Today we're joined by James Seyffart, a research analyst at Bloomberg who's the perfect person to answer our questions regarding the convergence of crypto and ETFs.
 We dive into:
 - The probabilities of a Blackrock Bitcoin ETF and why
 - Important dates in which the SEC will need to give us answers
 - Neutrality, or lack thereof around the ETF approval process
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 TIMESTAMPS
 0:00 Intro
 7:44 What is an ETF?
 13:00 ETF History Lesson
 17:40 ETF Market Size and Holders
 22:46 Types of ETFs
 27:02 Where Are These Assets Stores
 34:04 Who Approves ETFs?
 40:08 Neutrality Of Regulators
 44:16 Types of Bitcoin ETFs
 49:17 Reasons For Rejection
 55:12 Does Gary Just Hate Crypto?
 58:13 Does Blackrock Change Things?
 1:04:46 Will Blackrock Get Approved?
 1:15:20 Possible Approval Dates
 1:19:09 Lack of ETFs to Blame For Crypto Fallout?
 1:28:38 Why Should we Care?
 1:34:14 Risks and Disclaimers
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 RESOURCES
 James on Twitter: https://twitter.com/JSeyff 
 Trillions Podcast: https://www.bloomberg.com/podcasts/series/trillions 
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 Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research.
 Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here:
 ⁠https://www.bankless.com/disclosures⁠

Yeah, let's be I'll be very blunt if you look at all the things that they have said and written over the

last 3 Years, this will be denied But really a lot.

There's a lot of circumstantial evidence that suggests that It will be approved.

It goes back to what I said, they can back into whatever decision they want to.

Okay, well, you said 2 things there, James.

Is the Bitcoin ETF actually happening or not?

BlackRock, Fidelity, some of the largest ETF issuers in the world have now submitted filings for ETFs with the SEC.

Is Gary Gensler going to let them through?

That's the question we raise with James Seyfert.

He's a Bloomberg analyst who's tracking this thing closer than anyone I've ever met.

He's on the episode today and He gives us a date by which we should have a clean answer from the SEC on the Bitcoin ETF.

So is he over or under on the probability of the SEC approving a Bitcoin ETF this year?

You have to listen to the entire conversation to find out.

And before we begin, I want to address a question that some of you might have, which is why is Bankless even covering the Bitcoin ETF?

That's not very Bankless of you, you might say.

I think when people buy crypto assets, they buy into crypto values.

Not all the way, not all at once, but a little bit at a time.

Crypto ETFs, in my mind, are a gateway drug, a type of gateway drug.

I don't think people will stop with just the Bitcoin ETF in their retirement account.

I think that's the gateway to them setting up an exchange account, for instance, and buying spot Bitcoin or spot Ether that way, which is the gateway to going full bankless and taking custody of their own keys.

In order for people to care about crypto, they actually have to own crypto.

And this is an easy way for people to own crypto in their retirement accounts.

When we get more crypto ownership, we get more economic security.

And we get more people who care about crypto issues in their respective jurisdictions.

We need a lot more people to care about crypto in the United States in order to turn the regulatory tide.

There's 1 other thing I think we get from this episode, which is learning more about traditional finance.

How is crypto supposed to eat traditional finance and disrupt it if We don't even understand how it works.

Like, do you understand how ETFs work today?

And that's where we start this episode with James.

This is a college level course on ETFs from their birth in the early 90s to the Bitcoin spot ETF and the possibility of that today.

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All right, guys, it's time to go find out about this Bitcoin ETF.

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The question on our mind today is a Bitcoin ETF happening.

We have an expert who can weigh in on this.

James Seyfert is a research analyst at Bloomberg.

He's got 1 foot in crypto and the other foot in ETFs.

He's currently a Bloomberg intelligence ETF analyst.

And he's here to drop some insight on the question I just opened with.

When are we going to get that Bitcoin ETF?

You know, we talk a lot about crypto in on bankless, of course.

And so I think it's in some people, some listeners, they got their first exposure to finance by way of crypto.

Actually, my co host, David Hoffman's very much like this.

So I don't know if David's ever purchased an ETF in his life.

And I think there's probably some Bankless listeners that fall into that camp too.

So could we start by going through some of the basics?

Does that stand for exchange traded fund?

And what is this thing that we're talking about today?

It's basically people, a lot of people have 401ks, 403bs, these types of plans, at least in the US, and usually what you're investing in is a mutual fund.

And those have much longer tickers with an X at the end, typically.

But essentially, what that means is those funds are not traded.

So you give money and at the end of the day, they put that money to work the next day for when your money comes in.

And for mutual funds, for 401ks and plans like that, it makes complete sense.

You're not usually super time commitment because you're just contributing on a regular basis.

And basically, the real story here is that the ETFs were invented after the SEC wrote a report in 1987.

A lot of it had to do with futures and derivatives.

And the SEC said basically they wish they had something that was more physically backed rather than derivatives or derivative of different assets.

And basically this guy, Nate Most, came up with the idea for what is now an ETF.

And it comes off the idea of these things called commodity warehouse receipts.

And the idea of commodity warehouse receipts, if you think about it this way, it's like, say you had a bunch of gold or a bunch of barrels of oil or whatever, wheat, corn, you name it, right?

And 1 thing that you used to be able to do is you would store that somewhere and then the warehouse would charge some sort of fee.

And in return, they give you pieces of paper that say, you have this much exposure, or it was a vault or gold.

And rather than moving that physical gold, those physical commodities around, you trade those pieces of paper.

So those pieces of paper were a right to those things held in that warehouse.

And that's where the idea of an ETF came about.

And basically the first 1 in the US was the S&P 500.

And it basically, those instead of commodities being held in that warehouse, it's stocks or the S&P 500, the stocks that make up the S&P 500 held in by a custodian.

And what that means is at all times, the key thing that makes an ETF work and why it's super efficient is because you can always access those underlying stocks.

Or in the example of the commodities, you can always access those underlying commodities.

So basically those shares are a right to your ownership of the underlying assets.

So in the S&P 500 ETF, you can always trade in shares of the ETF and get back the underlying stocks in a potential Bitcoin ETF.

You could always trade in the shares of the ETF and get back Bitcoin, or vice versa.

You can always trade in Bitcoin and get back shares.

And what that means is, we can get into this more, but like 1 thing that I'm sure a lot of your viewers have heard about is GBTC, the Grayscale Bitcoin Trust.

That operates more like what we what in our world we would call a closed end fund.

It's technically not 1, but it means ETFs have that mechanism where you can create shares and redeem shares because always the underlying can be exchanged for the shares of the product, right?

So in Grayscale's case, there's no way to access the underlying Bitcoin.

I can't hand over GBTC shares and get back Bitcoin, which is what Grayscale is suing to do to try and get access to that mechanism so that you don't have a situation where the price of those shares is very different from the value of the underlying assets they hold.

So when you have an ETF, that problem doesn't happen because you can always, at some point, if somebody thinks the price of the ETF is not in line with the underlying asset, you can buy those shares of the ETF or buy up the underlying asset and exchange them.

So basically there's some trading costs, so there's minute differences there, but for the most part, you can always exchange shares for assets, and that's what's causing a lot of the problems in different parts of the market.

So the way to think about an ETF is, if you're used to looking at stocks, or even cryptos really, right?

So for the most part, Bitcoin's a bad example since its supply is ever increasing.

But if you look at a stock, typically the supply of shares is relatively stable, right?

And what drives the price is that change in demand.

So if you think about like 2 bars in a graph, basically what drives the price of most assets is the change in demand, right?

The benefit of ETFs is as demand changes, you can change supply.

So you can add more shares to meet demand.

And If demand drops, you can destroy shares to meet demand.

So that way, the price and the value of the underlying assets, so the price of the fund, the price, the value of the underlying assets are always going to be very close.

So that's the background of an ETF and why so many people view this as like the key to the Holy Grail for crypto and bridge to tradfy.

You just opened up probably a thousand questions in my mind and I want to get to them.

That last point that you mentioned, I want to draw an analogy for bankless listeners.

So as the demand changes, you can increase the supply.

USDC, a stable coin, kind of works like that as well.

Well, kind of pretty much as long as the US continues to give access to Coinbase, to encircle to US bank accounts, it's kind of an unlimited supply.

It's as much as the market will demand, and it sounds like ETFs work that way too.

So this is a newish product, I guess, in the full scope of financial products.

You said it sounds like it was invented maybe in the late 1980s.

So technically, I told you about that guy, Nate Most.

He actually went, the first ETF ever launched was technically in Canada a few years because the SEC took like 3 years to get comfortable with the idea.

after talking with Nate Most and these guys.

And then we came along afterwards in the US and finally figured it out.

And along the whole way, there's been people questioning the structure, saying it was going to cause issues and they've done nothing but prove themselves as inefficient.

The way to think about it is it's a wrapper and it's a technology in a way.

It's a democratizing technology in the way it's been used in the traditional finance space.

It's interesting that people would say that this would cause issues, because it actually seems much simpler than the other kind of price exposure mechanisms based on derivatives and that sort of thing.

It's just a wrapper for underlying assets, right?

Yeah, So we don't need to get too far into the weeds here.

But essentially a lot of the people say, like, if you're looking at bonds, so they all, there's bond ETFs, they hold other assets that are less liquid than typical stocks.

But so people like think you're adding liquidity.

But essentially what it comes down to is in the good times, an ETF can be way more liquid than the underlying because people don't have to go and access the underlying market to trade it, right?

They can just use the ETF shares and sometimes it just trades back and forth.

There's a lot of market makers that can handle that.

But in times of stress, that like access liquidity ETF offers is not going to be there.

So basically, if the underlying market freezes up, like happened in March of 2020, during COVID, those, they basically, the ETFs don't, they're not magic.

So if the underlying market is locked up, there's going to be issues with the ETF.

So basically, like, yes, in the good times, there's more liquidity because the ETF is there.

So if you think about a bond market, it's mostly over the counter traded, like literally some of it's like phone calls still, like that's the way things are traded still.

But like basically what happens is like the ETF will look like it's dislocated, but what really ends up happening is just the underlying market is out of whack.

Nobody's willing to buy or sell or there's just mismatch of what's going on.

So there's plenty of examples of things like that that happened in March 2020.

But all the ETFs in the US and around the world have held up extremely well and were perfect beacons of efficiency during that time.

Even some of their most ardent critics even had to come step back and admit like they did extremely well in handling the issues.

Yeah, I mean, 1 of the things we've always said is like, we're gonna get into a lot of this, but like if the SEC had approved this thing, honestly, all the people in these markets, these market makers that operate in this market, like they're not going to let some of the fishy stuff that has been going on in crypto, like they're gonna go to the exchanges that are operating cleanly.

They're not gonna get involved in a lot of the other things that plenty of people have been involved in in this space.

So if we do get 1, it's going to clean things up.

ETFs trade like penny wide, very, very tight.

So there's no transaction fees on most brokerage platforms.

And then if you look at most brokerage platforms they don't really tell you what the bid ask spread is.

You can kind of back into it by looking at like what the trading looks like on Coinbase or Binance or any of those things right.

But there is a spread So you know you're paying a fee typically to do the trade and then there's also a spread between what the bid and the ask is.

And like usually market makers are making that money.

So there's a lot of money to be made in offering markets in the crypto markets.

And when an ETF comes about, it's gonna get way tighter.

So You'll see a lot of people who trade Bitcoin specifically in crypto markets learn to start to use the ETF and vice versa.

People from the ETF world will probably go to the underlying crypto markets and make things more efficient and more liquid because you have the behemoths of the US trading and financial system come in?

I think I was first exposed to kind of the ETF concept just earlier in my adulthood and early investing career through Vanguard Group and John Bogle.

The idea that, hey, you know what, you don't have to like outperform the market.

You just buy an index fund, buy a low cost index fund of some sort, and you'll outperform, you know, like 80% of active traders out there.

And of course you want to keep your management fees low.

And my understanding is a lot of ETFs can, can somewhat provide that.

And then I want to ask you, who are the holders of these ETFs?

Is it, um, is it like kind of large pension funds?

Or is it mainly like individual Americans, like retail investors with a Fidelity account or a Schwab account with their 401k money as you alluded to earlier?

So really, that's the beauty of the ETF, It's everyone.

So in the old mutual fund world, what you're used to looking at in your 401k or whatever it might be, if you're a US listener, there are multiple share classes.

So like you need to invest a certain amount of money to get access to this lower fee because you get these other things, right?

So they have all these different share classes, ABCI for institutional.

But what the ETF did is it democratized at all.

So if your grandma wants to buy an ETF, she's buying the same ETF as Citadel if they're looking to trade that, or some other big hedge fund or pension or PE fund.

And that's the beauty of the ETF ecosystem because it incorporates everyone.

So you have all the liquidity from the big trad fi players who are looking to make short term trades alongside the mom and pops you were talking about, who some of them might be looking to do short term trades.

A lot of them are just looking to buy and hold like you were talking about low cost ETFs and hold them for a very long time.

And part of the reason they can be so cheap is because so many people are using them.

So many different types of people are using them.

How big is the ETF market, James, in terms of assets inside of ETFs?

So like we're right around 10 trillion globally, but most of that is in the US.

I believe we have, I'm looking it up right now, I think we have 7.

I think we're right around 7000000000000 in the US alone.

I'll tell you the exact number, 7.25 trillion.

But I don't, I probably vetify ETF.com, things like that will probably have that type of information.

But the global markets, like over 10 as well.

But that you got to remember that includes like it holds stocks, that's going to hold bonds, it'll hold treasuries, commodities, everything you can think of that has basically been thrown into an ETF wrapper.

We're building here, building our understanding here.

Okay, so 10000000000000 dollars worldwide.

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Expert's Take: Is a Bitcoin ETF Really Possible? with James Seyffart