Bitcoin ETF: Sell The News, Buy The Dip, Or On To New Highs?

Ram Ahluwalia, Pranav Kanade, Quinn Thompson, Alex Thorn

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Episode Description

In this episode, we delve into the recent developments surrounding the Bitcoin ETF. Will the SEC approve the applications? What should the discerning investors do?

Episode Transcript

[00:00:00] Bitcoin is in the news today. I'm pleased to have three phenomenal guests on our Lumida non consensus investing podcast. We've got Alex Thorn, who's Head of Research at Galaxy Digital, who dropped a terrific report on flows in Bitcoin. We've got Pranav, who's the Portfolio Manager at VanEck, covering digital assets, and Quinn, who's a friend, VP of Capital Markets, Head of Capital Markets at Maple Finance.

Which is a lending protocol. And in the last week or so, I've had informal conversations with folks here. And I feel like every other day, my view on the question around Bitcoin is changing with new information. So we said, look, let's elevate this to a public conversation. Let's focus on truth seeking.

Let's look on both sides of the debate. And the question is, hey, is this Bitcoin ETF, is it a buy the rumor, sell the news? Is it a [00:01:00] buy the dip? Is it an event to bring on to new highs? How do we interpret this? Would it make sense of it? We'll start off by, cycling through the key views, and we're going to keep it open, interactive, and Socratic here.

Let's dive right in. Alex, do you want to lead us off with, actually, for now, why don't you lead us off with the metrics to frame up Bitcoin? And then we'll turn to Alex with your, thesis on what happens next. Yep, happy to and just to caveat this, obviously none of the stuff I say is anything like financial advice my guess is as good as your guess, but we track a lot of these metrics just to really, understand what market structure looks like, so as we speak, open interest on bitcoin is around, I think, 11 billion, if you exclude CME, obviously much higher, I think CME last I checked was somewhere between 4 to 5 billion, so you can add that on top, if you go back further, and this is in dollar terms, so obviously you can look at it in bitcoin terms we're at the same levels in terms of open interest as we were, around May 2021 which was, right after you had this big bitcoin correction [00:02:00] when China decided to ban bitcoin mining in the country.

This is Substantially off the bottom. So the bottom after FTX collapse was around five or six billion. So you've built up a whole bunch of open interest in the futures market. From a funding rates perspective, it was very high yesterday. I think it was annualized almost 30 plus percent right now in a live base.

This is closer to 10, 11 percent annualized. Given the move we had this morning, funding or at least leverage in the market is generally reset. Open interest went from say 12 billion, excluding CME to almost 10, 10 and a half. And then, um, obviously funding rates also reset meaningfully.

So I'm happy to share my screen by the way, if that's useful to anyone.

Ram, I think you're on mute. Oh, sorry about that. No, feel free. If you'd like to share your screen or really anyone else as you share your perspective, we all said that. News headline from Matrix Report, where they put out a piece saying that they expect the SEC to deny these ETFs were provocative, and [00:03:00] it seems to have caused some of the sell off.

Alex, what's your take? I take my news from Alex. On the Matrix Report, I thought this was quite puzzling. I found the logic and arguments to be extremely deficient in a number of ways, frankly, in some cases, nonsensical. For example they claimed that, and I'll get to my real take here in a second, but just since this is the news of the day they claimed that the bull run in the fall was started by Franklin Templeton's ETF filing in September, but in reality, the run didn't really start until middle of October on Cointelegraph.

Fake tweet, and then the next week on the gamma squeeze, not to mention, they also said in that, that Franklin Templeton, they had then become, at the point that they had filed, the second large traditional finance asset manager to file an ETF, that's not true, Invesco, Fidelity, WisdomTree, VanEck ARK, all manage more AUM under, on, in ETFs, and had all previously filed they have this argument that there's not [00:04:00] a, Sufficient surveillance sharing agreement in place with Coinbase because Coinbase doesn't represent a regulated market of sufficient enough size.

But actually that entire argument was invalidated by the DC Circuit Court of Appeals. It's totally irrelevant. And then they have a bunch of conjecture about the SEC commissioners themselves probably voting against it, even if the staff recommends it. That's just totally made up. We don't know how individual commissioners might vote against it.

Vote or react, of course, but again, that's just like somebody shooting from the hip, and then I don't know if you read Jihan Wu's tweet today, but I thought it was pretty cool. Oh wait, Alex, you missed the best part of the report. At the end, they were like, hey, we got some great put options you guys can consider.

Yeah, exactly. It was like, let's try some flows. Yeah, exactly. I, I thought, I did think it reflected badly on Bitcoin markets generally, if that was the main catalyst, and of course, other markets were down this morning, too, right? It wasn't just Bitcoin, but I think that was certainly part of a catalyst, at least during Asia hours, obviously, we rebounded since then, but it shows the, relatively low liquidity [00:05:00] of this asset class still, and that will change with an ETF.

I think, to one of my colleagues. Big takes, I think, for this year is that this is going to be, across crypto markets, a year of clashes of the titans. I don't know if that's the text I'm going to stick with when I publish about this, but Bitcoin is about to crash a giant wave into Wall Street, I think, if it doesn't, theoretically, if it doesn't happen You know, in the next couple of weeks, it will happen sometime this year and I don't know if the world is ready for that, and I don't mean that in a bad way, I think people are going to be very surprised by the impact that has on people's portfolios, on the markets, on Bitcoin.

I'm glad you clarified that. When, Alex, when I first heard you say, I think Bitcoin is going to crash, My heart skips a beat. I thought you'd come off mute for a second. You said, in a big way, on Wall Street. Yeah, sorry. This is a good blow up pipe. Just to clarify for everyone. Think of a giant wave that you can surf down, with a nice tunnel and I think, honestly, 15 years in the making, obviously, for bitcoin, but even 10 years in [00:06:00] the making for a bitcoin ETF.

It's going to be huge. It's going to reshape many traditional markets and portfolios. It's also going to reshape Bitcoin markets in a lot of ways. People will be writing options and borrowing off their ETF holdings. So it'll reshape some of the way the prime brokerage business in Bitcoin works.

And I won't go down the list, but you've got Ethereum versus Solana. You've got real world assets versus the Fed. You've got a whole range of interesting clashes that are yet to play out in 24 regulatory jurisdictions against each other. So it's going to be, it's, I think it's going to be a year of significant change, frankly and it's going to be exciting.

I love the perspective. And what's your view on this ETF approval specifically? My view is that this ETF gets approved notwithstanding the report from Matrixport. Okay, Triforce, I think everyone's debunked here, and by the way you'd want to buy puts before that report, not after the report.

That horse is out of the gate. Yeah, I I think it's very likely. I think there's a bunch of reasons why it's likely. The simplest one is that the [00:07:00] only two arguments ever made by the SEC to oppose it have both been resoundingly struck down as arbitrary and capricious by the single federal court that literally oversees the SEC.

So that, that's the simplest reason that there, there is no existing articulated argument to deny them, right? So they'd have to come up with something new. There's obviously all the other signs we see that are being well reported on meetings between issuers and the SEC, or even today I saw reported that there were meetings between the exchanges and the SEC about this.

This doesn't, they don't do all this work and make everyone work over the holidays if they're going to turn around and reject them for, Some new reason which, by the way, would have to be new. So I think it's very likely. I think there's there, I think there is, even if the existing sentiment around Bitcoin between today and two months from now doesn't change at all among people in the world, there's a huge amount of potential inflows to come in just because that this segment of the investing ecosystem doesn't have access to Bitcoin exposure yet.

And so [00:08:00] Even if they just get exposure in the same percentage, they might, everyone else are, even if it's less than the rest of us. And this segment, who do you define as this segment? Like RIAs, sovereigns, or folks that can only access public securities, or what's the incremental market?

Primarily wealth managers and financial advisors affiliated with banks and broker dealers and then also some independent RIAs as well. So, and GBTC is not an adequate, suitable enough product format. Definitely not from a suitability standpoint merely because of the fees and the the premium or discount.

But also, we know most of the broker dealer advisor platforms don't allow, the trust. Alex, I was going to say, I use one of the large IRA platforms myself personally, and I have IRA with them and I've always asked them, hey, can I, I think it's OTC products, and the answer's always been no it's not allowed, whatever.

Yeah, and they do a lot of approval and compliance decisions. And by the way, they don't have to just be compliance. It's not like it's illegal to buy the over the counter [00:09:00] trust, but there, there are suitability, there are some of those platforms, Pranav, that don't allow you to buy cannabis equities, right?

Those are totally legal. Yeah, exactly. They just don't allow it, right? And by the way, most of them, I, we're not, I'm not aware of one, a major bank or broker dealer wealth advisory platform that allows them to buy the futures based ETFs either, frankly. Some of them do allow private vehicles. So I know don't want to name any of the platforms or the issuers, but Yeah, there are some that have struck deals with, crypto asset managers.

Not Grayscale, but others that have private placement. Vehicles that some of their end clients can go into, but those options are limited, and also they don't allow everyone to go into them, right? It would only be like some huge client they have to appease. So it's a market expansion opportunity.

Exactly. And you view this tactically, just today, as opposed to the 2024 outlook. How do you view markets on trading? behavior, both on approval and then [00:10:00] launch, which could be a few months in the future. I think a lot of crypto native money is mostly max long already here. It's what brought us over the last, we'll call it 15k in bitcoin price.

I think there's incremental. Net new crypto money to come. But I think the real question has been from the institutional side. I can tell you like at 25k back last year, institutional counterparties of ours that had traded Bitcoin, right? Not like they're just deciding to. They had traded in 21 and 22 they finally picked up the phone after, 16 to 25, it took till 25 for them to say oh, hey guys, we're still here and then they didn't buy and then at 30 they're like, eh, what do we think, is this gonna, is it gonna come back, and then they didn't buy, and I know many that still hold me.

have never come in, right? And so I really don't think the institutions are here yet. I think it's, in their mind, I think it's possible that you think about an ETF approval, both the actual creation of the market access vehicles that can allow this new market expansion, but also the, [00:11:00] I don't want to, I hate to call this a stamp of approval from the Securities and Exchange Commission, at least on the concept of owning bitcoin.

Which is what these will be. I think in a lot of institutional investors minds, if that happens, there's plenty of more room to go. They don't need to try to front run that. It's not like they're out here trading on crypto exchanges or even, bigger financial advisors or, what, trading CME futures.

Really, you see some of the hedge fund community here and doing that, but outside of the market. The sort of faster money hedge funds, I don't see a ton of institutional interest yet, which tells me, of course, that we can certainly go higher if these products are approved. So the thing I go, I'm like, very mixed and I keep asking the same question myself, which is, how does the next, let's just say, two months look, right?