Wokan A trillions.
I'm Joel Weber and I'm Eric Belchunas.
Eric, I know you're really excited about this episode, and I had a prediction that was related to that. We're going to talk about prediction markets, which had become I think one of the most fascinating areas in all of kind of we'll call it finance, even though I think it's slightly adjacent to that, but people have gotten really into prediction markets, and that meant that the ETF industry has also taken note, and there's been some filings that
I'm really interested in discussing on today's episode. What caught your attention?
Yeah, about maybe a month ago somewhere, and there I was sitting I remember exactly where I was. I was at my kids au basketball game. We're just about to keep score. I wasn't the coach. I was the scorekeeper for this one. But anyway, I saw the filing. I think James might have texted it to me and he said, look at this. And it was Friday. A lot of the best filings come in at Friday on Friday at like four pm. Anyway, I'm looking at it, and it's
prediction market ETFs. There was a filing from round Hill and then Bitwise followed and then there was a third issue or so there's three issuers who filed for prediction market ETFs. A that's interesting, and be the ones they chose were Democratic president wins twenty twenty eight election, Republican president wins twenty twenty eight election, and then there's some Democrat Republican Senate ones in there, so it was political. Now that's just a tip of the iceberg of what
prediction markets could do. But as instantly as an ETF analysts, I'm like, oh my god, they're going after this. I just didn't anticipate it. There was nothing in my brain that was expecting prediction market ETFs. And I'm pretty aware, you know, I'm total nerd in this space. So it was interesting to be caught by surprise. And then you know, we looked in how will these work? And again that's why it's fun to be an ETF analyst. It's never
a dull moment. I mean, every time, every time it gets a little like calm out there, something else throws you into this new world. And this could be really interesting because if these go through, there's you know, the sky's the limit. You know, we could see a whole gigantic category created for basically easy ways to click a button and bet on prediction markets for a variety of things.
So I thought it was worth discussing, you know, while they're in registration, just so people could sort of, you know, get these teed up and look out for them if they launch.
So if being the big operative, we're there and to discuss all of this with us. Matt Hogan, who's the chief investment officer of bit Wise Asset Management. Usually he comes on to talk about crypto, so I'm excited about talking with him about something off today, this time on trillions prediction markets. Matt, Welcome back to trillions.
Oh thanks for having me. I'm excited to be here.
Okay, So I didn't know that you wanted to do things other than crypto. I thought you had gone full crypto, and once you go full crypto, you can't do anything else. But I guess there's room for a little bit more.
Wait, hold on, did you go full crypto? Because whenever we had him on and he said he was fifty five percent crypto, he.
Was full crypto. But yeah, okay, I think you're full now, Matt, Yeah, what's that breakdown? Now?
Come on, guys, I dragged ETFs into crypto along with a lot of my friends, so I merged the two worlds. Yeah, full crypto, full financial innovation. Look, prediction markets are a close analog to crypto. They sort of got their early traction in the crypto market with Auger and then polymarket, and now we see more regulated traditional onshore venues like Kalshi.
So these were close cousins. I think if you've been involved in crypto for the last five years, you've been paying very close attention to prediction markets, So to me, it's a natural extension.
Okay, so I'm really curious about how this is actually going to work, Like, how do you imagine calci or polling market style bet being packaged into an ETF. What are the mechanics of that?
Yeah? Sure, I mean first I should say that I can't speak about the filings beyond what's in the actual filing, of course, because they're alive filing and registration. I'm going to speak generally about the process as opposed to specifically about the prediction shares filing. But look, you know, if you think about the ETF industry writ large you guys have been covering. It takes interesting financial applications and packages
them into an easy wrapper that people can access. We've seen that from stocks, to bonds, to hedge fund like strategies, et cetera. This is a natural extension of that. So if you think of the underlying exposure, what's going on in prediction markets. There are prediction markets on a wide variety of things, from the silly to the geopolitical to the political. Have something like a Democrat or a Republican wins the election in twenty twenty eight, people in the
underlying prediction markets can bet on that outcome. Let's say it's trading fifty five forty five Democratic. They could bet on the Democrat winning fifty five percent. If he wins, it goes to a dollar. If he loses, it goes to zero. The ETFs, per the filings, can use swaps or direct exposure to gain exposure to that kind of outcome.
So it's actually it's relatively simple, which is that this exists in a regulated market, and the ETFs are capturing that or proposing to capture that, because of course they aren't launched. They may not launch theirself to be approved, proposing to capture that in an ETF rapper.
Okay, so Matt, Basically, if you're looking at let's say to CTF launched, and you were at the fifty five to forty five the Republican one, I forget what you said, but let's say that was the fifty five to one, you would buy the ETF and it would match the percent currently on polymarket or whichever interface you were using.
So effectively, all this is doing is just making it a little more convenient for people who do like to use ETFs versus getting your own poly market account, which again isn't that dissimilar from crypto, where you're literally just having this thing put into your environment where.
You like it.
That's all that's happening. There's no other variable here. You basically will click by at fifty five and that number will move based on how poly Market moves up to the election.
I mean, that is what you see in the filings. That is how it's defined. Of course, the exact exposure, as I mentioned, could be either swaps based or direct contract based. The proposals contemplate both, but the general idea is exactly that. I think the analog to crypto and bitcoin is very similar. When the bitcoin ETF's launched, there's this hue and cry you heard it about why do we need a bitcoin ef You can buy it on coinbase,
you can buy it through self custody. It turned out that people like the protections and ease of the ETF format. This is exactly that. It's absolutely true that individuals can open a Calshie account or a poly market account and trade tailor swift song views if they want to, but not everyone wants to open those accounts, capitalize them. They don't fit into their plans, et cetera. So if these were allowed and permitted, it would allow it to happen in a traditional ETF repper.
So how have regulators responded to your interest so far?
Well, we're engaged in the process with regulators. I'll just say that there is there is interest. But you know, one thing I've said before when we filed originally for crypto ETFs is that bitwise doesn't exist to pay lawyers and file projects that we don't believe will launch. So if we didn't think there was a pathway to launch,
we wouldn't have taken this filing. All that said, I said that when we first filed our bitcoin et which I think was twenty nineteen, So you should take because words with a long term view and not a guarantee of any short term activity.
Is there a prediction on when your filing will actually get through?
Yet?
Can we get.
Prediction markets on when the prediction ETFs will launch?
I've actually pretty shocked that there isn't. Well, as far as I know, there's not one. But maybe after people listen to.
Should I should get it going?
You should get it going.
I mean after seeing what went down with the bitcoin ETFs and the crypto ETFs and how well they've done. And again, the ETFs have proved over and over you could stuff almost anything in there. These issuers know what they're doing. I don't see them taking that long to launch. There could be something I'm not seeing here, but it's seems like you would just be able to use those other examples as things that worked fine in a similar fashion,
And that's all ETFs have ever done. They've just made something you can probably do on your own easier.
Yeah, I think that's right. If you think back of the history of ETFs, they've almost always worked extraordinarily well accept in situations where the underlying was really complex, like inverse vix, or where they were underlying liquidity issues like putting private shares into an ETF have. Those have enabled challenges.
But if you have a liquid underlying that's accessible and that could be clearly explained to people, that has an extremely strong track record in ETF land over the last thirty years.
So if I'm a regulator, what's going to make me nervous? Like? What did you have to anticipate as you were thinking about this, about what the anxieties are going to be?
Yeah, certainly, I think they're probably two that come immediately to mind, and these would apply to any sort of filing that you're doing. One is the underlying liquidity. Right, the underlying liquidity on some of these contracts can range from very good to very poor, and so you have to think about how liquid the underlying is. That's certainly something that went into our calculus when evaluating this space.
And then the second is that prediction markets are a vast canvas and we've seen reactions for and against different parts of the prediction market sector. Right, there's this big debate our prediction markets investing or gambling, and I think it's like not a great debate, because if you take a prediction market on a sports game, like the outcome of the NCAAA final, that looks a lot like traditional
sports betting. If you take a prediction market on FED fund futures and the outlook for interest rates, that looks like a lot like traditional investment categories. And so I think the other thing that we think a lot about is what is appropriate in a setting and then what is maybe less appropriate. And I think that's that's something that I think you'll see et officialers think carefully about as they look to pursue this.
You guys have these look I agree, and I actually before on the train ride up, these political ones Joel are the most popular. So my guess is there's a lot of liquidity for giant political races, and that's why you started here.
But I'm actually sports is by far the more popular place where the money goes. It's like something like Matt, you'll probably know better, something like ninety percent is all in sports. It's basically become a proxy for sports books, which is why states have been filing lawsuits against prediction markets. So I'm curious, like you, I mean, starting in a place like politics and elections purposely avoids that discussion, and I'm curious why go politics to start?
Well, look bit wise exist to help people gaining interesting exposure to important areas of the market. I think politics is obviously extremely important for the outlook of the market. I mean, living in crypto, the outcome of elections has a huge impact on my business, and there is no way to explicitly hedge that impact or lean into that impact. So if you think about it from an investment lens,
the presidential election will impact huge numbers of investments. Whether Michigan beats Yukon or not will not impact a huge number of investments. So I think it's as simple sort of real politic as that.
But isn't the sports thing inevitable, Like we're going to have Super Bowl bets and ETFs at some point if we go down this path.
Oh, I don't know. I'm not sure that that's true, you know, as you mentioned, and there's a lot of state based litigation about that. I think that introduces some regulatory risk and maybe some existential risk into the development of products focused on that, while those is still adjudicated. So I'm not sure that you have to assume we go to infinity, if we go to one, I would
even say that oddly about prediction markets. I think there's a possibility in the future that prediction markets narrow in from their current enormous scope and refine what is appropriate, at least on the regulated onshore markets. I don't think, yeah, I don't think that that is fully scoped at this point, and people are sort of feeling out the edges.
It does seem like the ETF industry will definitely play with this a little bit. I expect that if these launch, we will see a little silly season, but generally speaking, when it comes like I'm I'm thinking of like will Aliens come back? Will Jesus come back? Will the Eagles win the Super Bowl? I want a two x version of that. I could see this happening, But those ideas
are very similar to crypto. The further you get from further away you get from these big liquid areas, they're not going to be huge successes in the ETF either. So I think sticking to politics it is probably makes sense for me point of view too, which is there's probably a lot of people who are interested in that, and you know, there's always been this thing like oh, hey, I think Trump's gonna win, let me go along the market.
Or some people were like he's going to crash the market, and that's actually two way bet there, like people don't even know. This cleans that up a little because then you don't have to actually do like three D math, like, well, if the Republicans win, the rates will do this, and people will think this and this will go up and down. This is just straight up this will pay off if they win, which it cuts through having to do that three D math, which people have to do with the
political stuff a lot. I think.
I think that's enormously true, and I would actually extend that beyond things. If you look at something like interest rates and you look at the Fed fund futures market, that involves a high degree of math to figure out what they're expressing, Whereas what people want to decide is will interest rates go up or down at the next meeting. I would even say that that extends to some degree to like options and and equity price outcomes. You know, what people want to allocate to is will bitcoin cross
one hundred thousand dollars. They don't want to talk about various Greeks on how that's expressed in the options market, at least not everyone wants to. So you know, again, if you think of one pathway that ETFs have followed has been taking institutional exposures and making them accessible and
easy to understand for everyone. I think prediction markets are in that vein when it comes to politics, economic indicators, market indicators, and I think that's really good for investors and actually really good for the world as well.
Just to stick with the regulatory theme for a second, one of the things that I find interesting about prediction markets is that we've talked about the states and how they're suing the companies and trying to change what you may or may not be able to bet on. The CFTC has really been the most vocal on a federal level proponent of the markets. So I'm curious. We've seen what happens between SEC and CFTC on occasion. Do you have any inklings of how that dynamic plays out yet?
Look, I think it's it's you know what celig has said. The chair of the CFTC is pretty clear that he've used these as swap contracts that ought to be regulated by the CFTC, which means a lot of things which are worth noting. It means things like market surveillance, it means things like rules against insider trading, et cetera, et cetera.
I think that is obviously the dominant paradigm. ETFs have interacted with commodity swaps and options for years, right, So ETFs hold things that are primarily regulated by the CFTC. That's been going on at least since the gold ETFs, right, certainly you know before that. So this is just an
extension of that. Now, of course, the SEC has its own review process for these contracts, but the underlying I think there's a I think there is a broad consensus that those are you know, swap that belong under a CFTC guidance.
And just to stick with the mechanics of how this might work. So there's this, let's call it a binary that on a presidential outcome. What does that look like after it resolves? From an ETF perspective, Is there any version or comparison that we've ever seen in the marketplace of basically a you know, ETF resolving itself in sunsetting like that seems like a new chapter.
Yeah, Actually, so there are two versions. There's one that you're referring to, which I would say there is a great example, which are the bullet shaars. The bulletshairs were bond ETFs that targeted specific years, so like I'll only hold treasuries that mature in twenty twenty nine, and then at the end of twenty twenty nine you would get your one hundred dollars par back. You've collected interest along the way, and then the it liquidates and off you go.
And the reason that was a successful franchise is because people have specific needs at specific years. They want to get their money back, and traditional bond ETFs don't do that, and then people would often move from the twenty twenty nine to the twenty thirty or the twenty thirty one, et cetera, using them like a bond ladder. So I think that is the best example of sunsetting ETFs that
we have, and it was enormously successful. Obviously, it introduces some capital and tax considerations that are worth thinking about, but we do have a clear example of that. The other thing you see in the filings, again not talking about ours, but just the filings broadly, is a concept of rolling these into future where you would use stock reverse splits to sort of recalibrate it to the next election.
I think it remains to be seen. You know, what is the best approach, what investors want, how those will work from a mechanical perspective, But if you dig into the filings you'll see both ideas.
I'm curious, Matt, because you're referring to filings other than just your own. Is there anything else you saw in the filings that made you go, Oh, that's that's different and that tickles my brain in a way that I hadn't expected.
Yeah, I think I think that is the That is the primary thing that I've seen. From a difference perspective, I think a lot of the details have to have yet to come out and yet to materialize. I think if you're thinking around where are the interesting structural questions, that's the primary one, and then how you gain exposure is the secondary one. But that's more sort of nuts and bolts. And if you think about product development perspective, it's the question we talked about earlier, is are there
more where else could get this go? Where is appropriate? What is helpful for investors versus harmful for investors? What is easy to understand versus not easy to understand, and I think those are the two avenues of exploration you'll see at least first as we go down. As Eric mentioned, you know, the ETF innovation machine throws everything against the wall. So I won't foreclose what other people will do in the future. I have no idea if we'll see leveraged
prediction markets or something like. Who knows.
And I'm telling you right now, these things go through. You know, Matt Tuttle, just the name one. He's on a loan. We're going to see some funky stuff and I'm here for it. I don't mind that. I've always looked at the exotic and even silly part of ETFs are just you can't have perfect innovation where everything's serious and perfect and always works. It's just the way capitalism works. And one of these goofy ones may take off, and
that's fine. This is a free market. That said, like earlier, the goofy er and crazier you get the less of the market. There will be the same thing's happening with the crypto. As you get further away from bitcoin, the assets are going to go down and down, and the interest will go down. It's not like the ETF will all of a sudden drum up new dynamics that the
underlying market doesn't have. So I do think though there's there are some ones that could appeal to direct retail that are just silly, goofy and you know a little on the de gen side, and then they might leverage them.
We'll see.
But you know, there are two x dock ETFs out there right now that have such incredible volatility that you know, there's plenty of ways to gamble. So it's not that big of a deal. But the it'll be seem like a big deal for a while. It always, it always does. I've just been doing this so long. You know, at some point nothing shocking, you know, like.
This is when he like becomes the old man on the rocking chair.
Well, actually, I feel pretty young at heart because there are some other analysts I won't name them who kind of crap on a lot of the new stuff. We had a theme that we started writing about last year called no industry for old analysts.
That's it. I think that's right. But that's been going on in ETF land forever. I mean, people didn't think we should do bonds in ETFs. To me, the dividing line is is it easy to understand or is it hard to understand? The exotic ETFs that I dislike are the ones that are difficult for people to understand, like highly leverage, daily resetting ETFs that are subject to path dependency. One of the great things about prediction markets is that they are easy to understand. Right, the Democrat will win
or the Republican will win. And if you can design an ETF that expresses that, well, then I think the probability that people who allocate to it know what they're doing is very high, right, And that's the job of the ETF issuers to increase that fidelity between what people expect and what they get. And so that's what I think people will try to do with these.
So, Matt, what comes next? What do you what's the next step that you're waiting for?
Well, what do you want to what do you want to see in a prediction market ETF? Joel, do you tell me? Man?
I don't know if I'm allowed to comment on that specifically, but I mean more of.
Like, it's got to do something, It has to do something with Beyonce.
Oh No, I think the thing that I find interesting.
We'll Beyonce Win the Grammy like that that's the stuff he wants to bet on.
But I already can do that, right, And I think what is interesting about this conversation. You know, it's like what you can do on Kyle she or Polly Market currently versus the stuff that you can potentially tie into your brokerage account, right, And clearly Matt's thinking the same way.
So so Matt, you know, I think I could almost you could just look at what's currently available and start to go, Okay, well if you really think about how investing could fit in this wrapper or like, there's a lot of things that are currently there that would suddenly like be available in your Schwab account y or robin Hood account or whatever else. So so I meant the question more as you know, you're engaged in the SEC could have a long time ahead of you. What's mechanically
for you? What's the horizon look like here? What's the how much dancing do you have to do?
Yeah? That makes that now I understand. I was going to say, I'm not going to tell you what I'm filing for because I'm sure Will ryand and others are listening. So what happens from here. So typically in an ETF filing, there's you know, there's a series of comments and questions. The SEC will look at your initial filing and come back to you with a list of questions and you'll answer those, and you'll go back and forth over things
like disclosures and the underlying functioning. As an outsider, the clue on whether you're getting close or not is how detailed the filings are. Filings start very abstract, and once they fill in all those details, that is the signal that you're typically approaching launch, although nothing's guaranteed until it launches,
so that will be the process behind the scenes. What a company like bitwise will work on in these situations is ensuring that the liquidity is there, ensuring that the trading partnerships are there, ensuring that swap counterparties are lined up, ensuring that you know the initial audit and things of the filing is done, and then on something like this, ensuring that you know how you're going to communicate about it, that you can do so in an appropriate manner. A
it's a pretty big task. So there's the SEC dance. There is the sort of execution of the product if it launches, dance, and then there's the messaging dance, all of which has to happen well in advance of any potential launch because it has to go through regulatory compliance approvals. So that's the process taking place a bit wise, and it's a yeah, it's a lot of work.
Ben Johnson, our mutual friend from morning Star. When these came out, he wrote this, He goes casino. Gamble has just filed for its first ever gamble shares ETFs. Gamble shares when baby swift ETF, gamble shares what will bitcoin do in the next five minutes ETF, and gamble shares who wins the next powerball ETF. So he's having a little fun for that with that. That's where I think a lot of people's minds initially went, We'll see I
hear you, though. I think being able to bet on politics without having to overly think it makes a lot of sense. I want to just ask one of the questions for you about polymarket. It's somewhat related. It's adjacent to this. Polymarket runs on the blockchain, correct, Can you go into that a little bit? I found that people don't know that, and even I don't know it completely. But how does that work?
Sure? Yeah, Polygon is a crypto based prediction market. It's not the first, but it is by far the largest. So the underlying contracts are resolved using oracles as opposed
to external data feeds run by an individual. So, in other words, while a traditional market may look to Bloomberg data directly to resolve a contract, polymarket will engage with a data oracle that will aggregate sources to resolve it, sort of independent of internal oversight, and then the underlying contracts are maintained and stored on a tradition from a blockchain. The beauty of it is it's not that different. Actually,
it speaks a lot to where crypto is going. If you think about it from a user perspective, polymarket calshi. Your user experience is actually remarkably similar. Right, you invest, you get the outcome, it's a dollar or it's zero, and you don't care what's happening behind the scenes. Right, do you really care how exactly they're resolving these contracts or how exactly they're storing You don't. The real difference is in the community they access in sort of the
global versus country based regime. And I think you're going to see that. It's sort of a roadmap to where I think things like tokenization will look like in the future, where you won't even really notice how it works.
And by the way, Joel's been asking me about his bitcoin investment. You know, he's again saving up for his cyber truck and he wants to know when's it going to hit one hundred and twenty five thousand dollars.
Again check the Polly market man.
Yeah, I love I love that Eric can just read my mind and articulate all the things that are ticking around my brain.
Everything I just said is kind of the opposite of how of Joel.
He doesn't. Yeah, I do, but nottt just done. On crypto. I mean, it has been a bumpy last few months, and you know, just to change gears out of prediction markets and and talk about where crypto and and and bitcoin seemed to be going, Like where do you feel we are in the life cycle of uh, you know, post ETF launch, huge initial enthusiasm now a lot of retail investors bought in at a moment that you know we're well below.
Yeah, that's absolutely right. Specific to bitcoin, I think we're in a classic crypto winner. It's a four year cycle. I think it will recover towards the end of the year as we get past tax season, particularly if we get passage of the Clarity Act, and particularly if the bitcoin community takes action on the rising concerns about quantum computing. I do think that that is a weight holding the market back from what would otherwise be a recovery into
the spring of the four year cycle. So I think will it rally towards the end of the year is dependent on whether the Clarity Act passes and whether the bitcoin development community takes robust action on quantum concerns. If both of those happen, I think it will be a great end of the year. If neither of those happen, I think it will be challenging. So that's a contingent
answer on the rest of crypto. Look, I think stable coins and tokenization are effectively a runaway train, and I think that's going to drag up the rest of crypto again, particularly if we get the Clarity Act passed through Congress. I do think that that is an important fork in the road, because if it doesn't pass, I think you'll see Wall Street pull back a little bit from tokenization efforts. On concerns on what would happen in a new administration.
If it does pass. I think they'll lean in, and so that is supportive for Ethereum, Solana and DeFi apps in particular, but generally speaking, we're just in a traditional winter. We've had these before. Bitwise is seen three of these now. We started in twenty seventeen, and you know, even with the pullback, bitcoins up, you know quite a bit since since bitwise started, So I think it'll be okay.
It sounds like you maybe want to make a prediction about the Clarity Act.
Actually, the funny thing is the prediction markets on the Clarity Act. I think put the odds it's something like sixty. I'm slightly more barrassed than that. So if I were, if I were taking the bet on that, I would take the under unfortunately, but wouldn't it be nice if I could hedge that in a familiar ETF wrapper.
It is really crazy how you can do. You can get on some of these things pretty easily. The ETF just is that much easier. It's just it's amazing to me. It's not that hard to do prediction markets or crypto on your own. I just want to put that out there. I just think it's it's that's again why I got into the industry. It is unbelievable.
It is, it is remarkable, and it expands the set of people who use it dramatically. We saw that in bitcoin ETFs. Now you have every macro hedge fund trading bitcoin. Look, I think prediction markets are one of the most important new financial ideas that I've seen, maybe since crypto uh and and I think I think if we can impacte them in an e t F, you'll see extensive use of them in various portfolio settings.
We'll leave it there, Matt, thanks so much for joining us on Trillions.
Thanks Matt, thanks for having me.
Thanks for listening to Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spot five, or wherever else you'd like to listen. We'd love to hear from you. Hit us up on social I'm at Joel Weber Show, He's at Eric Faulcinus. Trillions is produced by Magnus Henrikson