Nov 10, 2023

The Securities and Exchange Commission (SEC) has one last short window, an eight-day period starting Thursday, if it wants to approve all 12 spot bitcoin (BTC) ETF applications this year, Bloomberg Intelligence analysts wrote in a recent note.

Video transcript

Joining us now to discuss the crypto markets and how they're reacting to Blackrock's Ethereum, ETF Boomer Plan, whatever you wanna call it is diffuse funds founder and Ceo Kenny Estes. Welcome Kenny, thanks for having me and TGIF. Yes, indeed. So let, let's uh you, you guys are in an alternate, diffuses an alternative fund platform. Uh You, you offer uh different, different investment products including digital assets that the only thing. So what's your take here on this uh idea that Blackrock might be uh wanting to create an ETF that holds ease? I think it's generally bullish for Ethereum overall. Um I would kind of go back to a comment that was said earlier in the program around Blackrock. Um in particular being well connected. They're not doing anything without knowing what the outcome is in my opinion, right? Most of this is probably pre negotiated or at least there's a wink and a nudge understanding with the sec before we put an application in. So the fact that they're putting in an Ethereum application to me sounds like it's a predetermined outcome that it will be approved. It's just a matter of when it will be approved now that in and of itself isn't overly exciting from a technical perspective because an Ethereum future ETF exists right now and actually launched a month ago yesterday. But the volumes are almost non existent, right? I think it was 2.5 million on the highest day yesterday. From a technical perspective, a spot, Bitcoin Ethereum ETF is not going to be any better at tracking Ethereum than the spot was. But the difference is having big institutions putting massive amounts of marketing and business development resources and having Larry Finkel on C NBC talking about how Bitcoin is a global currency, that is what's gonna drive institutional adoption and really push the price of both Bitcoin and Ethereum to the next level, right? But I, you know, I look at this uh and I I say, OK, well, from a risk profile, the spot ETF is not much different than a future. ETF, if I'm, if I'm holding one or the other, there might be some differences on return, but generally volatility and returns will look like each other. And as you mentioned, the futures ETF gained very little uh excitement relative to the Bitcoin ETF that came out during the height of the previous market. In that situation, the Bitcoin futures ETF came out as prices were moving up in this situation, prices are moving up because of a rumor, supposedly they're moving up at least because of a rumor that this will get approved kind of different ideas. What makes us think here that a spot ETF would have better, uh, traction, more interest than a futures. ETF, if from a, a portfolio management profile, I'm looking at this and I'm like, they're basically the same thing. 100% futures ETF tracks, uh, Ethereum or Bitcoin at about 99%. Right. You lose a little bit from interest just that's how forwards work or futures work. Um The spot ETF is going to be about 99% as well because it's going to get dragged down by custody fees. So from a technical perspective, you're 100% right? The spot ETF in either Bitcoin or Ethereum has almost no difference versus the existing futures. One, the difference is all about how it's coming to market and who is pushing it, having Blackrock as a significant sponsor and normalizing the idea that institutions should now have this as part of their portfolio, which is right now starting to, but it's largely seen as retail investors are the only ones who touch crypto, right? So that mentality shift is what's going to change with all of the marketing and business development resources being plowed into these new products. Now to keep that in perspective, right, the total market capitalization of crypto is about $1.4 trillion which sounds like a big number, but that is less than half of apple, one company in the grand scheme of things, Cryptocurrency is a rounding error in financial services today if you start to see institutional adoption and becomes normalized to have 2 to 5% of your portfolio in digital assets because they keep hearing about it from every one of their biz dev resources that is going to have an incredible impact on the price of both assets. Kenny, what are the chances that a spot Bitcoin ETF doesn't get approved again? Um I'm going to be talking my book a little bit here and I'll say almost zero, right? I think it will get approved. Um And the biggest reason for that is because Blackrock put in the application, this is probably the most well connected organization on the planet. Certainly, when it comes to regulators, the SEC in particular, right? They are not doing this on a whim and hoping for the best. I don't think those applications are put in unless they understand exactly what the outcome is going to be. That from an optical perspective, they still need to go through all, jump through all of the hoops. So like Nick said in the previous segment, it's not going to be in the next month or two. Would it be an Ethereum spot? ETF? But it certainly isn't it? 6 to 12 months seems reasonable. The Bitcoin spot. ETF interestingly enough yesterday, the SEC came out with a video basically saying our job is to protect you the public and you get to choose what you invest in that type of video typically comes when they do an approval that they don't really like. So personally, I would not be surprised if we see a Bitcoin spot ETF approval within the next week. So you think if we do see an approval, maybe it's going to be with a little bit of reluctance from the sec, you think they're may be getting forced into it? I think 10 years of fighting back is a pretty good indication they're not going on with this approval, right? So, yeah, I think that we will see the over them, overcoming the reluctance and giving the market what they're demanding and frankly what the judge is telling them they need to do because they are like Nick said, they're in an inconsistent state, right? You can't have a futures ETF and then deny I spot ETF because apparently the latter is more prone to market manipulation. It doesn't make any sense. Now, there is an argument around custody, right? You don't have to c to do anything on a cash settled futures contract. That that is a legitimate argument, but I don't think that's where it's going, but, but there is a difference and that's the, that's the future ZTF is based off of futures contracts traded on the CME. And granted, we can argue about where the CME and how the CME gets its pricing versus a spot Bitcoin ETF, that would be based off of something a little bit different. Right. So, ultimately, the responsibility for the future ZTF falls with the CME and the CFTC. And it's almost a way for the SEC to say, well, we don't really have that much responsibility. This is more of AC FTC problem when it comes to pricing. And their solution is we're comfortable with because they're using their, their, their wack, a dole uh pricing mechanism for settlement with the spot. ETF, it's a little bit different. It puts a little bit more of the pricing onus on the private corporation that's going to come up with the pricing for every day for their uh for their ETF. And I, it seems like that's an issue that the SEC has a problem with. So, I mean, can you at least recognize that difference and, and how would you get around that difference? No, you're right. They are gonna have different pricing mechanisms for sure. But I would argue that that's actually largely inconsequential because at the end of the day, both pricing mechanisms are going to have to be based on actual, on exchange trading activity, right? In very liquid contracts. And in a former life, I as a high frequency trader, right? If those things got out of whack very much at all, that's an arbitrage opportunity. Those things aren't actually going to deviate in virtually any scenario I can see for a very liquid contract like Bitcoin or Ethereum. So it has a negligible impact. But I will say the custody one is a knock on the spot. ETF right now, you have a third party risk Coinbase in pretty much all examples of this larger entity, not properly custody in those assets. So, but, but getting back to this whole thing is that one of the biggest issues of course, is that the spot market is controlled in a huge way. The centralized spot market is controlled by an entity that the SEC is currently investigating and is very concerned about, first of all, from not being controlled, from being domiciled outside the United States specifically uh questions about its uh its uh you know, its quality of, of uh what it's actually doing. I mean, the, the SEC is basically, you know, in so many words, uh trashing it. I I I'm trying to be diplomatic here because there are a lot of lawyers who will get involved if I say first of all, what the SEC is probably really thinking it is. Um you know, perhaps I don't want to say criminal operation that should involve its CEO going to jail. But I don't think they're necessarily not saying that either with that said, why, you know, isn't that kind of the big issue here that we're not addressing controlled? Yes and no. Right. It's an exchange. So at the end of the day, yes, those assets are on, on uh on the actual exchange. I'm assuming you're referencing Binance. Um I'll say it in name. And so you don't have to take the legal risk there and Binance us in particular, so the same way that FTX is holding assets on behalf of the customer, but again, the most likely scenario where bin this is a bad actor and is doing what FCX did, which I'm not saying is likely, but let's say worst case scenario and they're, you know, going out and I don't know how they bought like stadium naming rights. I don't know if they, if they're misappropriating those customer funds, right? What that's going to happen is the B or the Bitcoin price, the Ethereum price on Binance is going to drop and all of the other exchanges will keep exactly in line with it because arbitrators will make sure that it stays exactly in line with it. Or if we see an FTX situation where they shut down, they just take it out of both indices that they're tracking against. So I really struggle to see a scenario where in either the spot or the future ETF the price they're tracking against gets out of whack from one another. All right, Kenny, we are going to have to leave it there. Thanks so much for joining this morning and providing that analysis. Thank you for having me. Appreciate it. That was diffuse funds founder and Ceo Kenny Este

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