Ric’s 2024 Bitcoin Prediction - with a Warning

What to expect with the launch of spot bitcoin ETFs

Ric Edelman: It's Tuesday, January 2nd. Happy New Year! Hope you're looking forward to 2024 as much as I am. In fact, let's start off this brand new year with the most exciting investment conversation there is crypto. Bitcoin rose about 160% in 2023. There's a huge amount of excitement over what's coming next, because everybody's anxiously awaiting the SEC to approve the new spot. Bitcoin ETFs. The SEC announcement might come as soon as today or tomorrow, with the launch of these funds no later than January 10th.

My prediction for 2024 is that the SEC will approve several of these ETFs, and they will be the most successful ETF launch of all time, beating the ETF. I invented the iShares Exponential Technologies ETF, symbol XT back in 2015. That was the second biggest ETF launch in history when it came out. And I predict that we're going to see $150 billion flow into these new spot Bitcoin ETFs over the next three years. And that $150 billion is going to come just from RIAs. I'm not talking about stockbrokers at wirehouses or independent broker dealers or regional broker dealers. I'm not talking about the institutional investors. Independent RIAs alone are going to send $150 billion into these new ETFs. How do I reach that number. Well think about it. Independent registered investment advisors collectively manage about $8 trillion in assets for clients. Three quarters of those advisors say that they're waiting for these ETFs in order to allocate Bitcoin to clients, and that their average allocation is going to be 2 and a half % of the portfolio. 

So do the math. $8 trillion times 77% times 2% - you get about $150 billion. That's a huge inflow into Bitcoin. But as much as I'm enthused about that, as much as there's so much excitement and anticipation of the SEC's approval of these new ETFs, I need us all to temper our enthusiasm. We need to recognize that this is not a light switch. The mere approval of the SEC, the mere launch of the ETFs themselves, does not mean that bitcoin's price is going to double, triple, quadruple overnight.

We need to temper our enthusiasm. I'm afraid people are getting a little too excited, a little too ahead of themselves, a little too bubbly, and that's going to lead to disappointment. It's going to lead to unfulfilled expectations. And you're going to see some negative headlines when the instantaneous doubling of bitcoin's price doesn't occur.

First of all, let's remember that the flows into these ETFs are not going to occur immediately. Yeah $150 billion is what I'm expecting from independent RIAs. It's not going to happen overnight. It's going to take the next few years for that to happen. Let's keep in mind that there are three different kinds of financial advisors. You've got the wirehouses, you've got the IBDs and you've got the RIAs. 

So let's talk about them one at a time. At the wirehouses, we're talking about the nation's biggest national brokerage firms - Merrill Lynch and Goldman Sachs, Morgan Stanley, JP Morgan, Wells Fargo, UBS. These are the huge, big wirehouses. They manage most of the money that all advisors manage, because these are huge organizations that have been around for 100 years. These organizations are slow to move. Just because the SEC says these ETFs are available, doesn't mean that these brokerage firms are going to put those ETFs on their platforms on day one. They're not going to make them available to their financial advisors on day one. These firms typically go slow. First of all, they're big bureaucratic companies. They've got compliance departments and investment committees. They've got to do due diligence. Do they like these products? Are these products something they want to make available to their advisors? Which of these dozen ETFs do they want to make available? Compliance is going to weigh in on this as well. And typically these big wirehouses they generally don't make new ETFs available to their advisors until they have at least $100 million in assets. They want to make sure that there's sufficient liquidity to be able to handle the massive trading flow that their tens of thousands of reps would want to engage in. So it could be a year before these firms make these ETFs available to their advisors and by extension of their clients. 

And then there are the IBDs. These are the independent broker dealers, the regional broker dealers, outfits like Raymond James, A.G. Edwards, Edward Jones, LPL and the like. These independent firms also are a little bit bureaucratic. They're faster to move, they're a bit more agile than the Wirehouses, but they still aren't necessarily going to make these products available on day one to their reps. It's that third category, the independent RIAs. These are typically small mom and pop shops, often a single adviser in the practice. They are owning their own business. They can therefore do whatever they want because they are their own compliance department. They are their own investment committee, and they typically arrange custody through an outfit like Schwab or Fidelity or Pershing, who will make the products available on their platforms right away, because it's not up to them to decide what their reps want to offer clients. This is the category that will be fast moving, but even they are not going to be able to move instantaneously. Even if you are one of those independent RIAs and these ETFs become available immediately, that doesn't mean you're going to immediately add them to your client portfolios.

Look, it's the beginning of the year. You've got other things going on. We're about to get ready for tax season number one. You've just finished year-end tax planning with your clients last week. We have other things to do. You've got to figure out which of these ETFs do you want to offer. Which of your clients do you want to offer them to. How much do you want to put into the client portfolio? How are you going to communicate this to your clients? You are either going to tell them in advance you plan to do this, which means you've got to explain to them what all this is, or you're just going to do it automatically using your discretionary authority. All of this is going to take a little bit of time and effort on the advisors part to figure all this out. And let's face it, most advisors don't know much about Bitcoin, which means all advisors, whether you're at a wirehouse or you're an independent operator, you're going to need to take a little bit of time and learn about this new asset class, something I've been beseeching you to do for the past ten years, by the way. But we won't go there. So it's going to take time for these flows to occur into these ETFs.

So if you're expecting massive amounts of money to be dumped into these products on day one, I think you're going to be disappointed. And I think as a result of this, we are likely to see headlines in the financial trade press as well as the financial press, like The Wall Street Journal and Bloomberg and Investor's Business Daily, all saying that flows into these ETFs are proving to be disappointing. They're going to look at lackluster flows as evidence that there's not much interest in these products. None of that will be true. None of that will be accurate.

But for those that don't understand the mechanics of how an investment advisory practice works, they're just going to look at that as a data point and they're going to make a big deal about it. So let's temper our enthusiasm simultaneously. While everybody's really excited about the opportunity to finally buy bitcoin and incredibly easy way, this is why these ETFs have been considered the holy grail of crypto for a decade. There's nothing simpler, easier, and inexpensive as an ETF for investment management. The fact is, while so many of us are looking forward to seeing money flowing into Bitcoin via these ETFs, we need to recognize that some folks are very busy selling their bitcoin.

Two organizations in particular are going to be doing a lot of selling this year. Who are they? The Mt. Gox Rehabilitation Trust and the trustees of the FTX bankruptcy. Yeah, these were the two biggest crypto frauds since the inception of Bitcoin Mt. Gox way back in 2012. You probably have never even heard of it. 

And more recently, FTX. You've certainly heard of that. Bottom line is, just like the Bernie Madoff scandal occurred way back when, back in 2007, the trustees of Bernie Madoff are still distributing money to victims here all these years later. And today, we are still distributing money to the victims of the Mt. Gox scandal and the FTX scandal. These trustees are sitting on a bunch of bitcoin, $5 billion worth of it at Mt. Gox; 3.5 billion of it at FTX. And under court order, they are in the process of distributing that money to victims and to distribute the money they've got to sell their bitcoin.

So while everybody is busy buying bitcoin through these new ETFs, these two very big trust organizations are busy selling their bitcoin, which means you have downside selling pressure while there's upside buying frenzy. So that'll temper the excitement of Bitcoin flows during 2024 as well. Most folks are not aware of this. There's something else going on that many people are not familiar about with these Bitcoin ETFs. The SEC is requiring them to redeem in cash only, not in kind. Now, this is a piece of fine print that most investors are not going to be able to follow. But it's really important for investment advisors to understand how this works. I'm going to explain it to you in detail.

Pretty much every ETF that trades in this country, and we're talking tens of thousands of them, you can redeem in-kind, which means if somebody wants to sell their shares, the ETF doesn't have to liquidate the shares and convert it to cash. They can transfer the shares of the underlying securities inside the ETF. This is a huge tax advantage that ETFs have over mutual funds. Mutual funds have to redeem in cash, but ETFs can redeem in-kind. This is why ETFs are so incredibly tax efficient. They virtually never distribute capital gains on an annual basis. Mutual funds almost always do.

But the SEC doesn't want these Bitcoin ETFs to distribute in-kind. They don't want in-kind redemptions. Why? Because the redemptions would be in bitcoin. Bitcoin is not a security and the SEC doesn't want brokerage firms handling non-securities. Therefore, the argument goes the SEC only wants cash redemptions. This is going to create additional operational effort, complication and cost for the ETFs and create tax liabilities for the investors. A lot of folks don't realize that immediately. They're going to figure it out pretty soon. And that means a lot of investors are going to ultimately decide they might want to buy their bitcoin in a different format than these ETFs. They're simply not going to prove to be as tax efficient as many people assume.

And let's keep in mind, we have 13, maybe 14 ETFs that are trying to get approval from the SEC right now. We're not sure how many of them the SEC will approve. I think it's going to be the vast majority of them, somewhere between 6 and 12 of them.

But frankly, do we need a dozen Bitcoin ETFs? They're all buying the same thing. It's a single asset product. They're all buying just one crypto Bitcoin. It's like an ETF in the stock market that only buys a single stock. How many of them do you really need and therefore how many of them are really going to survive. So when you look at the amount of money they're managing, you look at their asset management fee called the expense ratio. They need to collect about $50 million in assets to make enough money to break even. These ETFs are not nonprofits. They are in business to make a profit. And if they can't collect enough assets under management, they will shut down.

With a dozen of them all being launched all at the same time by the SEC, they're all going to be competing for investor dollars simultaneously. This is massive competition, which is good for the investor. It's good for the consumer. This is exactly why the SEC is going to approve so many of them all at once. You're going to see massive marketing and advertising efforts by all of these companies, because they're going to be trying really hard to collect assets under management to get you to choose them, as opposed to one of their competitors, because they're going to be spending so much money in advertising. 

This is going to be raising their costs. It's going to either forcing them to raise their expense ratio, where you pay more to own the ETF, or it's going to take longer for them to become profitable because they're going to need that much more in AUM to make a buck. And at the end of the day, I'm not sure that we need all 12 of them in the marketplace. Some of them may fold, and if one of these ETFs folds because they aren't collecting enough assets under management, that will be a negative headline in the financial press. And that negative headline will be used by the crypto haters as evidence that bitcoin is a bad investment. And while all that's going on, a lot of advisors and a lot of investors think that these Bitcoin ETFs are all the same, they don't realize that there are tremendous differences between them.

Everybody thinks, well, hey, this is a single asset product. Everybody owns the same thing - bitcoin. Therefore there's only one thing that's different, the expense ratio. What's the fee of the ETF? You're wrong if that's what you believe. There are in fact four major differences in these ETFs that you need to pay attention to.

First, who's the custodian you see when you buy a stock ETF? We don't think about who's the custodian of the shares of our stocks, because we've been handling shares of stocks for over 200 years. We've gotten really good at it. It doesn't matter where you buy your stocks from, whether it's at Merrill or at Schwab or at Fidelity. Nobody really thinks about it because it really doesn't matter very much. But in the world of crypto, who the custodian is matters an incredible amount.

Remember Mt. Gox that was a custodian; FTX that was a custodian. Both of them went broke and took away the investors’ money with it. And in the world of crypto, there's no SIPC to bail you out if the crypto custodian folds. So your choice of custodian matters an awful lot. Who are these ETF providers choosing as the crypto custodian on behalf of their investors?

Second, who's the surveillance partner? You see, if you want to know what's the price of IBM stock? Well, it's easy. We all agree on the price of IBM stock. You just look at the price on the New York Stock Exchange. You'll know exactly what the price of IBM is. Everybody's in full agreement all the time. But what about Colgate toothpaste? You know, Safeway Supermarkets has one price. 7-Eleven has a different price, both at the same time. So how do you know what the actual price of Colgate toothpaste is? That's the problem we have with bitcoin. It trades 24/seven, 365 on a global basis, and in any given moment, on any given exchange around the world, the price of bitcoin might be different. 

The SEC doesn't like that because the SEC cares first and foremost about fairness to the investor. They don't want you getting one price and another investor getting a different price at the same time from two different places. So the SEC is very concerned how these ETFs are handling the reporting of the price of bitcoin. And the SEC has said to these ETF providers, we're not going to let you tell us the price because you have a conflict of interest. It's in your best interest to have the price be as high as possible, because that makes the profits as big as possible.

So the SEC has told these ETFs, you've got to hire a surveillance partner, an outside third party objective observer who is going to surveil the crypto marketplace and tell you what the price of bitcoin is at any given moment. Who is that surveillance partner? How effectively are they able to surveil the marketplace? How legitimate is the pricing that they're reporting? The choice of surveillance partner is key to the value reported on your ETF. Who is your ETF choosing as their surveillance partner?

Third. Although it's true all these ETFs are single asset ETFs they're all doing nothing but buying bitcoin. Some of them are actively managed, while most are passively managed. If you're just going to buy and hold bitcoin, sure, that's like buying and holding the S&P 500 as a passive strategy. But we know the big debate among advisors between active versus passive. 

Some of these Bitcoin ETFs are actively managed. They are going to be actively buying and selling during the year based on what they think is going to happen next to bitcoin prices. Do you want to own an actively managed bitcoin fund or a passively managed one? We're going to see some pretty big differences in returns because of the volatility of bitcoin. So you need to make that important decision.

And related to that is the cash allocation decision of the ETF. When you invest in any ETF, 100% of your money doesn't go into the stocks or the bonds, or the real estate, or the gold or the oil or the bitcoin. The ETF provider keeps some of the money you invest in cash they need to handle liquidations and withdrawals. They also need to debit their annual fee, the expense ratio which they debit on a daily basis. So some of the money sits in cash. Well how much? 5% of the portfolio? 10%? 20%? The more money that's in cash, the less money that's invested in bitcoin which reduces the returns when bitcoin rises. So not only do you have to choose whether you want an ETF that is active versus passive, you've got to evaluate how much cash are they generally going to hold in the portfolio.

And then finally the fourth difference between these ETFs the expense ratio. What's the annual fee that they're charging? So there are four levers for you to fuss with the custodian the surveillance partner active versus passive and the expense ratio. 

And here's what I really think is going to happen. Advisors, for the most part, are currently not recommending bitcoin to their clients, only 12% of them, according to our latest data. And yet three quarters of them say they're going to invest in these Bitcoin ETFs. This is the first time the vast majority of advisors will be investing in crypto. And they're going to check the box. They're going to accommodate the client. They're going to expand the diversification of the client portfolio. It's all good.

But advisors are smart people, talented and experienced. And advisors know the proper way to invest. Advisors know that the importance is diversification and rebalancing, and advisors understand dollar cost averaging and tax-loss harvesting. And this is exactly why advisors give their clients diversified stock portfolios. I don't care how much you like Apple or Amazon, that's not the only stock that you own in your portfolio. You've got hundreds, thousands of stocks in your portfolio. Because we know diversification reduces risk, and the rebalancing of a diversified portfolio helps to improve the returns. This is how we manage money. It's all based on Nobel Prize winning investment strategy. Modern Portfolio Theory, the Sharpe Ratio, Fama-French Three-Factor Model, the Brinker Study, the list goes on and on. We use metrics like Sharpe and Sortino and Max Drawdown to improve the risk reward metrics of our client portfolios. But here's the thing; Bitcoin ETFs only own Bitcoin. 

That's not a diversified crypto allocation. That's like buying a single stock. Advisors are going to quickly realize that although these Bitcoin ETFs are giving their clients allocation to crypto, it's being done in a very narrow way. And then on top of that, we've got the question of did I choose the ETF with the right custodian and the right surveillance partner? Did I choose the correct strategy of asset versus passive.

So you know what I think a lot of advisors are going to end up doing? They're not going to choose one of these Bitcoin ETFs. They're going to choose 2 or 3 of them. They're going to diversify the client assets among two different Bitcoin ETFs, one of them active one of them passive. One of them using this custodian and one of them using that custodian. So if the custodian goes broke, at least not all my eggs are in one basket. I'm going to use different ETFs that have different surveillance partners to diversify the risk away as best I can for the client. This is going to require extra effort and thought and execution by the advisor, but better result for the client. But still, even after doing all of that, the advisor is going to ultimately realize, wait a minute, all I did was give my client bitcoin exposure. I didn't give them any Ethereum. They don't own any Solana or Polygon or Algorand or any of the other major coins. 

And this is why advisors are going to ultimately conclude. And this may take weeks. It may take months; it may take a couple of years. But advisors are ultimately going to figure out, I didn't diversify my client in crypto the way that I diversify them in stocks and in bonds. And besides, how is the advisor showing value add? If all I did was give you an ETF that any schmo can get on their own through any discount broker like Fidelity or Schwab or E-Trade. Advisors want to show value. They want to be able to provide their clients a better outcome on risk and reward than the client is likely to obtain on their own. That means a more sophisticated investment management strategy.

And you know what the answer is going to be for these advisors? Crypto SMAs. Yeah, SMAs are very popular with financial advisors. They are superior to ETFs. Think about it. It's like an ETF that is only owned by a single person. See, the problem with an ETF is that when you own it, you own the exact same portfolio as everybody else who owns that ETF. You can't customize the portfolio. You can't engage in customized tax strategies. But when you create an SMA, a separately managed account, you can do all of that. You can customize what's in the portfolio, you can customize the tax management and the trading. And as a result, you can design the portfolio to fit exactly into the needs of the individual client. 

Can't do that with ETFs. And yes, there are crypto SMAs. So I think these new spot Bitcoin ETFs are going to be the entree the original door opener into crypto for advisors. But they're not going to stay there forever. They're going to recognize that the SMAs are the better route. And that's where it's going to get really, really exciting. But no matter how the advisors choose to do this, they're going to engage. We're going to see $150 billion flow into these ETFs from advisors. Initially we're going to see ultimately more than $1 trillion flowing into these from the entire financial sector of financial advisors individual investors and institutional investors, endowments and pension funds and insurance companies and hedge funds and family offices and sovereign funds - the money that's managed by governments for the money they own themselves. Think about the UAE and other Middle Eastern countries, Russia and China and others. We're going to see massive asset flows into these ETFs and into bitcoin. Outside of the ETFs and crypto beyond bitcoin, it's going to be an incredible flow.  My prediction is that we're going to see $150 billion of flows just from independent financial advisors. Trillions of dollars more from around the world in years to come.

What does all this mean for the price of bitcoin? Well here are some predictions of what Bitcoin's price is going to be here in 2024, Bitwise, which, by the way, is one of the companies that is trying to launch a Bitcoin ETF. Bitwise says that by the end of 2024, the price of Bitcoin will be $80,000. That's about twice what the current price is. Standard Chartered, one of the biggest banks in England, says the price of Bitcoin by the end of this year will be $100,000. Tim Draper says it's going to be a quarter of $1 million, and that's just 2024. Some are making predictions about 2025. AllianceBernstein says that within two years, Bitcoin will be $150,000. I've said the very same thing $150,000 by the end of 2025.

And how about the end of the decade? Techopedia says Bitcoin will be $120,000. JP Morgan says it will be $150,000. CoinPedia says Bitcoin will be $350,000. Ark Invest, which is also trying to launch an ETF, says bitcoin's price by 2030 will be $1.48 million, 1.5 million. So we're looking at projections. Predictions in one year of two x to six x, in two years of four x to nine x; and in six years, three x to 35 x. We're talking X's here, not percentages. Typically you expect 10% from the stock market in a year. We're not talking 10% in a year for bitcoin we're talking 2X6X. That's 600%, 900% in two years; 3,500% in six years versus the stock market that might give you 10% in one year, 20% in two years. 

Maybe you'll get two x over six years out of the stock market. And this is why there is so much excitement about the new spot Bitcoin ETFs, and why a small 1% to 5% allocation makes so much sense.

So yeah, there's a lot of excitement surrounding Bitcoin. And I'm going to be bringing you all the information you need about all these new spot Bitcoin ETFs. As soon as these get approved might be today. Might be tomorrow. I'm going to be presenting special interviews on this podcast with the new ETF managers. I'm also going to be hosting a series of webinars introducing these new ETFs to you. We're also creating a complete toolkit on these new Spot Bitcoin ETFs, which will include a guide exclusively for financial advisors. Another guide one for investors. The toolkit includes my new white paper on these ETFs, a new Bitcoin Infographic, and a really useful chart that lets you easily compare all these new ETFs, plus three educational videos. And all of this content is available for you for free. Just sign up at TheTruthAYF.com, so we can send it to you as soon as these new ETFs are approved by the SEC, which might be today, might be tomorrow, don't fall behind. Make sure you've got the latest information you need so you can make smart investment decisions.

And by the way, for all the attention and excitement that these new spot Bitcoin ETFs are creating, they're not even everything that the crypto community is excited about for 2024. There's a lot more going on in crypto this year, like decentralized physical infrastructure networks and decentralized computing. You've heard of DeFi? Well, these are DePIN and DeComp. DePIN projects incentivize people to build physical infrastructure that's not controlled by big companies or governments. Think of the power grid or telecommunications networks owned by you, not T-Mobile or Con Ed. And DeComp is an extension of DePIN, a distributed network of computers to tackle huge tasks like forecasting the weather or inventing new cancer drugs. Think about generative AI. ChatGPT requires massive computational power, and it looks like bitcoin miners can deliver that power with using the gear they've already got.

Privacy is another new frontier for blockchain developers, and there are two new things coming ZKP and FHE; zero knowledge proof and fully homomorphic encryption. These things let computations be done on user data while keeping the data itself encrypted. For example, you've got a health care organization. They could analyze patient data without revealing the health information of any of the patients and watch for tokenization of real world assets. Institutional use case is now focused on capital market instruments, bank deposits, money market funds, repo agreements. The majority of traditional securities, as you know, settled “T plus 2” (T+2), but this is going to get shortened to just minutes.

In November, JP Morgan used settled tokens that were issued on three different blockchains at the same time. It was a demonstration project for Singapore's central bank and Jamie Dimon, the CEO of JP Morgan. He's still saying publicly he hates crypto. That's absolutely hysterical, especially considering that JP Morgan is one of the authorized participants of BlackRock's new Bitcoin ETF. Jamie, you might say he hates bitcoin, but in fact, based on what he and JP Morgan are doing, it's pretty clear he loves it. He just doesn't seem to want to say so. In fact, JP Morgan settles a billion and a half dollars in cross-border transactions every day using the JPM coin. That's a stablecoin that trades on Onyx, JP Morgan’s own private blockchain. Yeah. JP Morgan uses blockchain technology for the benefit of its institutional clients. And JP Morgan is not the only one doing that. There's $127 billion in stablecoins worldwide. And just like JP Morgan is demonstrating stablecoins like the JPM coin on Onyx, they that is the future of money because of their high speed, low cost and easy access. So yeah, crypto is alive and well.

But wait, I haven't even mentioned NFTs. That's one segment of crypto that has become worthless, right? Well, tune in tomorrow because we're going to talk about NFTs, the crypto fad that has collapsed. Or has it? I've got some surprising info for you, so be sure to listen. Sign up to get our Bitcoin ETF Educational Toolkit.

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