What to Expect After SEC Approves the First Spot Bitcoin ETF? | European Blockchain Convention 9

3 2 1 Is this enabled? Perfectly. Good morning everyone. I am very excited to be on today's panel with my colleagues Maurice, Ave, and Manuel. We will talk about the upcoming approval of a spot Bitcoin ETP in the US.

And I say soon because I believe it will happen. The question is not if, but when. And if you followed you followed any of the previous panels, um, the topic of ETP always came up. But let's first introduce the panel. I give it to you, Manuel.

So, quickly moving on to the panel, I work at Julius Baer. I do investment research on a team called Next Generation Research. Essentially, I have an asset class view at the bank, and I'm also working on a bit of strategy. I am originally from Venezuela, a country of arbitration. I've been hedging domestic currency risks with cryptocurrency for some time now, and that's it .

Good morning. My name is Eric Fonseca. I work at Investcorp and manage a blockchain manage a blockchain fund from Abu Dhabi. Before joining Investcorp, I worked in the investment investment banking industry for 20 years, including about eight years in the digital assets space on the blockchain. Thank you.

Good morning. I am Maurice Mureau. I am the CEO of HODL, a digital asset fund management company. We implement diversified digital asset strategies across Europe. And yes, I'm very happy to be on this panel today.

Thank you, gentlemen. And just to conclude, my name is Kristoffer Sedendahl Kristoffer Sedendahl . I manage institutional sales at Uphold. We focus on education and execution of mostly altcoins mostly altcoins . And just raise your hands, who actually knows what ETP is?

And for those of you who know, who believes that the spot ETP will be approved by the end of the year? Perfectly. Um, with that, uh, positive vibe, I'm going to ask you the same question. Maybe just explain to the audience what ETP is and then what you think about when it gets approved. Well, I'll start with my thoughts.

The approval date, obviously, I raised my hand, but it's uncertain, right? We have several deadlines. Grayscale's deadline already passed last week, so the SEC, according to SEC policy, must provide a response soon. They are either rejecting Grayscale Bitcoin Trust's application to convert to an exchange-traded fund, or they have a new basis, right? Or they simply endorse the product.

On the other hand, we have a cohort of applications, the first of which will be Arca 21 Shares 1 with a maturity date of January 10 next year. So, by January 10th, I expect we will have some answer on this issue. ETFs are essentially going to be around for now , physically backed exchange-traded funds aren't anything new, right? So, in Europe we have assets like these, and in the US we only have futures only have futures . So, they are based on derivatives.

The underlying asset of an exchange-traded fund (ETF) is a futures contract that can be traded on the CME or CBOE. And with this, we have a very large product, the ticker of which is product, the ticker of which is BITO, and which has been on the market for several years. So the consequences can be significant. I think we'll discuss this in a few seconds. And yes, for the SEC, it will peak in the first quarter of 2024.

I expect an answer sooner. Yes, I'll just add the instructions. I think one of the key points of this product ETF (ETP) is to give people the ability to access Bitcoin within the infrastructure they are familiar with. So many institutional and professional investors are already accustomed to trading with ETFs. This means they have already set everything up.

So this is a key factor for them to gain access without having to get a wallet for their own storage, to directly receive Bitcoin. Thus, this will open up a wider audience of investors audience of investors who have been on the sidelines until now, and it will allow them to participate. And this can grow to all my network people, such as accredited investors, who also want to diversify their portfolio. I was a little surprised that there are multiple applications for approval this year because Bloomberg ETF analysts, they actually exist, said there is now a 90% said there is now a 90% chance that approval will be this year. And this is based not only on what Manuel and Javier have already said, but also on the fact that the SEC is currently actively communicating with ETF applicants regarding the product.

And this is the first time since the since the initial filing, it seems, was over four years ago that the SEC is actually in the final stages of discussing what the product should be. Thanks, guys. I guess to create a little background, if you remember, last Monday there was a fake news story that a fake news story that a Bitcoin spot ETF had been approved, and the price immediately went up. So, I'd like to ask you like to ask you guys what your expectations are for the price dynamics of Bitcoin, and then maybe dive a little deeper into the correlation of Bitcoin with other cryptocurrencies, what kind of relationship, what kind of price reaction, uh, do you expect from the whole sector. Maybe I'll start with you, Maurice.

Uh, uh, I think we've seen the price action over the last 2 weeks after, uh, the fake news from CoinTelegraph that Bitcoin is up 35% since BlackRock's implementation. And uh, yeah, I think there's a lot of buzz around this in the short term, and it's definitely going to be very interesting, uh, to see if that continues when the actual approval is out there somewhere soon. Uh, but in the long run the consequences will be great. Uh, I think we should look at the correlation look at the correlation ... That's a separate topic.

Let's look at this in another question. But yeah, it's very interesting to watch, obviously a lot more parties, individuals, institutions will get access to Bitcoin through the ETF, which will probably increase demand, and that's with the half-off inflow, and yeah, that's definitely going to lead to the price action that we've seen over the last two weeks. And if I may add, from my perspective, the main consequence of ETFs is the fact that they appear at a time when there is no market depth for digital assets. If you want to trade Bitcoin on a centralized exchange, you may also experience slippage, which will be the difference between the strike price and the settlement price of around 40 basis points. Large orders will destroy the order book, and that's exactly what happened on Monday.

On Monday, we saw 105 million short positions liquidated in a matter of minutes, and that is also the reason why we are seeing this much improved sentiment. I do n't know if this will be sustainable in the medium to long term because the market is likely to improve in terms of market depth. Currently, market makers have very low incentives to hold their assets on exchanges and provide liquidity. We have 5% liquidity. We have 5% US dollars.

We can issue Treasury bills and calm them down, and that's what hedge funds and all the other market makers do. So, one of the main reasons for such low liquidity is that Bitcoin is becoming a means of savings. Bitcoin plays a role in a portfolio context, providing risk-adjusted returns. And at the same time, Bitcoin owners are accumulating assets. About 80% of the total number of bitcoins has not been traded for over a year.

About 70% have not traded for more than 6 months. So, given this, a supply reduction may even be in the offing . Yes. Yeah, yeah, just a little note, because you asked what happens after, but I think it could also start happening right now, right before that, because the market will be pricing in rumors most of the time, and, you know, buying rumors and selling news selling news . So, we're starting to see this price dynamic for people who are expecting this to happen.

We know that there are some deadlines, for example, the beginning of January. Therefore, we believe that it will be adopted by the end of this year , and then the market will already start to form a price, and this may accelerate. And then, most likely, you'll see another wave, which is the use case I was talking about: ease of access. And you'll have more traffic for people to access. Ultimately, if liquidity is still a little lacking, it will lead to a price increase.

This all sounds very, very positive, but earlier this year we saw the launch of an Ethereum futures ETP , which, when you look at assets under management, seems to have been a bit of a shaky start. Do you have any thoughts on this? I mean, there's one very big positive outcome of this approval of an ETF based on Ethereum futures in the US on October 2nd. Namely, the SEC approved a cohort of products at the same time. In the past, when they approved BITO, they essentially played the role of king- the role of king- manager.

They would approve just one product, and then , a couple of days later, they would approve other products. It so happened products. It so happened that BITO was the first, and they managed to collect the maximum possible amount of assets under management (AUM). What we saw with the US ether futures ETF was the launch on October 2nd, and we saw unimpressive volumes to say the least, although some strategies were weighted towards Bitcoin and Ethereum, weighted by market cap. And unfortunately, we can expect that investors will not be interested in holding derivative-based ETFs.

What to add? I mean, in general, we're talking a little bit about products other than Bitcoin now, and what we've seen in stocks over the last 20 years is search, innovation, and exchange-traded products. It all started with, uh, securities that just tracked the NASDAQ or the S&P 500, and then very quickly evolved into a very creative space where you could track factors and sectors, as well as ESG-themed portfolios. I was going to ask the panel how you see a potential repeat of this in the digital asset sector. Well, I'll start.

So, I think it's interesting to see more and more intersection between Trade Five and anything blockchain-focused. So, in the case we are discussing, if it is an ETF, then it is a factor that allows access to digital assets through conventional, like traditional rail transport. But we also see a way back, eventually, with the tokenization of real assets, which is a hot topic right now is a hot topic right now . And then, for example, you could potentially tokenize everything using blockchain technology to make it a factor for fractional ownership and others. So I think this is just the tip of the iceberg and the general willingness of the market to get involved, to spark interest again, more and more interest in digital assets.

It will also be good to see if there is another product now in the Trade Five range that has, for example, a different settlement period and all the different methods involved, different storage conditions; and that makes it very interesting to see if they did that while working with the product to see the benefits of blockchain, and that will definitely lead to more products, not just in the ETF space, but also in the tokenization space also in the tokenization space , I think. And finally, in my opinion, in the context of a portfolio, your retail investors need a product that lowers the barriers to entry into cryptocurrency. As we all know, we need a very high level of education to understand the simplest blockchain transactions blockchain transactions . Average retail investors aren't ready for this yet, and ETFs could actually spur a new surge in demand, right? So, people need an institutional-grade asset class institutional-grade asset class where they can gain indirect access to this asset class and include it in their portfolio.

So, in my opinion, there is also a demand component. No, absolutely. I mean, it's a wrapper that was used in the past. People are familiar with it, and I think one of the key words when it comes to ETP is accessibility. As you understand, I mean this turning point, which I previously called the tipping point.

Once we approve this, what will it do for the digital asset space as a whole, considering mainstream media, education, will people start to become more comfortable trading? Well, there will be no trading, but there will be access to Bitcoin as part of portfolio diversification? Are there any thoughts on this thoughts on this ? Yeah, I'm very optimistic about it, and regardless of the movement of Bitcoin, to be honest , I'm not really against it, but, uh, the interest from the ecosystem is starting to show, also it's related to funding, it's all coming back because people often equate blockchain with Bitcoin, which is just one of the use cases, maybe the most visible. But with the return of confidence in these use cases, and with the fact that we start talking about it more and more on the side in combination with artificial intelligence, I really believe that people will also start paying attention to blockchain again.

This means that we also, like a venture capitalist, or like funding rates, we get more people who want to invest to support all the innovation for startups, and it starts to have a domino effect. Because if we invest in more companies like this, it will mean that these are also companies that are working on DeFi, working on different use cases that will help the ecosystem overall. So for me, aside from ETFs and Bitcoin price dynamics, this is what's really interesting. This is a new wave of interest and investment in the global ecosystem. And you can already see that the questions that the SEC is asking applicants are that they need to think about this.

What happens when a hard fork occurs? How does this relate to your product? They should describe this so that investors know what is happening with accounting standards. How is it taxed, etc. taxed, etc.

So, it starts with the product developers explaining to investors how the product works, as well as how the underlying product works. And this makes them more aware of cryptocurrencies, blockchain, etc. And this will certainly lead to more. But when it comes to education, I think the main task here belongs to all of us. This is a blockchain conference or convention, and we need to be spokespersons to make everyone realize that this space is evolving so rapidly that everything related to traditional finance will eventually touch blockchain in one way or another .

Anything to add? Yes, I mean, for me, and I have to be the devil's advocate here, so if we get approval, and BlackRock itself, the loyal companies of this world will become the largest holders of Bitcoin holders of Bitcoin , if they satisfy the necessary interests. So, this creates a management problem that I obviously don't know the answer to, but it's something that's worth thinking about later for everyone here. The same thing we see with Stake Teeth, with Lido, as well as blockchain governance, especially within tokens, will be a very important topic in the next few years. I think that's a great idea.

Um, when it comes to ETP, um, one name always comes up , and I think it's in the best interest of everyone here in this room that we need to define the Grayscale product, why there's a discount or why there's a premium, um, and, actually, what impact this approval will have on potential current Grayscale holders. Um, if you guys could elaborate a little bit on this and explain the complexity of the problem that Grayscale is facing? Okay, so, um, for the audience that's not very familiar with Grayscale, Grayscale is a trust that provided access, I think, in 2020, 2021 in this industry. There was a large influx from US citizens and individuals, um, to buy Bitcoins within the trust structure. The thing is, you can't buy them back.

You can sell your trust to someone else, your participation, but you cannot redeem, and the bitcoins cannot be sold. So, Bitcoins seem to be stuck in the product. In a bull market, this meant there was a premium. So, if you had a share of a Bitcoin Trust and you could sell it actually above the price of Bitcoin. But when the bear market started, the situation changed because you couldn't get rid of your product, and the discount went down to 50 the discount went down to 50 % or 53%.

So you could buy a locked Bitcoin for 50% cheaper than the spot price. Um, Grayscale didn't see that this was n't good for this product. So they said, "Okay, let's apply to convert the trust into a Bitcoin ETF or ETP." Um, and that means that now, um, the chance of getting the discount approved seems to be disappearing. I think it was about 13% last week.

So that meant that people who bought a share of the Grayscale trust six months ago outperformed Bitcoin by about 40%. Simply because it was converted into an ETF, and then you could sell it, and they could sell the underlying asset. Which is also a price risk because I think Grayscale is one of the biggest holders of Bitcoin right now, which means that if we can trade them at some point, there might be a lot of people who are just playing the discount, wanting to get rid of their Bitcoin. I don't know if it's a big influence or not. I think it might not be that bad, but it's definitely something to consider and consider and , uh, see what happens after approval if there's pressure to sell from that side.

I think it was great. Uh, we, we, we, we're getting more or we're getting more or less to the end, but there are a few things we might need to touch on, uh, since everyone here seems to be trading, uh seems to be trading, uh , cryptocurrency natively, what are the costs associated with me getting some bitcoin through an ETP? Who is the custodian? Potential tax regimes? If you have any ideas on this for the audience.

I mean, I can quickly add that if you buy a product from any ETF asset manager ETF asset manager , they will probably be held by the person they appoint. They can do this themselves, or they can appoint some of the largest exchanges, such as Coinbase's custody department, as custodians of these assets. So they are generally cheaper than on-ramping. So, the biggest limitation to starting cryptocurrency trading will be on-ramping. There aren't many access providers that allow you to connect to the blockchain and do your own storage when you're just starting out.

Therefore, you usually have to go to a centralized exchange or a third party to connect to the blockchain. And it could cost you 200 pips. The expense ratio on average for these ETFs is around 1%. It can reach 2%, and this applies to both futures and physically secured or spot, as we know. So this will definitely be a cheap way to go, but you have to remember, and as everyone says, not your coins, not your assets, not your keys, not your nothing.

So, you have to keep that in mind , and when you buy a derivative product, an indirect product, and for me, that's the most important aspect most important aspect . Yes, and I think an account consultant would be very beneficial. In our company, the most frequently requested document with our investors is their year-end report, which they can use to pay their taxes. So if it's needed, yes, but it's in your regular portfolio, and then you can just add it to your portfolio reports and include it in your tax return. So I think this will make life a lot easier for many parties.

Perfectly. Well, we are, as I said, moving towards the end of time. This seems like a very optimistic, very bullish panel. Maybe just a moment from each of you, thoughts on the price of Bitcoin. Will we see an all-time high in approvals by the end of the year, uh, or not?

I already feel compliance breathing down my neck, so I'm not going to answer that question. What I can say is that if we see a build-up like we've seen in the last few years, where most of the Bitcoin supply hasn't traded for over a year. You know, 80 over a year. You know, 80 % of the Bitcoin supply hasn't been traded for over a year. What will happen next year if this continues?

Where are the market makers, where will asset managers be able to buy bitcoins without disrupting the order book? So maybe there will be a supply squeeze supply squeeze , maybe not. There will definitely be a surge in demand, which depends on the approval of the ETF. And the prices will definitely also take into account the halving that we will have next year. So we may see an acceleration in Bitcoin supply growth at the same time as supply compression.

Yes, and BlackRock already anticipated this, because even before the application was filed, they had acquired a stake in four of the five largest mining companies mining companies , a stake in the shares. So they know where to do it, and it doesn't necessarily have to involve directly buying bitcoins from miners. This means less flow in the market as miners are natural sellers. So, it will be, um, very interesting to see how this, um to see how this, um , how this all ends. And nothing special to add .

I think we were pretty optimistic about the price movement. Now it's hard to know where she will end up. I don't know, I don't have a crystal ball, so we'll see. We have 1 minute left. Any pitfalls?

Can the SEC still, um, do they have to approve the product by January 11th? For example, are there any pitfalls, ahem, on the roadmap? And the SEC can do whatever it wants. They can reject a product just as easily as they can approve a product. They are under pressure from the US Chamber of Financial Services, led by Chairman Patrick McHenry on the Republican side.

They want to promote innovation. They saw innovation coming to Dubai. They saw innovation coming to Singapore. It is not in the interests of the United States of America for this space, these innovations, to spread abroad. So the SEC, even if they are guided by the Chamber, can reject a product on new grounds.

Now new grounds. Now , the Circuit Court of Appeals has said that they believe the previous decision to reject Grayscale's application was capricious and arbitrary, especially given the fact that the spot and futures markets have a 99% markets have a 99% correlation. So it is quite possible that ETFs will also be rejected by January 10th. Let's see what happens. Perfectly.

We have a minute left. Do we have time for questions? Is there anyone? One question from the audience, if there is any topic we haven't touched on. Maybe better.

Um, what do you think about the potential impact of USDT, and somehow the lack of transparency around that and its impact on whether a Bitcoin spot ETF could be approved . Any thoughts? Curved ball. Um, the thing is, it's really a curveball. I think this goes beyond compliance issues compliance issues , as it is also about a privately held company, right?

And it is also about an asset that the company issues. So, I'm not the one who can say whether they were transparent or not. I think you know the answer yourself, which is why you asked this question. So I, I, I would just pass that question on to someone else. Because for me it's the opposite.

I think after ETFs it's not just ETFs, in the end it's also all the discussions you have around it, like how to treat digital assets in the US, stablecoins, CBDCs. So that's what will be initiated and that may affect your question. Yes, I agree. Perfectly. On that note, thank you very much, gentlemen.

And I think the message is: buy Bitcoin before approval. Thank you. This is not financial advice. Yes. Really.