The Edge Podcast - What Wall Street Thinks of The ETH & BTC ETFs

In this episode of The Edge Podcast, which took place on June 28, 2024, DeFi Dad and Nomatic hosted Ryan Rasmussen from Bitwsie to discuss the impact of Bitcoin and ETH ETF approvals on Wall Street, insights into what the world’s largest investors think about these assets, and more! Read our notes below to learn more.

Background

DeFi Dad (Host) – Host of Edge Podcast

Nomatic (Host) – Co-Host of Edge Podcast

Ryan Rasmussen (Guest) – Head of Research at Bitwise

Bitwise – a partner to individuals, financial advisors, and family offices, navigating cryptocurrency

The Impact of Bitcoin and ETH ETFs: Institutional Adoption

Ryan Rasmussen shares his high-level thoughts on the Bitcoin ETF. He recalls the launch of 11 spot Bitcoin ETFs in January, marking the first time that a large group of US investors could access spot Bitcoin through a traditional ETF wrapper. He explains that while 20% of US wealth is controlled by retail investors, 80% is managed by institutional investors. The launch allowed these institutional investors to consider Bitcoin seriously for the first time.
Ryan highlights the success of the ETFs, which immediately broke records. The aggregate of these ETFs raised billions within their first days, surpassing previous records for ETF launches. By the first six months, over $15 billion had flowed into Bitcoin ETFs, signaling strong momentum and interest from institutional investors. The ETFs provided a low-cost, familiar investment vehicle that resonated well within traditional finance.
DeFi Dad asks Ryan to identify specific milestones or data points that could convince skeptics of the Bitcoin ETF’s success.
Ryan cites surpassing the previous most successful ETF launch in just weeks. He also mentions predictions from Bloomberg experts, who estimated $5-15 billion in first-year flows; Bitcoin ETFs reached the high end of this range within five months. These achievements demonstrate the ETFs’ success and exceed expectations.
Ryan addresses the skeptics who doubted the Bitcoin ETFs’ potential, saying that their predictions have been proven wrong by the ETFs’ remarkable performance and investor interest.

The Evolution of Bitcoin ETF Adoption: Insights on Institutional Interest and Advisor Integration

Nomatic asks Ryan about the composition of buyers for Bitcoin ETFs and whether there’s a cohort of allocators still going through diligence.
Ryan explains that they are still in the early stages of adoption, with multiple waves expected. The first wave has been primarily driven by retail investors and smaller institutional investors who can move quickly. He mentions that larger institutional investors and RIAs are still in the process of due diligence and education, which takes longer.
Ryan elaborates that as an ETF issuer, they don’t have detailed data on who is buying, but they can get insights from 13F filings, which show holdings by asset managers with over $100 million in assets. The initial 13F filings revealed that much of the early activity was retail-driven, contrary to expectations that large RIAs and institutional investors would dominate. He notes that larger institutions have lengthy approval processes and compliance requirements, which means their adoption will come in subsequent waves.
Ryan highlights that Bitwise spends a significant amount of time educating and assisting financial advisors and RIAs through their compliance and approval processes. He anticipates that once these advisors can actively promote Bitcoin ETFs, there will be a significant increase in adoption. The final wave will involve large endowments, pension funds, and government funds, which will take even longer to adopt these assets.
DeFi Dad asks about the problem that Bitcoin and ETH ETFs solve for financial advisors and wealth managers.
Ryan explains that financial advisors manage clients’ money and charge a fee based on assets under management. Historically, crypto assets didn’t fit into their traditional workflows, making it difficult for advisors to bill on these assets and create comprehensive financial plans. ETFs solve this by allowing advisors to include crypto assets in their billable umbrella and financial planning tools, making it easier to manage and advise on clients’ entire portfolios.
Ryan further explains that ETFs are a low-cost, familiar investment vehicle that offers institutional-grade custody services, easy tax reporting, and integration into comprehensive wealth plans. This makes them attractive to both advisors and their clients, facilitating broader adoption of crypto assets in traditional financial planning and investment strategies.

Overcoming Barriers: Institutional Adoption of Bitcoin ETFs and the Future of Ethereum ETFs

DeFi Dad asks Ryan about what might be preventing institutional investors from moving forward with Bitcoin ETFs.
Ryan explains that it primarily boils down to education. Many RIAs and firms spend very little time thinking about crypto compared to other assets. Their main focus is often on traditional investments and gathering assets. The process involves getting these investors to understand and create a thesis around Bitcoin, then moving through due diligence and investment committees, which can take months. Additionally, educating their advisors on how to talk to clients about Bitcoin ETFs is another crucial step.
Nomatic asks about hedge funds potentially using Bitcoin ETFs for delta-neutral strategies, referencing the example of Millennium hedge fund. Ryan confirms that hedge funds are likely attracted to the volatility of Bitcoin and can now easily harvest that volatility through ETFs. He suggests that this type of activity is one reason Bitcoin’s price has been range-bound despite strong inflows, as hedge funds are engaging in arbitrage rather than directional long bets.
Nomatic asks about Bitwise’s five-year forecast of $72 billion in flows for Bitcoin ETFs and whether this estimate should be revised.
Ryan mentions that initial adoption has been stronger than expected, already surpassing the most successful ETF launch benchmarks. He believes the total market opportunity could exceed $100 billion, especially considering the changing dynamics in Washington, DC, where bipartisan support for crypto legislation is growing. This regulatory clarity, combined with the familiarity and security of the ETF wrapper, makes Bitcoin ETFs an attractive option for investors.
Nomatic transitions to discussing Ethereum ETFs, noting the recent approval of 19b-4 filings and asking if this was surprising.
Ryan acknowledges that it caught the industry off guard, as there had not been much engagement from the SEC on these filings compared to Bitcoin ETFs. He explains the two-step process for ETF approval: the 19b-4 rule change filing and the S-1 fund prospectus. While the 19b-4 filings for Ethereum ETFs have been approved, the S-1 filings still need approval before the ETFs can start trading. This process can take weeks to months.

Institutional Investors’ Growing Appeal for Ethereum Over Bitcoin

DeFi Dad asks Ryan about the common sentiment on Twitter that Wall Street might struggle to understand Ethereum compared to Bitcoin. He mentions an analogy comparing Ethereum to the Apple App Store, which seems to resonate well.
Ryan agrees that institutional investors might grasp Ethereum more quickly than expected. He argues that Ethereum, viewed as a network of crypto applications or the iOS for crypto, fits well into the technology sleeve of institutional portfolios, which already include tech giants like Apple and Microsoft. This makes it easier for financial advisors to present Ethereum as a disruptive technology worth investing in.
Ryan adds that many institutional investors don’t have gold in their portfolios, which makes the digital gold narrative for Bitcoin less compelling. In contrast, they all have significant tech allocations, making the pitch for Ethereum as a blockchain-based app network more intuitive.
DeFi Dad supports this by referencing a tweet from Ryan highlighting Ethereum’s revenue surpassing companies like Robinhood and Etsy in Q1 2024. This demonstrates Ethereum’s real value and user base, countering the simplistic digital gold narrative with substantial economic data.
Ryan says that institutional investors understand revenue and cash flow, which makes Ethereum’s financial metrics an attractive proposition. He believes Ethereum ETFs will be more successful than anticipated due to this financial appeal and the growing adoption metrics of the Ethereum network.
Nomatic then asks about the potential inclusion of staking yield in Ethereum ETFs. Ryan explains that staking yield can be compared to a preferred dividend, making it understandable for institutional investors. He acknowledges that while current ETF filings exclude staking due to regulatory concerns, there is significant interest in including it eventually. The main hurdle is regulatory clarity on whether staking turns $ETH from a commodity into a security. Once this is resolved, Ryan expects that ETFs will likely incorporate staking to increase returns and meet investor demand.

Positive Sentiment and Political Dynamics: ETH ETFs and Crypto’s Future

DeFi Dad asks Ryan about the sentiment on Wall Street regarding the ETH ETF.
Ryan responds that the sentiment is very positive, noting that many Wall Street investors are now paying more attention to crypto due to the high-profile approval of Bitcoin and Ethereum ETFs. He highlights the importance of familiar investment vehicles like ETFs in attracting institutional investors and believes that Ethereum ETFs will follow a similar adoption path as Bitcoin ETFs.
Nomatic asks Ryan to compare the potential inflows into the ETH ETF to those seen with the Bitcoin ETF. Ryan suggests that if Ethereum’s market cap is about 20-30% of Bitcoin’s, then it might receive a similar proportion of inflows. He also notes that investors might start creating a “crypto sleeve” in their portfolios, reallocating some funds from Bitcoin ETFs to Ethereum ETFs, aiming for balanced exposure to both assets.
DeFi Dad shifts the discussion to the intersection of crypto and politics, particularly given the upcoming election year in the United States. Ryan comments on the changing regulatory environment and the recent positive developments, such as the approval of Bitcoin ETFs and supportive legislative actions. He finds it ironic that the Biden administration is considering accepting crypto donations while simultaneously pursuing regulatory actions against crypto companies.
Ryan expresses optimism about the upcoming approval and launch of Ethereum ETFs. He anticipates that these ETFs could start trading within the next few months and highlights the significance of the 19b-4 approvals, which were a major hurdle. Ryan expects the launch of spot Ethereum ETFs to be a significant milestone, potentially accelerated by political motivations as the election approaches.

Check Out These Important Links

Show Information

Medium: YouTube (Video)

Show: The Edge Podcast

Show Title: What Wall Street Really Thinks of The ETH & BTC ETFs

Show Date: June 28, 2024