then they're going to work with an AP authorized participant . So that could be like a night or somebody on the trading forum that's really buying up the shares of stocks .

So they're creating these shares , so they're going to go out and buy the S&P 500 and they're going to wrap it up to one share of SPY and so in the end there can be some arbitrage on that . So it could be that the basket's worth more than the share or vice versa , so you can track the net asset value of an ETF .

So when you go to a place to trade and we had to do this now there's so much liquidity and we stick to at our firm we stick to the bigger firms , the bigger names , because we know that they have the volume and we don't have to worry too much about that .

Or we're moving so much in volume that we don't really don't even have to go through the exchange . We just go directly to the AP through our custodian Right and typically that's 25,000 or 50,000 shares , depending on what the issuer states is Like a minimum Right .

So what you want to do , or how this all gets set up , is that creation redemption process that the AP is doing . In my world it shields a lot of tax liability .

So if you own a mutual fund , mutual funds give you that capital gains at the end of the year and you have to pay income tax on it and , like in 2022 , a lot of people had to pay capital gains tax on money they didn't even actually make , so it's really bad in most cases . So ETFs typically won't pass through capital gains .

Unless you're in really really extreme circumstances , yeah , and actively manage ETFs , there's a chance that you're going to get it um a capital gains bill . But if you're traditional large , mid , S and P , 500 type type ETFs , they're not supposed to be doing that .

And if they did , initially , like in SA the early 2000s or the late 2000s , oh , let's see 2004 . So after the financial crisis so 2010 to 2012 , there were funds that passed through capital gains and and people left like the funds shut down because it was because it was broken , is that point ?

, I think they just maybe they did it through shares , mutual funds as the backend . I'm

not quite sure . Um , but the , the the benefit of ETF is it trades on an exchange like a stock , so a mutual fund , you sell it , , at 5pm . It clears based on the net asset value , or the ETF is a constant value during trading hours . So you can sell it and buy it .

You can trade it , yeah , actively trade it , yeah , yeah , which is not what we do , right , but but , but liquidity is the , liquidity is nice , , inside the ETF , , and then you know you think about , you know people get , you think about bonds . So bonds are inside ETFs , but they , but it trades like inequity .

But you know , like an SPY which is the S&P 500 , it's paying a dividend but it holds it in cash before it sends it back , sends it to you at the end of the quarter , where , like an IVV which is owned by BlackRock , or a VOO which is owned by Vanguard , they actually reinvest it back into the index before they send it to you .

Well , markets are typically usually up , so there's a little bit of a cash drag on SPY . This is getting to nitty gritty , where IVV and VOO typically would have a slightly higher rate of return because , it gets reinvested . But , but , in terms of of , like expenses , etfs uh typically have much lower fees .

, and then the , obviously the , the structure of ETF promotes , for the most part , transparency .

This is not as true as it used to be , because there are active , more active ETFs out there that don't disclose their holdings , but in the true sense of an ETF that represents a index , you , you have daily transparency , or at least you know , monthly transparency and some of the more active ones , gotcha .

So I think , going back to a single stock world , you're going back to a single stock world , but you , you know , at the Schwab conference right now , I think we'd be doing that at our firm , but it's more expensive than holding the ETF and we don't have any biases , like we're not trying to build ESG portfolios or anything like that , so we'd just be buying

traditional index . So you have to beat three basis points . That's what it comes down to is we're paying 0.03% for the S&P 500 . How can it get cheaper than that ?

Now , for a lot of our wealthy clients with large brokerage accounts , there's tax loss harvesting opportunities , which we do that with ETFs now , but you can even do it at a security level going forward , and so custom indexing is basically we have the formula for the S&P 500 and we're going to build it and hold the 500 companies ourselves , or a replication of

that . And then if we have , let's say , we have an Apple executive who comes in to the firm and they have a large concentration of one stock , then we can we can , yes , and we can build around it .

And then we can tax loss , harvest real time , all you know through the investment process and then try to sell off some of the Apple at a gain , selling off something else at a loss . But the , I think the ETF itself is , is , serves clients very well . For us , is is enabled us to scale . Oh , absolutely 20 years ago .

There's no way we could have had the number of clients that we have and our mandate you know I call it the heart of the firm is to help everybody , right ? So someone comes in with $100,000 or $500,000 . Most people can't help .

Would most advisory , most high-end firms you know Edward Jones is going to take you and charge you commission and all that but most high-end firms , those are well below the minimums . But we're able to still do that because we can scale these ETF models , so from that standpoint , it worked really well . Also , etfs allow individual stock pickers .

If there's any of those left , uh , to say , oh man , I really need to get access to airlines , so they they don't know which stock to pick , necessarily , but they can just buy the sector , exactly . So that was that was really good for for ETFs and but in terms of what we're talking about today for , for crypto , specifically Bitcoin I mean .

And then now I'm stepping out of my realm and back into your realm , but I think there's so much interest in Bitcoin .

So I just wonder if , if an ETF is approved , because the BlackRock ETF you know the whole thing has been there's no regulation , you could have lots of theft , you know , but the BlackRock is is going to be custody it coinbase correct and that was part of the revisions that the five or six different Applicants came back with , because at first they didn't have

who was going to be their custodian or where the trading was going to happen , right .

In coinbase the stock was up like 35% , right , I mean it would be a big deal for coinbase and and honestly , they're almost like the de facto , like only answer right now if you want to use a US based company , Correct so I mean you have bit go which does custody , but there's no , like they don't have an exchange For better , for worse .

Right now , coinbase has got all the different pieces they have the custodian piece , they have the exchange piece and , right you know , a broker-dealer license which they don't use .

Yeah right , and this I'm having to go back and deep into my memory , but I was there front and center for it , but I remember that how they structured the oil ETF , it was never , but like $150 bear oil was just something that , no , they ever fathomed , and so it broke . Okay , it didn't work . And so I think about Bitcoin .

Now that oil , is it that'd be future contracts to right , you don't actually own a bear of oil .

been alleviated . I mean , there's there's if there's enough for futures contract or if futures Product . There's got to be one for spot . Yeah there's definitely been a huge evolution in just Bitcoin liquidity and all these different exchanges , so , like the idea that it's they would be going through coinbase . Coinbase is so big right in the grand scheme .

I think that the idea that somebody can manipulate it would take a lot of money , and maybe there's enough money Sitting in brokerage accounts waiting to buy a spot , right ?

We have insider trading rules , things we have to follow and always kind of laugh at that and I I think insider trading rules are very good , yeah , but how it applies to me and my firm is one of our largest holdings , the S&P 500 , I think my gosh if I took the entire firm and all my friends firms Right , there's no way we could ever manipulate it right

and ETF of the S&P 500 like it wouldn't happen . You'd have to be like the day before Thanksgiving on , that short trading day ends at one o'clock .

this is Kind of not the point . I think that at some point you know what the SEC part of their claim is they're trying to keep crypto away from the current financial system because of the risk of it . Right , you know that that's a difference of opinion there and what where the risk lies .

I think that you know you have to understand just the scale difference here . Like the total crypto market cap is probably like 1.3 trillion dollars .

So Bitcoin's market cap is 580 Billion right now and the total crypto market cap is 1.2 billion trillion . So just under half . So it's probably , you know , 45% yeah . You know , a spot Bitcoin ETF , I mean 578 billion dollars , is not much in the grand financial system , true ?

So it's gonna affect the supply demand of Bitcoin , yes , and so , in theory , if you think people are just chomping at the bit to buy the ETF , that so that well , I think .

It's not a trade that I will be doing , but it's you know . You also wonder like , okay , how many people are on the sidelines that have had Bitcoin for a long time ? They're waiting for this moment , for this quote-unquote spike . I the first day it's gonna be volatile , there's no doubt about it .

The first month is probably volatile , I think over time it kind of gets back to more of a crypto type Volatility , a scale , even though that is quite volatile . I think when this launches is gonna be extremely volatile . But what ?

Yes , I was still stand by that but , the point the point is is that I still have to get over the hurdle of the fact that this isn't investment , is not regulated , it could be heavily manipulated Mm-hmm right and and could be stolen , and if Coinbase goes out of business , Coinbase is not a trust company , so you would be in line with creditors , correct ?

Yeah means black rock would be in line with creditors . I just assumed at that point black rock just buys Coinbase , probably right that you . Potentially it's a small enough number for them to Make that problem go away you know I .

Like Coinbase , custody is a well-regarded custody solution , Like it's already being used by many institutional players to store stuff .

But like it's the you're right it's , it's unregulated , it's murky , it's and I don't use murky in the negative sense that like it's sketchy , it's just purely it's confusing , right , and I think that , honestly , it's been made more confusing over the last year by the SEC's actions .

It was some of these lawsuits they've made , in particular over the last three months with them when they're suing Coinbase . But it's , I don't . We're just an interesting time in crypto . Like I Don't think that there's so much demand out there for Bitcoin where it doubles when this ETF assuming an ETF gets approved .

But we know that there's the Gray scale Bitcoin trust , gbd , gbtc right out there that would get converted . They've applied for an application for an ETF as well that would be converted from a trust into a true ETF . So I , you know , it feels like we're much closer , like if anybody's gonna get one approved . It feels like BlackRock as much as I don't .

I'm not excited about that , like all these other players been asking to do it for years .

Right , and then BlackRock comes along is like hey , I got this great idea and you know , BlackRock probably knows their timing well and they definitely have they have some connections , you know I think we even mentioned this in last podcast like their record of getting ETFs approved is absurdly high , like it's like 570 to 1 .

I don't imagine this is gonna be number 2 , just I'll take those odds . Yeah so well .

So that means you run a risk , a less risk of it being a Decommissioned because of right , but it's not a legitimate but not to kind of jump on a negative bandwagon here but you had you will use the example of you know coinbase went public in spring of I think it was May or April 2021 . Yeah , the SEC approved the rest one .

The SEC is now suing Coinbase for doing exactly what they had in the rest one , for saying it's illegal security . So it's like one of those can be true , not both . Yeah , well , not just yeah it's not just . SEC .

Yeah , it's the , yeah , it's weird . So liquidity risk I , just that's the thing I would want to watch really closely is . Can , can the volume , mm-hmm . You know , is there a ? Is there a chance that that Bitcoin , for that , that Bitcoin freezes up , that it can't get moved because all the buys and sells and transactions ?

But yeah so voluntarily will certainly Be magnified with obviously low liquidity .

Yeah , right , and yeah I , that's . You know , in the end , people don't have a whole lot of patience when it comes to investing something we have to learn so it's , I think it's gonna be definitely be an ETF that you you park your money in there and then maybe you take the earnings as it as it outgrows your allocation percentage .

But it's not something that that you should be thinking . I'm gonna , I'm gonna , I'm gonna be the next , you know , bitcoin billionaire . Yeah , I think that .

One thing that I um that didn't end up in the notes that's coming to mind now is you know Bitcoin's use , its power consumption .

There's been a lot of talk the last two years about how it's using , using green energy , and you know around the world , different places and I think that that's certainly been a narrative and it's true in many cases but how it's been pushed by Bitcoin maximalist , you know , does the ?

Does governments around the world decide to attack Bitcoin because it quote unquote doesn't fit the clean green agenda ? But I thought that had been mostly cleaned up .

Anyway , I say I say at this point , if black rock is , is rolling this out , that Larry fink has Plenty of friends in the white house , that well , that , and , and , and they're in this you know as an aside , and it's the ESG by black rock is fully dead at this point because , as I've read this morning , that they appointed the CEO of a Ramaco to their

black rock board . So like you can't be part of ESG , and and the unborn black rock board Can't be part of ESG , and and the unborn , with all that oil .

I've seen it so many times . That's the benefit of doing something for 23 years . Yeah , as you start seeing patterns , right , and you look back and you go , man , I remember when everybody had to have low volatility ETFs which became more volatile than the actual market . Right , nothing , nothing beats the S&P 500 , even the ESG rating .

S&p 500 is the highest rated ESG ETF . But yet blockrock comes up with a whole line of Essentially has the same stocks in it higher fee products For 56 million dollars more in revenue for just one ETF , because they charge Five or three , no , five times , five times the S&P 500 . But nobody talks about that . Nobody talks about that .

And then it's the point where I think , am I crazy ? My little one is crazy , right ? I'm just looking at the data in front of me and this is very obvious . But anyway , this is not an ESG topic Podcasts . We're gonna get back to crypto . We'll talk about some news .

soon to be . You can buy I forget which Swiss Frank I guess . I didn't . Don't remember the detail , but it's . I want to let you know if I buy it Does anybody know about it ? I . You know that is funny , I didn't like , is it a privacy based blockchain ?

You know , face-to-face hearing , you know where there's lawyers and judges or judge , and the judge asked the SEC specifically If the SEC really wants the court to believe that the SEC Approved the S1 for Coinbase to go public but now claims that the business is not legal . Judd seems to be quite skeptical of this .

Yeah , so this was not something that was live streamed , or anything like that . This was like a court reporting the kind of red , and there were some articles from it . It's just really fascinating to see , so early on , a judge being skeptical of the SEC's actions in this case .

And , you know , at the end of the day it's , I'd imagine , this case moves along much quicker Because of the next thing we're about to talk about , because there was a , you know , in the ripple versus SEC case .

We've been talking about this for , I know , as long as we've been doing this podcast , because that that lawsuit the SEC in ripple case was started in in December of 2020 and , just as of this , last Thursday , july the 13th , there was summary judgment came down from Judge Torres .

We've been waiting on this for Since , I believe , may , maybe even April , and it was a quite wide-ranging Opinion and just kind of the way that she talked about many things ripple lost be very clear like they didn't win all the points . I never really thought that it was gonna be a Grand slam win . You know the SEC lost everything .

They seem to kind of get right down the middle . It did it , you know . The lawyers seem to refer to this as splitting the baby . So it did seem like that . Ripple lost on In XRP .

They sold directly to institutional investors in the early days that that they actually signed contracts around , not necessarily to appreciate the price of XRP but just the work that they were going to do together . So they lost that . That was to the tune of 720 million dollars for the sales .

So you know of the Call it 1.3 billion that the SEC was claiming initially . So ripple likely will pay a fine here's my guess and move on like this . You know they lost , they can . Well , you know how that shakes out . I guess time will tell . The next piece is Programmatic sales of XRP that ripple made . The exchanges are not secure . This was a big win .

So this is basically saying that when ripple was selling XRP on an exchange the buyer on the other side had no idea it was ripple . It could have been , you could be , me could be ripple . So it was a blind transaction so that there was no expectation of profit or from ripples interest to kind of further promote XRP . So that was a big win .

She did not adopt that . Investment contracts require a contract . That was part of ripples . You know requests for summary judgment . So that was interesting . They also lost in the fair notice defense . It was me that has to preceded trial .

So , and and I know she means she does not allow the fair notice defense to move to trial , which I don't think was ever intended my , my understanding was never intended for this particular thing .

If it ever got it appealed , appealed , appealed up to the Supreme Court , that's where the fair notice defense comes in and that's where I think the consensus is that ripple would have a a A , a , a good judgment in their favor right with the supreme court in its current form Instructure In in .

Lastly , the big thing that was , you know , as an average XRP holder retail she she did not directly address secondary market sales , but in her words , most of the XRP out in the world are not securities . So , you know , if we sell it to each other , there's no like Contract .

I mean , I guess we could write one if we were doing a hand-to-hand transaction , but truly , through an exchange it's all blind . So the idea that XRP is not fungible . There's no way to tell the difference between two different XRP . So inherently not a security .

There's no way to be able to say this one is worth more than the other because I'm doing something with it , right . So at the end of the day , it was . You know that her ruling came out around um around 11 am Eastern on Thursday and you know , obviously the price shut up because it's great news .

Yeah , it went from , I think , 36 , 37 cents up to 80 cents and it's kind of been plateaued around . You know , low 70s , like it's around 76 cents this morning .

You know , I've often used , when talking to potential investors for my fund , like trying to help them understand They've heard of people becoming crypto millionaires and like they feel like they , they have missed that opportunity . And the analogy I use with them is you know , we is a baseball analogy .

So we are just at the time I was on and we're singing an ash land them right now . We haven't even really started playing the game Right , yeah , you're likely not to buy bitcoin and have a million percent return . I think that's off the table at this point .

But there's other assets that are going to be solving real problems with utility , that are going to , in theory , have great appreciation . So to update my analogy now , I'm saying the ref almost to me , the judge on thursday said play ball right like you know , bitcoin has got clarity . It is a commodity .

As of Thursday , the , the current law on the land let's me , yeah , the law in the us Is the xrp is not a security . It is the only other one besides bitcoin that has clarity . The therian was an opinion of a private , a prior sec administration . Yeah , the sec today won't even recognize that opinion .

So it would be interesting to kind of see my hope is , and it seems to be heading this way that congress is going to start Moving on like actually getting some legislation in place , because this is not fair .

I mean , like , as much as I would like to have an unlevel playing field because I own some xrp Like it really should be , that we should have a framework . Everyone knows what rules we're paying playing and you don't have to spend 200 million dollars fighting the sec to get clarity , because most people can't afford that , right ?

So do you think ripple goes public now ? , I think that you know , brad garlinghouse's ceo's asked that question on friday . I was listening to a twitter space . He was in and he kind of and I would say he walked it back , but he softened his aggressiveness with that . I think that ripple in some sense . Yes , they will go public .

He talked about how they're helping get employees and early investors liquidity . I my guess is that they don't need the cash to go public . T hey don't need the headache . So for the time being , they're just going to kind of cruise along and make the money that they're making , right ? So you know , are they public in the next two years ?

Probably , but I don't think they're like filing the rest one . Ironically , the the case is not over , so like there's some stuff that has to go to settlement and or has to be ruled on further , but for the retail investor , the case is functioning over so we'll show back up on queen base . It already has .

Oh , wow , okay , coinbase and kraken and you know three or four others . It's either said , is coming or already is in place

.

You know , you know in the South here when you see a church on one corner and then like there's a church on the other corner next day because they had some kind of break . Right , that's exactly what happens is they called a fork in crypto . They some likely some disagreement in the community and they wanted to prove upon it .

Some of them didn't want to change the current system . So you know there's two different theorems . There's a theorem , there's a theorem classic .

I mean David Schwartz , he's one of the initial developers of the XRP ledger and helped launch it . He has said that when he had worked on Bitcoin early in the day and he started seeing the problems that he thought it would run into , that's why they wanted to build a better Bitcoin . That's , you know .

Maybe that's you know , a cleaning up a history there , right , but it seems true , right , like you know , there's a path where that you could kind of connect the dots there . You know , at the end of the day , I think that a lot of there's . I mean there's tons of cryptos out there . A lot of them run on similar networks .

Like there's a you know Ethereum , but there's like thousands of tokens that run on Ethereum . So once you boil it down , there's probably of consequence , there's probably less than a dozen different networks , xrp being one , ethereum being one and some others .

Xrp communities is happy right now , Like been vindicated of sorts , but you know how it shakes out a couple of years from now . We just need laws in place so we can all Play by the symbols . So , based on if we're starting to play ball .

It is now the fourth biggest one by market cap , and the only thing that's third is tether . The USDT is stablecoin , so it is functionally , you know my suggestion is if you're going to buy three by the top three . That's not a stablecoin .

You know , there's been a long rumor in the XRP community and it's kind of been validated , but nothing like oh my gosh , it's on Ripple's website that Bank of America is a customer . That's a big freaking deal .

What I've been thinking about the last you know since last Thursday is , if Bitcoin spot ETF gets approved , how soon after can an XRP one , since it's got clarity , like , yeah , that's true , okay , so you're likely not to get into Ethereum one , because the SEC just won't agree to that .

And then so you have that and also , like it's just , you know , at what point does XRP flip and become the second biggest ? Can it get become the first absolute biggest ? Like that's a much bigger reach . That's a goodness . It's got over 10 X to get past Bitcoin at this point .

But , um , but to do to do that to Ethereum , it only has to go up like four X .

I think we're moving to a world where you have different pockets around the world doing it , you got the bricks , you got the dollar maybe , but I think crypto is going to be the one that ties all that together , because we seem to be heading down a path of less agreement than more agreement around the world .

I can't just write a letter and put it in the mail , right ?

. To me , this crypto confusion period that we're in right now seems very similar to the confusion period of why we need the internet . We don't fully understand what all the problems crypto is going to solve .

We didn't fully understand what the internet was going to do back then , right and like , if you view them as waves , obviously the internet and technology wave that came along was gigantic . A lot of wealth was created . I feel like the same thing is going to be happening with crypto over the next couple decades .