What's a Crypto ETF, Anyway?

And what does it mean that many of the products pitched as ways to diversify your crypto portfolio are performing pretty similarly to each other. In the studio today, to tackle these questions, we have Bloomberg Report to Katie Kreifeld Money. Actually look under the hood and see these are all holding what the same toolve come beanies, They're all trading in the exact same direction. Casey, welcome back. Thanks for having me tell our folks who you are and what

you do. I'm Katie Greifeld. I cover markets and exchange traded funds at Bloomberg. That seems busy. It is busy. There's a lot of markets. I also really like crypto so I try to do as much of it as I can. And then you have this whole thing about e t F s. Yes, so e t F s they're exchanged treated funds. It's a basket of securities that basically you can trade intra day like a stock, similar to a stock. You can buy them and sell them on your brokerage platforms. But it's actually again an entire

portfolio of companies. So what's an example in crypto of a kind of a popular e t F. And why are folks, you know, if if I'm interested in getting exposure to crypto, why wouldn't I just buy bitcoin? It's a great question. The most popular e t F and crypto is actually not in e t F, but it would love to be. We're talking about the Gray Skill Bitcoin Trust. You can buy and sell it intra day. It holds physically back to bitcoin, but it's a trust.

It's not an e t F. You do have crypto e t F physically back to crypto et F that actually hold bitcoin and other coins in Canada, in Europe, but the U s SEC has not allowed that structure. In the United States, the SEC rejected Gray Scales application to convert it's thirteen billion dollar bitcoin trust and to physically back to e t F. And within the hour the digital asset manager announced it would suit the regulator.

And if anybody is interested in catching up on why that is, we have multiple episodes that you can you can check out a ton of reporting from from Katie. But okay, so you know there's these crypto ecfs, they exist. What problem do they solve for investors compared to holding the actual spot bitcoin or anything else. Well, if you're a retail trader, you might not want to set up a digital wallet, for example, the concept of oh my gosh, I could lose my password or my keys and just

never have access again, that's real. Maybe you don't want to use coin base. You've heard a lot about the fees for example, or something similar. And if you're a professional trader, professional money manager, and institutional trader, it might not be in your mandate. You might not be allowed to actually physically hold. So somebody in a compliance department is like, nope, yes, yes, But then you can say, oh, but this is in e t F. This is fine, this is under the oversight of the SEC. What kinds

of stuff exists in E t F? S when it comes to crypto. So because the US has this regulatory structure that isn't like Europe, that isn't like Canada, and you can't actually hold bitcoin in an e t F in the US, you've seen this weird sort of frank and fund industry pop up. You have a lot of crypto ish e t F their equity e t F that exists in the U s and they truck companies that are related to crypto somehow, think MicroStrategy, which owns

a lot of bitcoin but isn't actually bitcoin. And then you have a bunch of miners for example, and I mean e t F issuers. The saying in e t S is that there's an e t F for everything, but there actually isn't an e t F for crypto.

But issuers are trying. They've launched e t f s that claim to track everything from the metavers to miners to n f t s, but if you look under the hood, they actually all just hold the same sort of companies as Asset manager pro Shares is poised to launch the first bitcoin futures e t F battle trade under the symbol b I t O. It'll investor people are like Yeah, prices canna only go up from here. What's the kind of stuff that's in that e t F?

So bits, so I'm gonna go with bid. Oh. So that is a bitcoin futures e t F, and that is a very important sticking point for both the e t F and the crypto industry because futures are not the actual underlying assets. Well, you're almost guaranteed to find your self trading at another level than the spot price right after a few weeks, months, certainly after a year, there is some tracking error there, it hasn't been as

dramatic as maybe feared. And then if you think about the crypto ish e t F is one of the biggest out there is the amplified Transford Transformational data sharing e t F to tickers, b l okay so block block a nod to the blockchain. Again, they all really hold sort of the same thing. You probably look at that you see a meta again not specific to block

but sort of this entire industry. It's probably meta PayPal square, all of the different miners, UH and micro strategy, and if you look at the correlations between these, it's almost perfect. It's basically point nine, which is extremely, extremely high point nine as in one would be literally anything that happens, they all take exactly the same direction. So point nine point nine is very very high, and it's a result

of exactly what you're saying. It's like, Okay, let's say there's twelve things going in E t F everybody's slicing those twelve things in a slightly different way. Um, that doesn't seem like a good set of options for somebody who's trying to look at these as a way to diversify their portfolios. Exactly. You could see a retail trader, for example, who E t f s are very popular with. They provide access to markets that a normal individual trader

might not be able to get access too. So if you're trying to create a portfolio that captures all these different themes within the crypto universe, and you're trying to do that through E t F s, it's pretty much impossible. Again when you actually look under the hood and see these are all holding what the same twelve companies, They're

all trading in the exact same direction. There are so many follow up questions I have, but I will start with the bitter sibling by the I know so same issuer, but is presented as a way to take a position on the market going down. How does that work exactly? So that's another of these bitcoin derivatives tracking funds. This will actually shorts the future. So it's the exact opposite of its sibling bite and it's the first. It was the first to launch, and then e t f s.

The first mover advantage is very very important. Uh, but again it's derivatives, so people don't love it as much as if I actually hold the underlying here. So let's spend a little time on the derivatives themselves. You mentioned earlier about you know, the possibility of tracking errors as it relates to future as ETFs. What does that look like in practice? When somebody say, well, you know this ETF is a tracking errorsospot bitcoin, that makes it less attractive.

Translate that for someone not spending all their time on seeking alpha. So this isn't actually the seeking alpha. That's pretty good. Uh. This isn't just unique to bitcoin futures et This exists in all derivatives based e t f s. Basically, you have a contract, you have exposure. Maybe it's a one month, maybe it's a three month contract. But in any case, no matter what it is, when you get to the end of that the expiration, you have to roll that rolled forward that exposure so that you maintain

it and it doesn't just disappear. And that comes with the cost, and people are thinking that with these bitcoin futures e t F So I remember spending a lot of time on it this time last year was the bitcoin futures curve is very upward sloping, so it's very expensive to roll that. But that's when bitcoin was going straight up, and as we've lived through the past year,

it hasn't been as dramatic as maybe feared up. Next more from Bloomberg's Katie Geifeld on how these crypto ETFs are acting similarly to each of the on what that means for the broader market, for the people who do invest in the futures ETFs as opposed to the ones that hold you know, shares and meta or block Is this a function of like, I'm sophisticated enough to not be scared of derivatives, my compliance department lets me like, what sort of the investor profile that does one versus

the other. I would imagine that for those who invest in the bitcoin futures et F. They want bitcoin. They're not trying to get exposure to the metaverse or n f t s somehow through this kind of tortured portfolio construction. They just want bitcoin. And if you have done that, if that's the route you've taken, you've actually done better. It's a really interesting quirk that actually the crypto equity

ETFs have performed more poorly than Bitcoin itself. I mean, the worst performing et F out there right now, uh, non leveraged is ticker r I g z's Bitcoin mining e t F. It's down almost seventy percent this year, and La Stie checked Bitcoin itself was only down about only fifty five or fifty six. This seems like a bunch of bad options for for folks who were or are trying to get crypto exposure and you know, they

really want to have access to split bitcoin. What are the prospects of you know, that kind of pure pla e t F in in the US in the near future. It feels like it really has dropped off the radar. I mean, if you think back to GBTC, which we talked about at the beginning, Gray Scale is in the process of suing the SEC over the SEC rejecting their application to convert GBTC into a physically backed e t F.

So people are watching the clock on that. That's the process that's expected to take several more months from here, if not a year, and then, I mean you have others who are just waiting for Gary Gensler to no longer be chair at this point. Honestly, it doesn't feel like it's an imminent front and center issue for anyone right now, and it seems like it's pretty much dropped

off the priority list of the SEC. Just as as kind of a closing thought, is this correlation is this point nine like unusually high with it either to each other or you know, to other parts of the market compared to everything that you're seeing in ecfs, As in, if I were a person and I was like coin tossing crypto et F versus like an entertainment focused ECF or something else, like, is it that there's a similar level of underperformance because all the markets are bad? Or

is crypto really an outlier here? It's true, I mean in a down market, which we're living in across asset classes right now, correlations tend to go to one in times of stress. But if you pull up the charts of these correlations, I mean they've been point nine. I think this is close to the high water mark for a lot of these relationships between the crypto equity e T F s. But they always have a very statistic,

statistically high correlation to each other. I mean, when I'm writing, uh, normal story that's not about crypto, for example, and I see a point sick to a point seven correlation, I'm like, Wow, that is so high. I should write about that point nine. I almost yes, what is happening here? Got it all right? Well,

thank you as always for being on the show. I heard, possibly directly, possibly a little bird told me whichever sounds more dramatic, that you're doing something crypto and showy that might be coming up in the not too distant future. Are you allowed to talk about that yet? I don't know if I am, I can talk about it in case I am excellence, and then we can just cut this. If you're not him Stenovic and I uh, he is my co anchor. We're putting together a crypto show for

Bloomberg Quick Take. It's going to be weekly. It's going to be taped where Tim has been calling it a podcast first approach, not to uh try to encroach on your turf, but we want to do deep dive interviews and of course you helped us out with the first few episodes, which is maybe how I know about it. I can't thank you enough. Not a problem. Well, as soon as that is out in the world, I hope you will come back and tell folks where they can

find it. Big time excellent. Thank you. You can find more of Casey's reporting on the Bloomberg Terminal on Bloomberg dot com, on Bloomberg Television, on Bloomberg Quicktick, and on Twitter. She is at k Greifeld. That's kg r E I f E l D. On the next episode of Bloomberg Crypto. If you're listening to this podcast, you probably know who Sam Bankman Freed is. You might even to explain to

somebody else what FTX actually does. But have you heard about Alimator Research and how they're connected to the Bankman Freed Empire. Tune in for all the details. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the i Heart Radio app, Apple Podcasts or wherever you get your podcasts. Send us your comments, questions, or suggestions for the show to crypt so at Bloomberg dot net or find us

on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer is Janet Babin. Our producer is Mohammed Faruk. Associate producer is Moses on m Desto. Wonder At is our engineer. Original music by Leo Sidrin. I'm Stacy Marie Schmall. We'll be back tomorrow