What the Crypto Crash Means for ETFs

kind of thing. But certainly came up. But where I

noticed that the most was on my Twitter feed. I would go to bed, and when you wake up in Australia, say six thirty seven, it's three thirty four pm in the US, so I would get to see a whole day's news flow, And of course there was always one or two new nuggets of like horrendous details about f t X, the crypto exchange that halted redemptions, halted withdrawals and allegedly used customer funds, and Sam Bankman freed who you know, it was the face of crypto he was

supposed to be like this disheveled tech nerd that like you could trust versus say, the Wall Street slick people. And this was a whole image covered on many, many magazines, many TV shows, And for this to be a complete implosion, I think is I can't overstate how brutal it is for Crypto because of how popular he was and how how much media exposure he had. Plus the other thing is having come from investor relations in crisis communications that

were to affirmed there for a couple of years. What you want with bad news is just get it all out quick and let the news flow take something else to Two days later, this comes out drip drip, drip, drip drip every new day. We're on like week three now and there's still new details. This is bad, This could be. I'm not gonna say it's the death blow for Crypto, but it is a devastating punch which I'm

I'm really wanting to talk about this. So we're gonna be joined by James Seifert from bloom We're gonna Telligent and Katie Gryfield from Broomberg News. We spent in the in the good times, we spent a lot of time talking about crypto and bitcoin et F s, and then now we've hit not only a crypto winner, but maybe a crypto nuclear winner is what a lot of people were calling it. So I think it's worth us talking about this again and what it might mean for e

t maybe a crypto coma. And the question is will it wake up this time on Jilliance? What the SBF? Katie James, welcome back to Jillian's. Thanks for having me, Happy to be here. Okay, Katie, it felt like the E t F world was really excited about bitcoin. How does it feel now? I mean, if you think back a year ago, I feel like we were talking about all time highs. We had just gotten the futures Bitcoin et F out the door to your sec here's another application.

Maybe you miss my last one. Yeah, for sure, people are like, okay, this was the last needed step. Now we're going to get a spot pitcoinn e t F. You also had all these crypto ish products launched, just dozens of them, and then worldwide you have all these actual crypto e t p s. You look at where we are now November two, and it's a totally different picture. And we've seen that big pipeline that I just talked about is dried up, and are there hopes for a spot bitcoin e t F at this point it doesn't

feel like it. Well, let me say this before we get to that. I agree, it's things don't look good right now, but James doesn't an e t F fix this. If the spotted Bitcoin e t F had been approved, like we were all saying the SEC should, and you were in this, you probably wouldn't have felt much you

could have. There's no way your funds would have been like frozen, and and the ones that traded seemed to trade find so it seemed like we were actually right by by encouraging the SEC to approve a spot pitcoin e t F. Yeah. I mean, if you had money at ft X or block Fire wherever, jet Genesis that's frozen right now, you would have much preferred to have your money in a bitcoin et F, which you can do it through future ZTF. But that's the that's not

exactly what people want. People want to spot and they went to these other areas and right now they're in trouble.

And if you had an et F that was regulated by the SEC under the thirty three Act, we wouldn't be having as much of a conversation, but no matter what, people would have lost a lot of money because there was a lot of money on this even before we were looking at a spot bitcoin ETF approval worth mentioning that there are those future based products that you you just alluded to, how have they stood up in all

of us? So actually they've done tremendously well. Their bidass spreads have stayed very tight um, the trading has gone through the roof. Biddoh is now the one a very highly traded et F. It's more more traded than GBTC, which didn't seem possible last year, so it's it's traded very well, traded tightly, and honestly, one of the big things we were worried about for potential with bitcoin future et F s is as has been talked about on the show many times, and when you trade futures there's

the potential for backward backwardation and contango. So you you have to sell a contract every month essentially, So if you're selling the contract, and you're selling a contract at one price and you have to buy a contract at a higher price, that constantly eats away at your returns UM and the year and a half leading up to the Bitcoin Futures et F approval, the rolling that front on future contract would have underperformed spot bitcoin itself by

a hundred and eighty percent over a year and a half, which is a lot. So we were worried. We didn't think it would be quite that bad. Futures have become more institutionalized, more efficient, but we were worried that it could be ten twelve percent a year based on what we were seeing in the markets. But what happened in the futures market for bitcoin, everything flattened out. There's bury any curve. At some point there was a tiny bit

of backwardation which actually aids in the performance. So we've only seen over the last year since this thing launched, Like Katie mentioned, it's only underperformed by about one point eight one point nine percent on spot market. And these things charge basis points, so you take out half of that and it's basically tracking within a percentage point of

Spot Bitcoin. The problem is it's down so that one point eight I mean, that's like UM does probably little to uh, I guess sue the people who might have bought it, So working great unless you are invested in there basically, but talk a little bit. Bid Oh one year old. You guys wrote a story about it. You actually wish that a happy birthday on t F. I q it was I share a birthday with Yeah, that's cute. I'm a lot older. But what's your take on biddo

and how it's held up since then? I will say it almost feels like there's this very delicious irony here that the spot Bitcoin e t F, or rather the future is back to eq t F s have performed so well, and I've spoken to a lot of E t F people, some in this room who have said that, you know, this is why we should have a Spot e t F for all the problems or the potential problems that would have been avoided that James went through.

But if you're Gary Gensler, who's one of his underlying problems is the exchanges, he's you know, made a point of that, and we're talking about this fantastic blow up of one of the biggest exchanges, I don't think this moves the needle in a in a good way for the Spot Bitcoin et F crowd um and one of the reasons we said that they should approved a spot Bitcoin e TF is that it would all these market makers who are not dumb. These are highly sophisticated people

with a lot of money at play. They would have knows their way into these exchanges a bit, and it's possible they would have sniffed out some problems with f t X long before and not used it. But even if they even if f t X had a problem, there's multiple exchanges, so they would be able to source liquidity elsewhere. And I think that's the world. The story is an e t F kind of takes away that that risk of one of these exchanges having an implosion in halting redemptions. I will say f t X was

the trading platform in the crypto world. Everyone wanted to use f t X because of the way they did liquidations, because of how efficient the trading was. So there were institutions that were caught up in that. But yeah, like you were mentioning in the in the e t F world, you have the Jaine Streets, the vertu uh Susquehanna, Ken Griff, the Citadel. These people are all in here. They are the biggest money in the world and they are trading.

They make Mark it's more efficient when they trade. That said, they might have been using fd X because there's plenty of institutions that had money on f t X that we now know. They don't know how much money they're going to get back, if any at all, and not small amounts of money, big figures, millions of dollars. Okay, So Eric, what are the odds that the SEC wades

into this and ever ever ever approves a spot bitcoin ETF. So, on one hand, this is devastating to crypto in general, and I don't know if you could say, well, this is probably just prolonged to spot bitcoin e f TF because this proves Gensler sort of worries. On the other hand, this could fast track regulation, and we all know that was the one thing Ginzler needed to satisfy him for approving to spot bitcoin ETF. Then he would feel more comfortable.

So maybe this actually gets it going. Um, And I think the question is, let's just say hypothetically there's regulation. Maybe Biden says to Gensler gets something going, or even says the Congress get some regulations out and Agains is happy they prove us up at twenty t F. Let's just say that all happens in a year. Probably not, but let's just say it does. Will advisors ever come back. I know they trust the E t F and they would certainly be like, this is probably gonna be better

for me than an exchange. But is crypto so um I guess mutilated and the reputation so bad in the toilet that doesn't even matter anymore. Yeah, I would say Eric and I were on the record we thought was a realistic opportunity. This was granted over a year ago when we first started saying that. I still think isn't

off the table for the reasons Eric mentioned. My over under was basically September two, end of Q three um I part of that was that I thought there was tail risk or tail potential for like some sort of big regulation to come in and US get like an earlier approval than we expected, maybe like Q one or Q two of this year, based on like some regulatory guidelines.

There was a lot of movement in Congress. Ironically, f t X was trying to change the way things were happening, which would have made their markets regulated by the CFTC, which could have satisfied it. Obviously that's not happening. So I think all those tail risk events of potentially having an early UM move move towards regulation, getting more regulatory clarity are gone. So I don't know that the September is going to happen anymore, but I don't think it's

completely gone. As Eric mentioned, this could bring more regulation, more demand for Congress to step in and do something here. But what about the ultimate question here, which is will would investors come back if there were a regulated entity like a spot bitcoin ETF. That's like the big rallying bull cry right that it'll unlock this previously untapped type of investor. But at this point I'm not sure that. Yeah,

But is the untapped market turned off? That's a great question if you think about who would be using a spot Bitcoin e t F trying to put it into you know, perhaps accounts that they can't go out and have a cold wallet ness sat right, that's somebody would want to get in low and watch it didn't should go higher. So I think I think if that product existed, somebody would be willing to dabble in it, and the whole point of it would be that it would be safe.

I don't think there's any political win here for anybody to touch this. So I don't see that I'm barish on your call for I don't. I don't. I think it's just a lose lose. It just looks nasty. So right now, at least I wouldn't see anybody willing to weigh in. It's too radioactive. Make any clarity here, Yeah, that's that's the That's why I are still low. But there is perceivably a path, but I would still stick

to lower. It's definitely radioactive. Right now, I don't think it like if Gensler were to approve a spotic when E t F. Right now, I can't like he's obviously not going to go anywhere near it. But a few months from now, I do think there's going to be a call from people in Congress, from regulators and legislators to to do something about regulation the cryptocurrencies ACE. So, so we are about to talk about something and I want to come back to it, which is g BTC.

If we we said it earlier, what is it and what makes it really interesting? Right now? Gbtcson over the counter trust that does it. It's almost like a closed end fund um where so it's it doesn't trade. There's no arbitrage, so it doesn't trade near the n A V of Bitcoin's once traded a huge premium and now it's at a huge discount. I think forty two closed at forty five on Friday and going down. Yeah, and

that's crazy. That's a that's a steep discount. And g BTC was, which is, by the way, the gray scale Bitcoin Trust. Yeah, a lot of people had used this because there was no spoty TF. I think a lot maybe they didn't even understand that it could have these steep discounts. But it's kind of a bummer if you went in anywhere near that premium or if it was close to the n A V and now you're down. Even if bitcoin was flat, it just would be a bummer to lose. That's why. Which is great. So bitcoin

is at one price. Yeah, Hi, if you're in this thing, off whatever that spot price right, So actually have some sizes here. I was just looking this up. Um in rough terms, since the end of g BTC is up something like a thousand percent, but bitcoin itself is up over three thousand percent, So this thing has lagged and lagged and lagged. Discount is staggering, but when you put

it that way, it's even more dramatic. Yeah, and but a lot of the lagging happened on the downturn too, and so I think I look one point where bitcoin was flat and you were down like a bunch, and that would really hurt. Uh. It's if you're up a thousand percent you can still kind of sleep at night, I think, But it's when you're down and bitcoin is flat or something like that, which is can be frustrating

and maybe you can't get your money out either. Right, Yeah, well you could sell it, but again you would be selling it. It would be like buying something and then you know you want to sell it discount or the ideas you weighed around potentially comes up, or if Gray scales trying to convert it to an each if that would completely close that gap. Some people are buying GBT

so ce for that hope. They feel like it's almost like a call option on them converting to an et F, which would give you just like that, and that's a that's a could would be great trade, right, but that's the risk and doesn't look like that slightly. But James recently looked into this and Gray scales owners are having a bit of a problem. So now there's a whole debate on whether GBTC will will be forced to liquidate or could have problems UM and and solvency potential with

the people who own them. So, James, why don't you go into that whole scene right now? So let me take a step back. Digital Currency Group is the owner of gray Scale. They own two hundred some odd other companies. One of the two big companies that most people know in the crypto world are gray Scale, which operates GBTC, and Genesis, which is basically a prime broker. They were

the first institutionalized prime broker in the cryptocurrency space. Right now, Genesis had some unknown exact exposure to the ft X blow up. Right now, Genesis and d c G are trying to raise money. It's been reported by multiple sources that they're trying to raise a billion dollars or so in emergency financing UM. Genesis could potentially be heading towards something. They're definitely in a liquidity or solvency crisis, So we

don't know what's gonna happen. There could be news by the time this drops that something big has happened in the space, so a lot of people are concerned about some sort of contagion risk with Genesis going into getting into trouble, which brings DCG into trouble, which leaves people

unknown to what's going to happen to g BTC. Now in the in the documents of GBDC, they specifically state that if the sponsor goes has goes into insolvent, or goes into insolvency or files for bankruptcy, then the trust will be liquidated unless fifty of the shares vote to like transfer to a new sponsor like go to I don't know Goldman or coin Base or some other person

that would sponsor this trust, um. But that means if they if this if Gray Scale does go bankrupt, which I don't see any way that that happens right now because of the amount of money they're bringing in on all these trusts. But again, a b DCG sells off Gray Scale as an investment to raise capital, I don't know if they would want to do that. This is

one of the crown crown jewels of their portfolio. Um. But essentially it comes bound to the fact that if GBTC has to sell uh has to liquidate, they're going to sell the bitcoin in the open market. It's not a lot of people seem to think like, oh, I'm just gonna get the bitcoin back that I have a pro rad to share. No, the documents are very clear that you would get they would sell the bitcoin in the open market and give you a prograd to share

of those sales. So there's a theory out there that d c G is actually shorting bitcoin and buying GBTC knowing they're gonna liquidate and they're gonna pocket. Well, So that's a theory out there. But I mean, we know for a fact that they were buyers of GBTC big buyers in Q two of two. They were buyers in Q one, There are buyers in Q two, and they were actually sellers in Q three, and I'm assuming they're also sellers now in Q four. There's no way to know for sure, but I'd be willing to bet that

they're probably selling some shares. But there's also they can't just sell. There's the GBDC. It's what's it's a it's a rule one a offering, which like we're going to get way into the weeds. We don't have to get into that. But it's not regulated on the closed in funds you talked about. But under one A, if you're a related party, which d c G is, you can only sell one percent of the shares outstanding that every three months. So they it's not like they can just

dump this on the street immediately. They have to sell slowly. If they are selling, I'm assuming based on what's happening with Genesis and d CG that they're likely selling a little bit to try to raise money. But we we don't know exactly what's going on behind the scenes. This is very opaque. This is not like the E d F world where we know exactly what's going on. I have a word, speculation. This is just it feels so all of this feels so speculative. It's hard to throw

thing about throwing money into this and this whatever this is. Yeah, it's hard to earn money here you go. It feels a little black gone, gone, gone gone. I've spent more time on Signal and in Twitter d M s over the past two weeks then I have in any other period as a journalist. But have a question for James, so wait, I understand why DCG was buying shares of GBTC. A lot of letters here. Why were they? Why were they selling? Do you think that was just to raise cash?

Why would DCG be selling shares of GBTC. I don't know. There's no way to know exactly why they're selling, but they owned a ton of it, so there's no reason, like if they need to get unloaded a little bit off of their balance sheet, or they just don't want to have that much exposure. They're going to sell slowly over time. They're probably trying to limit the market impact of that selling. Who who knows? We don't know why they're selling, but we know they they're the largest holder

by far. They own more shares of GPDC than any individual entity has owned of GBDC in its history. UM, so it's not like they're just unloading tons and tons of shares. It's a very small amount that they sold in Q three. Can I ask another speculation question, Cathy would bought GBDC shares last week? And I never got a satisfying answer. Why Maybe you could speculate about that? So when she bought bitcoin was around sixteen thousand, seventeen

thousand dollars per bitcoin. GBTC at the time was trading at a forty two ish percent discount, maybe more during the day. So I recently saw a GBTC was trading over a fifty discount. So there are times in a day where it goes crazy. So she could have seen one of those times and it was like, basically, if you're buying at that discount, you're buying exposure to bitcoin. At like I said, it's seventeen thousand dollars, you're getting it nine thou five hundred dollars. That's what your exposure

is at this type of discount. So she might have just said this, She's definitely believe in bitcoin. We know that for sure, so she probably just thought this was too good of an opportunity to get exposure. Well, but doesn't She also like to have maintain waitings that are consistent, and if GBTC went down, she had none. She she had none, There was no new by interest in this ets. She had a very very small mark. W W it

was She hadn't thought since July. But sometimes she buys just to keep the weight at where it was, because if it goes down, she has to buy it to keep the weight up. Was a big buy? Yeah, that that idea of buying in a discount I find really interesting and I am curious, like how much new money,

non crypto money could possibly come, could wash into this space. Well, I mean, if we get a spot bitcoin ETF we know for a fact there's trillions of dollars in US advisors that would probably take a nibble at this potentially. I mean, the other thing you've got to realize is Bitcoin itself has had like four or five plus draw downs, and every time people are saying this is the end of crypto, this is the end of bitcoin, and so far it's come back. Now, obviously this could be actually

the end of bitcoin. Maybe it's not going to get back to that sixty dollar high we saw, but this is part of crypto. If you're investing in crypto, you probably if you did any bit of research, you knew that a plus draw down was a realistic possibility and a realistic rix and f t X. Granted they're a huge exchange, but back in the day when moult Cox went under, which was an exchange that went bankrupt and they got hacked, they were the exchange. It's not like

it was like a bunch of other exchanges. It was moult Cox and nobody else and they lost money and everyone said this was it. Silk Road got hacked. They said, oh that's it for bitcoin, and we keep it keeps coming back. There's a lot of people still in this industry obviously hurting right now. But I don't know that I would count crypto and bitcoin completely out forever. Well, I agree, I would never kind of doubt it's come

back too many times. The difference between Cox and Silk Road, though, are that this guy was on the cover of every magazine, um except Business Week except when he fell and had the great cover with in ruins, really good. But yeah, he was just like Elizabeth Holmes the next buffet, which by the way, should be a bear signal every time now. Also hiring Larry David, giving all these political people money. Basically, I don't know. I felt red flags come up when I saw f t X on every umpire in anything

I did. I tweeted out, I said, this is there's something wrong here because MLB is not the crypto audience. These are like six the seven year old people who are knock at that's how much money they were just spraying everywhere they could advertise in places that weren't even their target market. They sponsored a sports stadium. I mean, all this stuff. I've just been spending a year doing

a book on Bogel. Who would He hated advertising. He thought that was a sign that the company's misusing your money. Do you remember what Bogel said when we asked him about crypto. Oh, he said, I wouldn't touch it over my dead body. Yeah. And and well the reason he would think there was the reason Bogel didn't like crypto that wasn't It wasn't because of the SPF potential. It was just because it's a commodity. And this is the

thing that crypto people miss. Sometimes crypto people trash the SMP five hundred in stocks and all this stuff, and I'm like, it's different. Stocks have cash flow, there's something of value there. Crypto is like a commodity. It's only worth what someone else will pay for it. And that's why Buffett and Bogel weren't hot on commodities or crypto.

And that basic thing of crypto not having anything beneath it besides what someone else will pay for it is the scary part where it you know it who go down more and stocks have money and cash flow to support them, especially in the next fun with five stocks, Which is why if I told Crypto all along, don't beat up on the SMP. You don't know what you're talking about. You went to Australia, people listen to trillions there,

would you learn? I know it's weird. You know how bands are like big in Japan, you know that whole thing, Or we're big in Europe, like the Pixies were a banned in the US that nobody really but in Europe they were huge. Um, we're big in Australia, guys. Yeah. The per capitive people who said, oh I listened to trillions was way off the charts. I couldn't believe it. So yeah, a lot of people are into it. I think what it speaks to is the whole of media there.

There is nobody there doing et F media, so they come to their star for it. Love you Australia, James Katie, thanks for joining us on Trillians, Thanks for having me, Thank you, thanks for listening to Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you like to listen. We'd love to hear from you. We're on Twitter. I'm

at Joel Wepper Show. He's at Eric Faltunas. This episode of Trillions was produced by Magnets Hendrix by m