Bitcoin’s Next Act

What lies ahead for crypto investors in the wake of bitcoin ETF approvals

Ric Edelman: It's Tuesday, February 6th. On today's show, a look at what's going on with crypto today. It's been less than a month since the SEC approved spot bitcoin ETFs, and in less than a month, these new ETFs have amassed more than 100,000 bitcoins. $10 Billion in flows, by far the biggest ETF launch in history. And these ETFs are just the beginning. The SEC is now considering a proposal that would let investors trade options on BlackRock's spot bitcoin ETF. Fidelity has applied for an Ethereum fund. Grayscale has filed for a new bitcoin Covered Call ETF, giving you the ability to earn income from bitcoin. And ProShares has filed for five new bitcoin ETFs; leveraged and inverse, two X and three X, and inverse ETFs, which bet against bitcoin.  

What's interesting is that while there's been a huge amount of inflows going into these new bitcoin ETFs, the trading volume in bitcoin futures ETFs have tanked since the new ETFs have launched. Trading is down 75% in futures ETFs, but don't count them out entirely. These bitcoin futures ETFs, which have been around for a few years, they're going to continue to have a role because of how ETFs work. It's worth you understanding all this. When you invest in an ETF, the ETF has to create new shares for you. Those shares represent what you're buying. So you send money to the ETF. The ETF creates new shares representing your money and then goes and buys bitcoin that these new shares then represent the ETFs don't go get the bitcoin themselves.  

However they turn to something that's called an authorized participant. This is a company that the ETF hires to go get the bitcoin for them. The authorized participant buys the bitcoin for the ETF. And later, when you sell your shares, the ETF tells the authorized participant to sell the bitcoin that your shares represent. Here's the thing. You and the ETF are both dealing in dollars. You're not sending bitcoin to the ETF when you invest, and the ETF isn't sending you bitcoin back when you sell, it's the authorized participant that's dealing with the bitcoin. But this means that the authorized participant is stuck with the volatility of bitcoin's price because of the time it takes them to buy or sell the bitcoin after they get the order from the ETF. So they want to hedge their risks against these price fluctuations. And a really good, easy way for them to do that is to trade futures. And presto, the bitcoin futures ETFs are a great solution for them.   

So even though you as an individual investor or advisor probably won't want to use a bitcoin futures ETF anymore, now that you have access to the spot bitcoin ETFs, the authorized participants are going to want to keep using those futures funds. So don't expect bitcoin futures funds to disappear. But also don't think that there's something you're probably going to want to buy anymore. You're going to want to focus, I think, on the spot ETFs instead.  

Meanwhile, is that all there is to this story? The fact that these new spot bitcoin ETFs are out there, and that there are a bunch of new crypto ETFs about to be coming, assuming the SEC says yes to them. Well, no. There's actually a whole lot more to the story going on. And this is what's underneath the excitement for these new ETF investments. Ernst and Young just released a 2024 prediction set regarding blockchain.  

And in their study, they found that 93% of institutional investors believe in the long-term value of blockchain technology and digital assets. 93%, nine out of ten. And 70% expect to increase their allocations to crypto over the next 2 or 3 years. Coinbase did a similar survey of institutional investors, and they found that of those that already own crypto, two-thirds of them plan to buy more. And of those who are not yet investing in crypto, nearly half say that they're going to do so.  

Everybody surveyed says that they believe blockchain can replace current financial systems that are used for payments and trade settlement. Considering that the financial services industry is the biggest industry on the planet, the fact that all these institutional investors from two different surveys are all saying the same thing, that blockchain technology and digital assets are the future of money. Now you understand why there's so much excitement about these bitcoin ETFs.  

And here's an element of the surveys that I think might be a little surprising to folks when they were asked what asset classes they expect to deliver attractive, risk adjusted returns this year. All those who responded listed crypto as one of the top three. And here's another piece of news that came out of Coinbase that I think really says it all about this notion of institutional engagement. Coinbase is slashing its fees. From now on. You pay no commissions for 60 days when you trade crypto at Coinbase, if you trade $500,000 a month. And if you convert up to $75 million into the USDC stablecoin, Coinbase is now charging zero. And they're charging just ten basis points, that's one tenth of 1% for conversions from dollars into stablecoins of between $75 million and $150 million. They're charging 15 basis points if you convert between $150 and $500 million; and 20 basis points if you do conversions of over half $1 billion. Are you getting all this? Are you tracking the dollar amounts we're talking about here? Who on earth has the money to convert hundreds of millions of dollars on a monthly basis into stablecoins?  

Well, you know who exactly those people are. Billionaires and institutional investors. Endowments. Pension funds. Sovereign wealth funds. Family offices. Hedge funds. Stablecoins currently hold about $140 billion in assets. It's not going to be long before they're holding trillions. Clearly, institutional investors are going all in on this. Is it any wonder that retail investors are paying a lot of attention too? In fact, there are now 22,000 blockchain developers. These are the folks who are building out this technology. Most of them are working on Ethereum projects, but not all. A lot are doing other projects as well.  

And at Cornell University, they have now just created the first college degree in Bitcoin, part of the College of Arts and Sciences. And Cornell has also approved its first Bitcoin club. So this is moving into academia as well.  

But if there's one sector of crypto that people think is dead and has nowhere left to go, it's the world of NFTs. NFT prices crashed 95% over the past few years, and people think NFTs are dead. I'm not so sure they are. Maybe, just maybe, they are nothing more than a bear market and that bear market might be over. Genesis Cat is a digital image that was minted using the bitcoin blockchain's ordinals. This is bitcoin's version of NFTs, which are more commonly found on the Ethereum blockchain. Well guess what? The Genesis cat, this digital image just sold for more than $250,000 in an auction by Sotheby's. It sold for 12 times more than expected. All told, Sotheby's sold 19 lots of digital art from 11 artists. Collectively, they sold from $1.1 million. So does this mean that we're returning to investor interest in NFTs and digital art? We'll have to wait and see.  

And to those who say that bitcoin offers no practical use in the economy, consider this news story. It comes from a bathhouse that's opening in Manhattan later this year in the Flatiron District.  

It's going to be 36,000ft². You pay 70 bucks to get in on a weekday, $85 on a weekend. You get to use its pools, saunas, steam room and two hammams, which are heated marble stones that you lay on. The bathhouse is going to have six pools, and four of them are going to be heated by bitcoin. Well bitcoin mining actually. You see it costs a lot of money to heat all those pools, $20,000 a month. The developers say a quarter million dollars a year in heating bills. So the owners have decided to start mining bitcoin, the computers they use to mine the bitcoin, throw off so much heat that they can use that heat to heat up the pools. They're installing 14 rigs. They're going to mine at the rate of 2,600 terahash per second. They're going to generate so much heat that they're going to be able to heat their pools essentially for free. They're going to save $20,000 a month. And not only this, they might just earn a block reward as a result of their mining. A single block reward would be enough to cover their entire heating bill. So for those who say bitcoin mining serves no practical purpose, I think this bathhouse in New York would beg to differ.  

CFTC Chair Rostin Behnam says he's worried about these new spot bitcoin ETFs because they might be introducing new investment risks for investors. And so he's calling on Congress to pass laws that regulate crypto. Nothing new here. He's been calling on Congress to do this for six years. Congress has still not acted, nor has the SEC done much about introducing regulation. Although one note, the SEC did issue a rule in 2022 on how crypto custodians have to report assets and liabilities. But the crypto community says the rules are impractical and expensive to comply with, and doesn't really protect investors anyway. The General Accountability Office, the GAO, says the SEC violated the Congressional Review Act when it issued that rule, which is called Staff Accounting Bulletin, (SAB) 121.  

So now there's a bipartisan group of senators and congressmen who have issued a joint resolution to repeal the rule. US Senator Cynthia Lummis of Wyoming and US rep Mike Flood of Nebraska; they are both Republicans. And US Rep. Wiley Nickel, who's a Democrat from North Carolina. They jointly introduced the bill in both the House and the Senate. And you really have to look between the lines here. The SEC has issued no rules governing crypto except for one. And everyone agrees that the one doesn't do any good and violated the SEC's rules on how you create rules. Clearly we've got to get the SEC into gear, which is what the CFTC is urging Congress to do.  

Meanwhile, something odd was just issued by the US Energy Information Administration, the EIA. The US Energy Information Administration has just declared an emergency and is urgently collecting data to find out how big a problem there is. The emergency that they say has occurred, the emergency, according to the EIA, is that bitcoin's price is up 50% over the past few months. Huh? Why is bitcoin's price up 50% a national emergency?  

Well, here's what the EIA said, “The EIA is making this emergency request because the price of bitcoin has increased roughly 50% in the past three months, and higher prices incentivize more crypto mining activity, which in turn increases electricity consumption. And because we cannot quantitatively assess the likelihood of public harm, EIA feels a sense of urgency to generate credible data that would provide insight into this unfolding issue.” 

Does that make any sense? This is Orwellian doublespeak at its best, and like all doublespeak, it makes absolutely no sense. It's as though the Biden administration is going to extreme lengths to scare people about an emergency that doesn't at all exist. Crypto mining doesn't put the energy grid at risk. In fact, it helps to stabilize electricity grids because it functions on a demand response basis. There's no emergency here to collect data that they don't already have. It's a demonstration that there are still some people in government who oppose crypto and are going to bizarre, crazy lengths to scare people about it in an effort to somehow restrict it, or maybe even ban it. You need to keep that in mind as an investment risk if you buy these new bitcoin ETFs.  

But it's not just Washington that is paying some attention to crypto, other countries around the world as well, but with a more level head. Thailand has an SEC as well, and their SEC has just created a new set of regulations governing crypto, something our SEC has refused to do. In Thailand. The new rules show how companies can engage in sales, trading and initial coin offerings. They're also letting retail investors invest as much as they want. There used to be a limit of 8400 bucks per investment. The Thailand SEC has eliminated that ceiling. Investors are now free to spend as much as they want on crypto investments.  

And in Germany, the police have just done something pretty amazing. They've just seized $2 billion worth of bitcoin. This was not a crypto scam. It was a video sharing scam. And it's really a fascinating story. This guy in Germany for five years ran a website where you could download tens of thousands of movies and a dozen languages. This site was one of the top 25 most visited websites in Germany. People used it to illegally download nearly a million films. They paid this guy a lot of money to do this. The guy took the money. He collected pretty profitable business, even though it was entirely illegal, and he took the money and invested it in bitcoin, and his bitcoin grew to $2.1 billion. And when the German police finally shut down his operation because it was illegal, they took all of his profits because his profits were illegally obtained. So when he got arrested for his video site, they took his bitcoin. It's the biggest bitcoin seizure in German history.  

But that ain't nothing. In the US, our federal government holds $10 billion worth of bitcoin that our law enforcement officials have seized from criminals.  

So what about you as a financial advisor? Are you recommending bitcoin? Are you encouraging your clients to buy these new spot bitcoin ETFs? I think you ought to. You know, my position on this crypto is simply another asset class. It's the newest asset class in 170 years. And just as we believe in broad based diversification for portfolios, there's no reason not to include every asset class. The more you add, the more diversified the portfolio is, the lower its overall portfolio risks. Adding crypto to a portfolio makes sense.  

Finra, however, is now saying that it's concerned that many financial advisors in their efforts to include crypto and client portfolios are making false and misleading statements about it. And Finra wants you to be reminded that all communications with the public must be fair and balanced, and you must provide a sound basis for evaluating the facts regarding any product or service that you discuss with clients. Finra reviewed more than 500 public communications that financial advisors and broker dealers made involving crypto, and Finra says 70% of those communications violated Finra rules, among other violations.  

Finra says these communications falsely said that crypto assets functioned like cash, which is nonsense; that they compared crypto to other assets without providing a sound basis for the comparison; that the explanations of how crypto works were unclear or misleading; that they misrepresented the protections of federal securities laws pertaining to crypto made misleading statements about crypto assets being protected by SIPC.  

You've got to be really careful that you know what you're talking about and that you are treating your clients fairly and objectively, just like you do with every other asset class, Finra says. You must make sure when you're talking about crypto assets, that your communications are not unwarranted or misleading, that you don't overstate the safety of trading in crypto like you don't say…”The crypto assets are secured by a trading platform or backed by a clearing firm…”, and don't make misleading comparisons to gold or cash, or misleadingly state that SIPC applies when it doesn't.  

And above all, make sure your presentation is fair and balanced. Crypto is speculative, you can lose your entire investment. Be sure to explain the commissions of the fees. Make sure you are sufficiently explaining technical terms like blockchain, decentralized platform, and so on. In other words, do your job like you always do. If you don't, you can expect Finra or the SEC or state regulators to come down on you, as well they should. You don't need to hype up crypto. You don't need to make it sound bigger, better than it actually is. It's simply a portfolio diversifier and you should simply include it in a portfolio for that reason; risks and all.  

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