Ric Answers Your Questions About the Bitcoin & Ethereum ETFs

Plus, two webinars this week on the ETFs and the coming cuts in interest rates

It's Monday, September 9th. Over the past couple of weeks, I have shared with you some updates regarding what's going on in the world of crypto: bitcoin, Ethereum, blockchain, tech, etc. It's generated lots of questions from folks. And so I thought what I would do today is go through all the questions that I've received over the past couple of weeks, since there's so much interest in this. So, here we go.

The first one, is from Buddy in Ohio:

“As I look at these Ethereum ETFs, I see that some are labeled trusts, others are called ETFs, and some use the term ETPs. What's the difference? At tax time, will some of these issue an I-1099 and others a K1?”

Yeah, it is a little unnecessarily complicated, I think, Buddy. It's, you know, when lawyers get involved, they tend to make things more complicated than ordinary mere mortals like you and me care about. Technically speaking, all of these, not just the Ethereum ETFs, but also the bitcoin ETFs, they're not really ETFs, even though, as you noted, some of them are referring to themselves that way. Technically, they are ETPs.

In other words, there's a difference between an exchange traded fund and an exchange traded product. They fall under different sets of securities laws. I really don't see any difference for you and me, in terms of practicality, in terms of safety and security, in terms of regulatory oversight, investor protection. It really doesn't matter a whole lot. What's the difference between an exchange traded fund and an exchange traded product? Well, product is a bigger overarching phrase. There are lots of different types of products that trade on exchanges. Some of the products are funds. Some of them aren't. For example, there are ETNs, exchange traded notes. So, it's kind of like, all dogs are animals, but not all animals are dogs. So, all ETFs are ETPs, but not all ETPs are ETFs. And also, as you noted, some are labeling themselves as trusts, and that's another example of the technicality of this industry. They all are trusts under the federal rule that is governing them.

Bottom line for you: it doesn't make any difference. A rose is a rose. And in terms of taxes, come tax time, as you've asked, you're going to get a 1099 for all of these. It doesn't matter which of the bitcoin or Ethereum ETFs you buy, they are all ETFs in terms of their tax application. So, you’re gonna get a 1099, not the dreaded K1.

So, no worries, Buddy. Glad you're asking, but don't give it any further thought.

Here's a question from Mike in Charlotte, North Carolina.

“Hey Ric, love all the work you do. Very helpful and inspiring. While still a novice on cryptocurrency, blockchain, and so on, I wanted to get exposure to Ethereum before the ETF was launched. So, I bought an Ethereum futures ETF. Now that the spot ETF is available, should I sell my futures ETF and buy the spot ETF?”

Mike, if I owned a futures ETF, I would sell it for the spot ETF. A futures contract is where you're making an investment based on what you believe the future price of the asset is going to be. You have to be right, both about what the future price will be and when it'll be there. In other words, I could make a bet that IBM will be higher in the future. If I were to buy IBM stock, I can just hold onto it for the next 50 years waiting for that price to get where I want it to be. But if I were to invest in a futures contract on IBM, I would have to be right within a certain period of time because all futures contracts have a deadline. Owning the stock itself doesn't have a deadline.

So, futures are inherently riskier. And as a result, since there is a deadline, the contracts expire. That means you have to buy a new contract to replace the one that expired. That means you're going to be doing more trading, and that means you're going to be incurring more expenses. So, futures ETFs are inherently riskier and inherently more expensive than spot ETFs. Spot simply means you own the actual asset. Futures means you're betting on the future price of the asset. So, yeah, if it were me, I would sell my Ethereum futures ETF and put that money into the Ethereum spot ETF instead. Talk to your financial advisor and tax advisor because you may incur tax liabilities associated with this. And remember, I'm offering education, not advice.

Dan, has written to me. He is a retired benefits and HR services director for the Long Island Railroad. And here's what Dan asked:

“Hi, Ric. Any thoughts on the recent court ruling in the case of the SEC versus Ripple? It seems like it should be a fairly big deal in the digital assets world, but I haven't heard much reaction to the ruling. Just curious. Thanks.”

Yeah, you're right, Dan. You've obviously been following the crypto marketplace for several years, and you would be right to assume that with this court ruling and Ripple winning its lawsuit against the SEC, that the crypto marketplace would be getting really excited about this, and it would be a big deal. It hasn't. It's been kind of petering out. Let me go back for some folks who are less familiar.

Ripple was one of the dominant digital assets over the past decade. It was sued by the SEC arguing that what they were doing was acting as a security and they were therefore, an unregistered security, which is a big no-no. Ripple disagreed, took the SEC to court, fought the SEC, and ultimately won in a very big way. And when the sec went after Ripple, the price of the digital asset collapsed like 99%. When Ripple won its lawsuit, or defeated the SEC in court, you would have expected the price of Ripple to rise dramatically, and it did go up a lot, not back to where it used to be.

But why hasn't the crypto community been paying much bigger attention to this? For the simple reason, Dan: I believe is that the crypto community has moved on. Ripple was a big deal way back when, but by the time they got through their fight with the SEC, all eyes shifted to other areas, particularly more so onto bitcoin, Ethereum, stablecoins, and other tokenization elements of the blockchain world.

So, yeah, congratulations to Ripple for winning its case against the SEC: one of many examples where the SEC has failed in its efforts to quash crypto. But, I guess you could argue the SEC kind of won because they took the wind out of Ripple’s sales. So yeah, much ado about nothing is what it comes down to with Ripple.

Louisa in Illinois asked me this question:

“Ric, I appreciate all the books you've written, and I've enjoyed them all, and I'm a devoted listener to your podcast. My question pertains to digital assets. How is it that law enforcement officials find ways to track and recover these assets that were stolen by hackers or by demanding a ransom? How can this take place if crypto is so ultra safe and secure?”

Well, here's what it comes down to, and it's a really good question, Louisa. One of the big features of blockchain technology is that your password, known as a private key, is highly safe, highly secure and virtually unhackable. And, yet, the downside of that, of course, is that if you lose your private key, you lose access to your crypto and your money is gone forever.

It's kind of like saying you've lost the password that, you know, that's kind of like saying you buried treasure in the backyard, and then later on, you forgot where you buried it: gone forever. So, you really want to protect your private key. But at the same time, I have said, in past commentaries about blockchain, that law enforcement loves crypto because law enforcement can track transactions. And in fact, they have been very successful at recovering stolen assets. Very famously, for example, a few years ago, the Colonial Pipeline was hacked. The crooks demanded $5 million in ransom and that it be paid in bitcoin. It only took the FBI about two weeks to recover the money. So, this seems to be a contradiction, doesn't it? If on the other hand, you lose your password or if your password is so private, that it's unhackable, how was it that the FBI was able to trace it, track it, find it, and reclaim it?

It's real simple. There's a trick here. Tracing and tracking is easy. That's the whole point of blockchain. Blockchain is a distributed ledger that is public. Everybody with an internet connection can see and trace every transaction that has ever been done on a blockchain. That's one of the big benefits. But just because you can trace the transaction doesn't mean that you can manipulate it, that you can alter it. In other words, just because you can trace it doesn't mean you can grab it, that you can steal it or obtain it. So, how was it that the FBI was able to do this? They did it with the cooperation of the blockchain itself. In other words, it's kind of like saying the FBI knocks on your door and says, ‘we understand that you are in possession of stolen goods. Would you please give us the goods that were stolen? You got them inadvertently. You didn't want to be a participant in this crime, but now that we're telling you that you are, would you help us out and turn it over to us?’

And the blockchain participants, the exchanges where this occurred, were very happy to help law enforcement. The honest exchanges are very happy to participate. They don't want to see the crooks engaging in this activity any more than anybody else. And with their help, the FBI was able to return the bitcoin to its rightful owner.

So that's what it comes down to, is that the community is cooperating with law enforcement and enabling law enforcement to do its job. So, it's not as much of a conflict as it might appear to be, but it might raise eyebrows that people are saying, ‘gee, is that good that the crypto community is cooperating with law enforcement?’ I would think so, the same way that it's a good thing that banks cooperate with law enforcement. But maybe you might have a different point of view.

David's in Beverly Hills, and he wrote me this:

 “Is buying a crypto ETF a smart move today, rather than buying directly at Coinbase?”

This is a pretty fundamental question, David. This is the fundamental decision that all bitcoin buyers and Ethereum buyers need to make: should you buy bitcoin directly? You know, you open an account at Coinbase or Kraken or some other crypto exchange, buy your bitcoin directly there, or should you buy bitcoin via a bitcoin ETF? Let me give you the pro and con.

If you buy a bitcoin ETF, you are buying it the cheapest possible way. These ETFs cost maybe 20 basis points, two-tenths of 1%. That is very, very cheap. Trading at Coinbase: substantially higher. 1.5% to buy, another 1.5% to sell. So, the ETFs are dramatically cheaper. They are also securities, which means they're regulated by the SEC. You also have SIPC protection because they are ETFs.

The record keeping and tax reporting are much simpler as well. You get a 1099. You can engage with this in your ordinary brokerage account where you can do rebalancing and dollar cost averaging and tax loss harvesting. Simple, easy, convenient to use. You can do this with any financial advisor. The downside of buying the bitcoin ETF is that ETFs are only tradable during market hours, you know, typically 9:30 to 4:00 p.m., Monday through Friday, except holidays. Whereas bitcoin itself trades 24/7, 365 all around the world. So, if there's a big movement in the price of bitcoin over the weekend or at night or on a holiday, you can't trade. You have to wait for the markets to open next week or the next day. So there, you could incur a bit of a time delay in your trading desires.

Also, the bitcoin ETF is great for bitcoin, but that's all it is, bitcoin. At Coinbase, you can trade dozens of different digital assets, not just bitcoin and Ethereum. So, you have a much greater opportunity for diversification at Coinbase than you have with a single asset ETF like the bitcoin ETF or Ethereum ETF. So the choice is yours, but I believe for most ordinary investors who just want to have a small allocation, 1 or 2 or 3% of their portfolio, in a diversified way as part of their broader investment strategy, I think for most ordinary folks, the crypto ETFs are the better way to go, but it's up to you.

Kevin lives in Middletown, Delaware, and here's what he asked me:

“When I buy a bitcoin ETF in a brokerage account, is the price of bitcoin reflected in the ETF price? I'm asking because the convenience of the ETF is superior to owning and storing bitcoin directly, but not if prices aren't accurate and current.”

Yes, Kevin, it is. The bitcoin ETFs have already proved in their short life, they've only been around since January, that the price of the ETF moves very, very closely to the price of bitcoin itself. That's exactly what you would want to see. It's the same thing we see with gold. The price of gold and the price of gold ETFs, they track very closely as well. As do stock ETFs and individual stocks. So, I don't think you need to be worrying terribly much about a disconnect between the price of bitcoin and that of the bitcoin ETF. It's not a concern in my opinion.

 Robert in Randolph, New Jersey wrote in as well. And here's what he asked:

“Dear ear Ric, I am a longtime follower of your radio show and now your podcast. Thank you for great content and insights into our financial futures. My question is about the new bitcoin ETFs. January 10th, my birthday, was the first day those bitcoin ETFs were allowed to trade. Feeling giddy that your forecast finally came to fruition, I purchased small amounts of EZBC and BITB. I have followed the ups and downs, and I note that the two of them tend to rise and fall in concert from day to day, but they do not seem to gain or lose value to the same proportions. Why is this different if they are essentially invested in the same underlying asset?”

Robert, you can see the same kind of phenomenon in the stock market and with stock ETF stock funds as well. It depends on the inner workings of the fund. It depends on the flows, the amount of money being deposited into the fund, the withdrawal requests that are coming out of the fund, the expenses associated with the fund, the trading parameters. You will occasionally see some divergence, but what we have observed is that the divergence among the different ETFs is really pretty small. The range has been pretty narrow, and it isn't something that I would be worried about. However, it does exist, as you've noted, and this is why I'm a fan of owning more than just one of the bitcoin ETFs. I think owning several of them can help you avoid the risk that you buy one that isn't performing quite as well as another one. Even though they'll be performing very, very similarly, there may be a difference of 1 or 2 or 3% per year. And this way, instead of guessing which one will outperform the other one, own several of them, and you'll average out their varying performances. That's what I do, anyway. I think that's a good approach.

Joe from Springfield, Pennsylvania also wrote to me, and Joe asked me the following:

“Ric, you mentioned that bitcoin ETFs can be purchased for any brokerage account. I believe that Vanguard does not offer them.”

You're absolutely right, Joe. I have said that you can buy the bitcoin ETFs from pretty much anywhere. But that is pretty much anywhere, and not anywhere. Vanguard very conspicuously announced that they will not make available to their customers the bitcoin ETFs, or I presume also the Ethereum ETFs. I believe: shame on Vanguard. This is, you know, Vanguard is not my mother. They don't get to tell me what I can and cannot do. If I want to buy an investment in a certain asset class, that's my money, my prerogative, and who is Vanguard to tell me I can't do it? I believe in the long run, Vanguard will change its policy because its customers are going to become upset. A if they're not going to be able to buy bitcoin ETFs at Vanguard, they're going to go to Fidelity or Schwab or somewhere else where they can buy it. So yes, you're right. Vanguard is not letting you buy the bitcoin ETFs. Therefore, my advice is to close your Vanguard account and go to Schwab or Fidelity where you can.

Jonas is from Harvard and Viek is from Mount Airy, Maryland. They both asked a very similar question. I'm going to give you the one from Jonas simply because I got his first:

“Hello, Ric. First of all, thank you so much for the service you provide in digital assets education to the entire world. I have learned from you that one of the uniqueness of digital assets is that it behaves different from bonds and stocks. So why, when the stock market fell recently, did most of crypto fall too? Is there a lesson to be learned here? Big fan of your podcast.”

Yeah, you know, if you've been paying any attention at all the past month, you've seen that the stock market has done very poorly, and so has crypto. The two have been moving in sync. Historically, over the past 15 years, the price of bitcoin has largely moved independently from the stock market and the bond market. This low correlation has been one of the attributes of investing in crypto. As we have gotten more and more engagement from Wall Street: the endowments and pension funds, institutional investors, family offices, sovereign wealth funds, and ordinary routine rank and file financial advisors serving retail investors, we're seeing more and more correlation. We're seeing that as investors are getting negative on the markets, they're selling everything: stocks, bonds, real estate, gold, oil, commodities, and crypto. And they're being less discerning about saying, ‘oh, bitcoin has nothing to do with the stock market, even though I'm selling stocks, I really don't need to sell my crypto.’

So, you're absolutely right. We have been seeing, recently, more of a correlation than we have traditionally over the past decade. Will this correlation stick, or will it return to the way it was before? I don't know. We're going to have to wait and find out.

So those are a bunch of the questions that I have received from you. Thanks for sending them in. If you have further questions, feel free to send them to me. The link to do so is in the show notes.

Also, I want to tell you that we just released our second quarter survey. We produce a survey every quarter with Franklin Templeton Digital Assets on taking the pulse of advisors about crypto. In our new 2Q survey, 40% of financial advisors say they have now recommended crypto to at least half of their clients. That's up from 32% back in Q1. No doubt the availability of the bitcoin ETFs are responsible for the increase. Also, the number of advisors recommending crypto to all of their clients nearly doubled from 8% in Q1 to more than 13% in Q2. If you'd like to see the full survey results, they’re all available at my company, the Digital Assets Council of Financial Professionals, DACFP.com. The link to the survey is in the show notes.

And we've got two webinars for you this week. Tomorrow, 1:00 p.m. on bitcoin and Ethereum. Should you invest in one or the other or even both? How to Make Informed Crypto Allocation Decisions. Now that the Ethereum ETFs are available alongside the bitcoin ETFs, a big question is how do you allocate between them? We're going to talk about their similarities and their differences, their risk reward profiles, and a whole lot more to help you make effective decisions. David Alderman, the research analyst at Franklin Templeton is going to be joining me. So, I invite you to participate. The event is free. If you're a financial advisor, you get one CE credit. You can register at DACFP.com. The link is in the show notes. That's tomorrow, 1:00 p.m. eastern.

And then on Wednesday, the long-awaited webinar on the bond market. That's Wednesday, September 11th at 1:00 p.m. Cash was king, but now that interest rates are going to be coming down, what does it mean for your cash holdings and more importantly, your bond holdings? Jerome Schneider, the portfolio manager at PIMCO, the world's largest bond fund manager, is going to be joining me. We're going to help you figure all this out. That webinar on Wednesday is also free with another CE credit available. You can register by just clicking the link in the show notes. I'll see you tomorrow and Wednesday for the two webinars.

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Links from today’s show:

9/10 Webinar – Bitcoin, Ethereum, or Both? How to Make an Informed Crypto Allocation Decision: https://dacfp.com/events/bitcoin-ethereum-or-both-how-to-make-an-informed-crypto-allocation-decision/

9/11 Webinar – Rates are Poised to Drop, Now What?: https://www.thetayf.com/pages/rates-poised-to-drop-now-what

Advisor Pulse Survey, Q2, by DACFP and Franklin Templeton: https://dacfp.com/further-reading/

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