Speaker 1: Welcome to Trillions. I'm Joel Webber and I'm Eric belchionis
Speaker 1: Eric in Business Week. Recently, we UM had an interview
Speaker 1: and story with SEC Commissioner Gary Ginsler, which you know
Speaker 1: I sort of helped initiate, and one of the main
Speaker 1: things that I just wanted to understand was what the
Speaker 1: SEC is going to do about a potential bitcoin ETF.
Speaker 1: What about his comments resonated with you. Yeah, so we've
Speaker 1: been tracking this for oh seven years now. I called
Speaker 1: to Kentucky Derby for e t F nerds since the
Speaker 1: Winkelvoss filed in I believe it was when bitcoin was
Speaker 1: trading at by the way, UM, the all these e
Speaker 1: t s have been followed with the SEC, and you know,
Speaker 1: when you look at what really has taken place over
Speaker 1: those years, it's all been e t F that would
Speaker 1: track bitcoin like the way g l D tracks gold.
Speaker 1: So that would be a physically backed even though people
Speaker 1: mocked me for saying physically on Twitter, but it's physically
Speaker 1: backed as you can get. In other words, it would
Speaker 1: store the bitcoin and track the spot price the way
Speaker 1: g l D tracts gold. However, Gamsler has come in
Speaker 1: and we thought he would be a little more lenient
Speaker 1: on bitcoin because he was an expert in it um.
Speaker 1: But he has come in and really been a little
Speaker 1: concerned about approving physically back bitcoin ETFs because they are
Speaker 1: filed under the Securities Act of three, which is a
Speaker 1: looser rule than the Act, which is a more has
Speaker 1: more protections. That's what all your mutual funds and most
Speaker 1: e t f s are registered under. So there's a
Speaker 1: lot more protections in there, and I think he feels
Speaker 1: more comfortable if an e t F that track Bitcoin
Speaker 1: were fall into there. So the only way to go
Speaker 1: through the forty Act and be bitcoin is to use futures.
Speaker 1: What happened in the days after we published that story. Yeah,
Speaker 1: So since he said that in the story came out,
Speaker 1: there has been I believe there's now five bitcoin ETFs
Speaker 1: that are now filed that would track futures under the
Speaker 1: forty So there's almost like a new Kentucky Derby forming
Speaker 1: in the shadow of the bigger one, and it sounds
Speaker 1: like that's what's you know. If all goes well and
Speaker 1: he is a man of his word, it will probably
Speaker 1: see these futures ets approved in November UM as early
Speaker 1: as November at least, and uh, that's what we're gonna get.
Speaker 1: So we should really look into how they work. And
Speaker 1: we have two people on today who literally run bitcoin
Speaker 1: future strategies into fun structure, so I think we could
Speaker 1: get real inside look at how they're going to work
Speaker 1: in the pros and cons of them. Okay, So joining
Speaker 1: us for this episode Steve Hawkins of Horizon Ets. He's
Speaker 1: coming back on You may remember him from the SHREWM
Speaker 1: episode a couple of months ago. And then Simmy and
Speaker 1: Hyman at pro Shares, who just a couple of weeks
Speaker 1: ago launched one of these future strategy this time on Trillions.
Speaker 1: A look into the Future of Bitcoin Futures ecs. Simmey
Speaker 1: and Steve, Welcome to Trillians, Thanks for having me. Thank
Speaker 1: you for having me again. Mat. Okay, Simmey and I
Speaker 1: want to start with you because this your your product
Speaker 1: came out literally just a couple of weeks ago. How
Speaker 1: did you come up with this idea because it was
Speaker 1: something that you put in motion obviously months ago. Well,
Speaker 1: we've actually been uh you know, focused on the on
Speaker 1: the bitcoin space for quite a while. Um, but we did. Indeed,
Speaker 1: we're very proud A couple of weeks ago to be
Speaker 1: the first market to bring the first bitcoin exposure in
Speaker 1: a mutual fund. It's ticker btc f X. That's our
Speaker 1: Bitcoin strategy pro fund. We have both pro shares et
Speaker 1: f s and pro funds mutual funds at our organization UH.
Speaker 1: And this is indeed a strategy that utilizes futures for
Speaker 1: exposure to bitcoin and puts that in a forty act
Speaker 1: mutual fund, as Eric was indicating, and I always like
Speaker 1: to be careful with e C SEC lane which the
Speaker 1: strategy was allowed to come to market. Remember, the SEC
Speaker 1: doesn't approve anything, they allow things to come to market.
Speaker 1: But we were really excited to be first on this one.
Speaker 1: And so let me ask you how this works. Right,
Speaker 1: So this filing is called a Bitcoin Strategy fund, which
Speaker 1: is what all of the new filings are sort of called.
Speaker 1: And they're all active, right, So this is an active strategy.
Speaker 1: How does it A typical future z et F like UM,
Speaker 1: you know, natural gas or something would take the front
Speaker 1: two months probably and then just try to roll them
Speaker 1: constantly to keep exposure. Does this go beyond those front
Speaker 1: two months? Does it use other funds like some of
Speaker 1: these UH filings are saying they can use futures and
Speaker 1: or other funds like presumably a Canadian Bitcoin fund or
Speaker 1: something um So, can you just really take us through
Speaker 1: how the strategy works and what it holds. Sure, So
Speaker 1: the basic intendency to use the front month contracts for
Speaker 1: exposure and the benefit of that historically is that the
Speaker 1: correlation voluntility and beta of those front month contracts to
Speaker 1: spot bitcoin is really high. Now we are an active funds,
Speaker 1: so that means we do have some ability around the
Speaker 1: margin to manage the role. You know, you've got a
Speaker 1: roll from at the end of the month, you got
Speaker 1: a roll to the next month. So we have some
Speaker 1: ability as an active fund to say, oh, we see
Speaker 1: a lot of liquidity today, we're gonna roll a little
Speaker 1: more than we intended a little less tomorrow. And there
Speaker 1: is a little bit of a room around the edges
Speaker 1: to think about, you know, where the collateral behind the margin,
Speaker 1: the the uh the futures contracts are invested. But still
Speaker 1: the primary intent for the exposure is to be invested
Speaker 1: in those front month contracts. So how's it going so far?
Speaker 1: Because obviously this is something that as Eric said, he's
Speaker 1: been watching for seven years. There's been a ton of
Speaker 1: people interested in it, you come out with something that
Speaker 1: is a close approximation of what everybody is gonna be. Uh,
Speaker 1: moving towards and instant feedback. How's it going. It's going
Speaker 1: pretty well from our perspective. We've seen the flows started
Speaker 1: to come in. Uh. And look, it's also been a
Speaker 1: period where where you know, bigcoin is on the rise,
Speaker 1: so that brings some extra highballs and the fund is
Speaker 1: doing what it's supposed to do, and we're seeing some
Speaker 1: nice flows, and um, I just want to get wonky
Speaker 1: real quick. I know Steve's waiting in the wings, but
Speaker 1: we just got to get through this mutual fund real quick. Um,
Speaker 1: this mutual fund. Right, So a lot of the filings
Speaker 1: that are coming into the SEC will say something along
Speaker 1: the lines of we're going to attrack futures and potentially
Speaker 1: some other funds that whole bitcoin and I guess that
Speaker 1: and I think some of you mentioned o t c s,
Speaker 1: o CC trusts, which would mean GBTC, does this one
Speaker 1: hold any of those? Was that in the language, And
Speaker 1: do we think that Genzler will actually filter out ones
Speaker 1: that have that? And because now we're seeing filence come
Speaker 1: in and just say just futures um and there's some
Speaker 1: talk that those are the ones will approve any thoughts
Speaker 1: on all that, So I don't want to sort of
Speaker 1: guess as to what the sec might do or what
Speaker 1: they're sort of signaling. But you know, back to my
Speaker 1: earlier point, because we are active, that means we do
Speaker 1: have a sum ability to think about how the cash
Speaker 1: is invested, particularly the margin behind those those contracts, so
Speaker 1: we can use a few things other than cash. Again,
Speaker 1: it's not the dominant intent of the strategy that the
Speaker 1: strategy parts perspectives indicates a focus on those front run
Speaker 1: traffic contracts, but there's a little bit of ability to
Speaker 1: think about where the where the cash is sitting. And
Speaker 1: just to be clear, the Act requires funds that hold securities,
Speaker 1: whereas you can fall into the thirty three Act and
Speaker 1: not hold securities. And bitcoin isn't a security, right, so
Speaker 1: you file into the forty Act because you're not. Futures
Speaker 1: aren't securities either, But you get the margin and you
Speaker 1: buy treasuries with them, and then presumably that's what you're holding.
Speaker 1: Therefore you get through. Am I right on that or
Speaker 1: am I missing anything? I'm gonna focus on. I think
Speaker 1: what's important to the investor in the distinction between the
Speaker 1: forty and the thirty three Act, because for for folks
Speaker 1: who are tuning in UH thirty three, the thirty three
Speaker 1: Act is a common structure for commodity exposure as compared
Speaker 1: to the forty Act structure, which by these are named
Speaker 1: for the year in which they were they were put
Speaker 1: in place, nineteen thirty three and nineteen forty The key distinction.
Speaker 1: As an investor, there is a real benefit to being
Speaker 1: in a forty Act, and that is perhaps most importantly
Speaker 1: the avoidance of the annoying K one. Most thirty three
Speaker 1: Act funds will generate a K one. You gotta deal
Speaker 1: with that when you file your taxes. When you're in
Speaker 1: forty acts space, get plain old ten ninety nine. So
Speaker 1: that's probably the most salient difference from an investor's perspective. Okay, Steve,
Speaker 1: I want to bring you in here, um because in
Speaker 1: addition to to the shroom conversation that we've had with you,
Speaker 1: you're also in the bitcoin space, which basically sounds like
Speaker 1: a pretty fun job. How do you get what you read? Okay,
Speaker 1: may want it to so what you read on the
Speaker 1: thirty three forty Acts and what's your distinction, Well, I
Speaker 1: mean I would I would just step back for a
Speaker 1: second and look at it from our perspective. So we
Speaker 1: launched our Bitcoin Features Index tracking EKF back in April
Speaker 1: this year. We were in a race with a few
Speaker 1: other um I would say digital let's call it digital currency,
Speaker 1: uh eric from a digital not physical asset perspective. Um.
Speaker 1: So we had our synthetic futures based product. They had
Speaker 1: their digital asset hole in the physical digital currency themselves,
Speaker 1: and we really thought that our regulators in Canada were
Speaker 1: actually gonna go down the same route as what the
Speaker 1: SEC has said. And so we believe that we were
Speaker 1: going to be able to get the first bitcoin ECF
Speaker 1: to market here in North America using futures as the
Speaker 1: underlying asset class rather than the physical digital currency. We
Speaker 1: just did really didn't think that they could get there
Speaker 1: on the market making and all of the sort of
Speaker 1: issues around liquidity that could occur directly with the holding
Speaker 1: the digital asset in the e t F custody account,
Speaker 1: if you can even call it that, and getting like
Speaker 1: the regulators themselves understanding the custody and the risks around
Speaker 1: custody of the digital asset themselves, and I think that's
Speaker 1: exactly what has you know, been holding up the SEC
Speaker 1: for very very long with all of the comment letters
Speaker 1: that we've seen on the pasta on the physical bitcoin filing.
Speaker 1: So that's why we went really hard down the route
Speaker 1: of the futures based et F here and and obviously
Speaker 1: the regulators approved the physical digital asset e t F
Speaker 1: before the futures and we were quote unquote novel and
Speaker 1: uh um, so we we had to go down that
Speaker 1: road and we uh you know, launched about a month
Speaker 1: after them. The physical products themselves are a little bit
Speaker 1: over a month. And you know, from our pay from
Speaker 1: our take, we really truly believe that futures is the
Speaker 1: best place for from this asset class to get exposure. Still, um,
Speaker 1: we believe that you know, all of the market the
Speaker 1: efficiency of market making and how an e t F
Speaker 1: actually works is best through underlying futures exposure in the
Speaker 1: et F. And that's both long and also we you know,
Speaker 1: we launched uh inverse bitcoin shortly after that because we're
Speaker 1: giving these things as trading vehicles and if people want
Speaker 1: to use them as trading vehicles, um, then we believe
Speaker 1: that the futures is really the best place to go,
Speaker 1: and that's why we agree with the SEC in that regard. Well,
Speaker 1: but let's let's dive into this. So unfortunately came out
Speaker 1: a month after the physically backed ones um. And but
Speaker 1: whether you're looking at the gold area where the futures
Speaker 1: gold ETF has one percent of the assets in the
Speaker 1: physically back gold ETFs like g l D and i
Speaker 1: AU in your case, this one has about one percent
Speaker 1: of what the physically backed big et F has in Canada,
Speaker 1: it's a very almost exact parallel, which basically shows the
Speaker 1: same thing people just wanted physically backed. But you're saying
Speaker 1: that futures are better. Um, seems against the grain. Like
Speaker 1: even someone I know you want to say, I want
Speaker 1: people to use the bitcoin futures at F, but like
Speaker 1: it just seems like nobody would agree with that. Well
Speaker 1: one first to market, eric, Right, So if if our
Speaker 1: big right here's ETF was first to market, you would
Speaker 1: not be seeing a hundred to one from an assets perspective, right. Um,
Speaker 1: it's just underling becoen exposure that they were going for,
Speaker 1: and it was who was providing the first and access
Speaker 1: to it in a liquid vehicle that could be traded
Speaker 1: on the exchange every day. I mean, we had a
Speaker 1: closed end fund here in Canada or a couple of
Speaker 1: closed in funds that had over a billion dollars of assets,
Speaker 1: and you know they were trading at premium to the
Speaker 1: net asset value every day. Guess what happened to that
Speaker 1: premium on the day that a bitcoin ETF got listed.
Speaker 1: It's now trading at a ten percent discount, right like,
Speaker 1: because the people don't want to be locked up into
Speaker 1: a vehicle that they can't trade in and out of
Speaker 1: on a regular basis. And you know, when you look
Speaker 1: at the efficiency of what et f s do in
Speaker 1: the marketplace, market makers have to trade this. They have
Speaker 1: to provide a bid us spread and they have to
Speaker 1: be able to hedge that exposure and actively trade that
Speaker 1: hedge as they buy and sell units in the marketplace.
Speaker 1: What are they hedging against any bitcoin et F right now,
Speaker 1: whether it be physical or future space. They are using
Speaker 1: futures because that's the only vehicle that they can trade
Speaker 1: intra day to hedge their underlying buying and selling activity.
Speaker 1: And guess what if your futures bas ETF and your
Speaker 1: market maker is using futures to hedge their exposure. They're
Speaker 1: getting one to one direct contra you know, contraining UH exposure.
Speaker 1: When that happens with a bitcoin digital currency physically back ETF,
Speaker 1: they're trading futures against it, there's gap and there's always
Speaker 1: going to be gap risk in that regard, and you know,
Speaker 1: it is what it is from that perspective, and so
Speaker 1: we believe that again as the market sort of UH
Speaker 1: evolves here and becomes matures from a from a market
Speaker 1: efficiency perspective in trading bitcoin, there's more bigcoin products out there,
Speaker 1: we believe that investors will lean towards where markets are
Speaker 1: more efficient from a trading perspective, and the e t
Speaker 1: F should trade it more efficiently. You know, we can
Speaker 1: accept futures UM and deliver features as part of the
Speaker 1: creation redemption baskets again making it more efficient for the
Speaker 1: UM liquidity providers in the marketplace. So it's it's a
Speaker 1: very very different asset. I'm not a trader, I'm a
Speaker 1: norm e UM futures isn't something I normally think about
Speaker 1: touching UM. So how does this market work? What do
Speaker 1: I need to know about it? Who listed them? How
Speaker 1: big of a market place are we talking about here?
Speaker 1: Can you guys break that down for me, so I'll
Speaker 1: start with you. Yeah, so among the benefits of the
Speaker 1: futures market is the regulation. The futures market UH is
Speaker 1: governed by the c m E and the c FTC.
Speaker 1: There is a central clearinghouse that you know, ensures that
Speaker 1: you know trades are not the folded upon and that
Speaker 1: those are really important aspects. Again, we can't be in
Speaker 1: the mind of the SEC, but we know what the
Speaker 1: what the advantages are. And exactly the Steve's point, the
Speaker 1: more that there are opportunities for for bitcoint exposure, the
Speaker 1: more volume and the more liquidity we see in these markets.
Speaker 1: But even in and and so, you know, simply you're
Speaker 1: buying a futures contract for what the market thinks the
Speaker 1: price of big point would be a month from now.
Speaker 1: And as we as I mentioned, the tracking of that
Speaker 1: has been pretty close to spot. But everybody likes to
Speaker 1: talk about role cost. That's everybody's favorite thing to talk about.
Speaker 1: It was any and Eric was gonna ask me, So
Speaker 1: I'm just I will throw a couple of comments I
Speaker 1: think before you even ask. He's so upset he didn't
Speaker 1: get to ask it. So I'll just pretend he asked it.
Speaker 1: So think about this, he's in my head. In bitcoin
Speaker 1: spot bitcoin, I think it was up about three d
Speaker 1: and five per cent. If you looked at a strategy
Speaker 1: that you know, approximated rolling one month contracts, you would
Speaker 1: have gotten about two eighty five. So everybody goes, oh
Speaker 1: my god, there was roll cost. The market was up
Speaker 1: three oh five. I mean, the only way there's meaningfully
Speaker 1: positive role cost is when market participants think the thing
Speaker 1: is going up. That's first principles in jargon e terms,
Speaker 1: the future is the unbiased estimator of the future spot price.
Speaker 1: So yeah, I mean, if it's up three oh five
Speaker 1: and you've got two eighty five, I don't think anybody's
Speaker 1: gonna be so worried about that. In a more normalized environment,
Speaker 1: it's very likely roll costs would be smaller. And the
Speaker 1: more of us that get involved in this, the more
Speaker 1: liquid the stuff is. That being said, I think ultimately
Speaker 1: there will be many different ways to get exposure. And
Speaker 1: also this these point, they all come with costs. We
Speaker 1: know how big that premium and discount is to the
Speaker 1: thing or things that are trading over the counter. We
Speaker 1: don't even it's it's hard to even get your hands
Speaker 1: around the opaqueness of the transaction cost if you're trying
Speaker 1: to get a digital wallet. So there's no freeway to
Speaker 1: get exposure. It's like the stickers on all on all
Speaker 1: the you know, on all the e T s. You
Speaker 1: know you you cannot get the exact return of the
Speaker 1: theoretical index. It doesn't exist. Eric, are you gonna try
Speaker 1: and ask a question about world costs? Now? Send it
Speaker 1: my way, Eric, send it my way. And yeah, okay,
Speaker 1: So yeah, look, I agree, that's a very good point.
Speaker 1: I mean, you're up to eighty five. We we always
Speaker 1: say that about the shiny object lane. Nobody cares about
Speaker 1: fees over there, because if you hit it, you're you're
Speaker 1: you're you're tripling the S and P like arc right,
Speaker 1: nobody cares they charge whatever. So many five basis points, um,
Speaker 1: So I get it. I think maybe let's put it
Speaker 1: into proportion of the fact that when physically backed e
Speaker 1: T f s, if they were to come out, probably
Speaker 1: would track more of that upside but also the downside.
Speaker 1: So I don't know, it just seems to me that
Speaker 1: in general, and I'm not Look, the futures are a
Speaker 1: fine way to get exposure to many different areas. Typically, though,
Speaker 1: if you can get it the physical physically back way,
Speaker 1: people tend to prefer it like we went up in
Speaker 1: Canada and just discussed that and in gold. Um. But
Speaker 1: the idea I think is just that humans that are
Speaker 1: investors generally just want something that tracks the price, you
Speaker 1: know that, they just want the Kelly Blue Book value,
Speaker 1: like just don't complicate this for me. That would be
Speaker 1: my one pushback on that. But to your point, if
Speaker 1: there's nothing else in the market, like if Steve's fund
Speaker 1: had gotten out a month before the physically backed I
Speaker 1: think he would have been bigger, had liquidity and been
Speaker 1: been stronger. So in Simeon's case, let's say these futures
Speaker 1: et f s come out, um and they're out for well,
Speaker 1: let's let's just start there. How do you think the
Speaker 1: SEC is going to approve or allow these? Are they
Speaker 1: gonna put out like all four or five at once?
Speaker 1: Will they pick some? How much do you attention and
Speaker 1: assets do you think they'll get relative to let's say
Speaker 1: a physically back to e t F getting introduced, which
Speaker 1: we think would be ten billion dollars within a month.
Speaker 1: So one let's look at physical gold versus a digital
Speaker 1: currency wallet, right, and who custodies that, how has it held?
Speaker 1: Is their risk to that underlying asset. Can somebody hack
Speaker 1: your vault at Fort Knox and remove your gold and
Speaker 1: sell it somewhere else? This is not gold finger anymore, right,
Speaker 1: But cybersecurity and hacking is like, this is something we
Speaker 1: have to live with for the rest of our lives.
Speaker 1: And will somebody be able to at some point in
Speaker 1: time hack Gemini Trust and figure out how to take
Speaker 1: money out of the digital currency e t F? That's there,
Speaker 1: you know what, I don't know, but I'm not going
Speaker 1: to take that chance, and I'm not if I'm invested
Speaker 1: in my gold physical goal EPF. I know that I'm
Speaker 1: not going to lose my physical gold anywhere, at any time,
Speaker 1: under any circumstances unless somebody misplaces it, which I don't
Speaker 1: think can happen either, because you know, we have a
Speaker 1: very very strong settlement cycle and way of trading gold
Speaker 1: and physical gold, even gold futures. But with digital currencies,
Speaker 1: when you're dealing with you know, exchanges that are getting
Speaker 1: hacked from time to time, You're dealing with custody arrangements
Speaker 1: which you're getting hacked from time to time, you're dealing
Speaker 1: with a lot of unknowns, as Simeon was saying, with
Speaker 1: respect to the actual trading of the fit you know,
Speaker 1: of the digital bitcoin, and it will be very very
Speaker 1: interesting when sort of we have interim financial statements coming
Speaker 1: out right now for the physical uh bitcoin ets here
Speaker 1: in Canada, and we really don't know that underlying trading
Speaker 1: costs and custody costs and flow through costs until we
Speaker 1: get This will be the first public reporting period for
Speaker 1: those et f s, so it'll be very very different
Speaker 1: from that perspective. I also wanted to say, like also
Speaker 1: to Simeon's point, when you're looking at the backwardation in
Speaker 1: contango of you know, the features curves for bitcoin, you know,
Speaker 1: since the inception of the bitcoin futures back to it
Speaker 1: wasn't really only until like the last twelve months, even
Speaker 1: less like ten months where we saw this huge sort
Speaker 1: of you know, contango effect which started creating tracking air
Speaker 1: between sort of BTC one on a long term basis
Speaker 1: versus uh spot Bitcoin. And to Simeon's point, like we
Speaker 1: created a five day rolling features index and you know,
Speaker 1: on a one year basis right now we're about you know,
Speaker 1: thirty five percent behind. Um. You know that three hundred uh,
Speaker 1: you know three and one percent return of BTC one right,
Speaker 1: and you know our role in futures. There's a cost
Speaker 1: to it, and it's only really been in the last
Speaker 1: year since bitcoin has been going straight up from your
Speaker 1: point of ars to sixty. Something's going to happen during
Speaker 1: that period. From a from a contango perspective, in the
Speaker 1: future is curve. It's just you know, reality. But when
Speaker 1: you normalize it, and when you normalize gold to gold,
Speaker 1: futures like this is a marketplace where we believe that
Speaker 1: futures will be again the best tracking vehicle because you've
Speaker 1: got to take the contango with the backwardation, and as
Speaker 1: you know, we see bitcoin slide, the backwardation really fits
Speaker 1: nicely into allowing us to really make up some of
Speaker 1: that gap. Um, as long as we're fully invested, which
Speaker 1: is you know, what all our ets are hoping to be.
Speaker 1: But I mean Simeon's might be a little bit different
Speaker 1: because it's active. Ours is passive and invested at all times.
Speaker 1: So Simeon, I want to ask you, um uh, you
Speaker 1: know you coming out just recently and then all of
Speaker 1: a sudden you see all these new of filings, handful
Speaker 1: of them that that Eric mentioned earlier. I'm sure you've
Speaker 1: had a chance to look at them. What do you
Speaker 1: what do you make of of those um of those offerings. Yeah,
Speaker 1: we have filed for an ETF. We're in the quiet period,
Speaker 1: so there isn't much else I can say other than
Speaker 1: we filed and uh. This is a this is a
Speaker 1: rapidly evolving and maturing space. I think when we get
Speaker 1: to some steady state, there will be multiple ways for
Speaker 1: investors to get exposure to bitcoin. And I think perhaps
Speaker 1: one of the best things that you can do as
Speaker 1: an investor is try to split up the underlying use
Speaker 1: case for bitcoin with the from the alternatives. As an investor,
Speaker 1: I think that's really important and it gets lost if
Speaker 1: you're trying to do this research because you know, whether
Speaker 1: it's the anonymity, the functioning of the blockchain, uh, the
Speaker 1: evolution of defy, all those things that are part of
Speaker 1: the underlying value proposition of bitcoin or any other cryptocurrency
Speaker 1: are are critical to you know what will drive its
Speaker 1: price over time. But you don't need a smelter to
Speaker 1: invest in gold, so those things are not necessarily the
Speaker 1: relevant question. The relevant question as more ways are allowed
Speaker 1: to come to market. To get exposure is to ask
Speaker 1: yourself the questions of as an investor, trade off the call,
Speaker 1: the the transaction costs of being all the in the
Speaker 1: spot market, in the futures market, if there is ultimately
Speaker 1: that choice, the tradeoff of being in a forty act
Speaker 1: versus a thirty three act in terms of your you know,
Speaker 1: personal tax positions or your predilection for a K one.
Speaker 1: So I think that's what's really important, because that can
Speaker 1: get so lost so fast because you go into the
Speaker 1: into the al Gores Worldwide Web and you you try
Speaker 1: to figure out what's going on with bitcoin, and all
Speaker 1: of a sudden you're reading the Setoti paper and you
Speaker 1: don't know how that's gonna help you. So I think,
Speaker 1: if if there's a piece of to take away here
Speaker 1: as an investor focused on the relevant distinctions in what
Speaker 1: it means to you as an investor, leave the underlying
Speaker 1: use case commentary perhaps a little bit to the side
Speaker 1: for that for that evaluation. Okay, let's take a step
Speaker 1: back and look at what might transpire. So, you know,
Speaker 1: we just talked about there's other filings. So here's exactly
Speaker 1: what Gensler said that everybody has honed in on which
Speaker 1: is quote. I anticipate there will be filings with regard
Speaker 1: to et s under the forty Act. When combined with
Speaker 1: the other federal securities laws, the forty Act provides significant
Speaker 1: investor protections. Given these important protections, I look forward to
Speaker 1: the staff review of such filings, particularly if those are
Speaker 1: limited to the CME traded bitcoin futures. Now, all of
Speaker 1: the filings, the first three filed, including your SIMI and Vanac,
Speaker 1: yours and invest Go have this language which says the
Speaker 1: fun and test intends to invest in pooled investment vehicles,
Speaker 1: including e t f s that invest directly or indirectly
Speaker 1: in bitcoin. This The last two that came in, Valkyrie
Speaker 1: and Galaxy, simply say we're only futures. They don't have
Speaker 1: that e t f s indirect bitcoin sentence. Does that matter?
Speaker 1: And how do you see the approval working? You think
Speaker 1: they'll approve all five at once, because when you file
Speaker 1: forty actors, you're on like a seventy five day clock, right,
Speaker 1: so it seems like the first one filed could be
Speaker 1: out first. I don't just give me your take on
Speaker 1: all that. I can't really opine on what the SEC
Speaker 1: might do, which which which I know you'd love for
Speaker 1: me to do. I we don't know, We really don't know. Um,
Speaker 1: it's pretty clear from the language that you know Gensler
Speaker 1: is a fan of futures and a forty act. But
Speaker 1: at that nuanced level, you know, all I can really,
Speaker 1: you know, respond to is yeah, we're active and we
Speaker 1: have that flexibility to manage at cash collateral collateral in
Speaker 1: a little bit more flexible ways than maybe some folks
Speaker 1: who are who are painting that a little bit more narrowly. Steve,
Speaker 1: the SEC can't harm you. You're up there in Canada.
Speaker 1: What do you think about that sentence? Do you think
Speaker 1: that will matter? And he'll prove just the two that
Speaker 1: said only futures or what's your taking? Well, I wish
Speaker 1: our regulator had the same thought process as against h
Speaker 1: first and foremost, because that I would have been first
Speaker 1: in marketplace. But that said, I you know, I believe, um,
Speaker 1: you know, he's really honing in on the fact of
Speaker 1: how can they get comfortable from a regulatory perspective around
Speaker 1: custody and trading of the underlying assets when this is
Speaker 1: such a new and you know every day it's changing
Speaker 1: with respect to how you can access digital currencies or
Speaker 1: any and and you know how you can hold digital currencies. So, um,
Speaker 1: this is an unregulated cross border currency UM asset and
Speaker 1: it's just completely unknown for them. But having the related
Speaker 1: uh CMME listed features governed by the CFTC is sen
Speaker 1: Emen saying, um, you know you have full on margin accounts,
Speaker 1: segregated margin accounts with a different trust, which is what
Speaker 1: we have had to do with with our e t F.
Speaker 1: You know, these are all I think these are all
Speaker 1: the comfort levels that is giving the regulator saying, I
Speaker 1: think we can get there now with the sort of
Speaker 1: e t F futures based and I think you know
Speaker 1: all the I think there's five or six filings now
Speaker 1: which are features based specifically in the US. I believe
Speaker 1: that they're all going to get approved um and I
Speaker 1: believe that hopefully. I believe that the SEC will approve
Speaker 1: them all together, Like if they're going to prove one there,
Speaker 1: they should be approving all of them together roughly around
Speaker 1: the same time. So for the people that are on
Speaker 1: defence with their their physical ones, um, you know, like
Speaker 1: the cryptoins and the wise and the first trust. You know,
Speaker 1: I think they should be getting there, you know, futures
Speaker 1: based filings in a SAP so that they can get
Speaker 1: onto the uh the train with the rest of the
Speaker 1: filings like uh you know, pro Chairs and and UH
Speaker 1: and Galaxy and invest Goo and Vanac and those guys
Speaker 1: who I think will leave the charge. If not, then
Speaker 1: I think they're going to be watching as uh these
Speaker 1: you know, US issuers get to marketplace with their first
Speaker 1: futures based TTF. And to your point, in Canada, they
Speaker 1: allowed this bitcoin ETF to come out one day alone
Speaker 1: and then they let somebody else come out day two.
Speaker 1: It was already like too late. It was so I
Speaker 1: agree they probably should approve all at once, given what
Speaker 1: they saw in Canada. And then they I think they
Speaker 1: corrected and the three ether e t s all got
Speaker 1: approved and allowed to launch the same vein and it
Speaker 1: was more of an even fight. Correct But that's how
Speaker 1: that's how big first the market. Now back to you, Simeon.
Speaker 1: Now you have a mutual fund that's futures and there's
Speaker 1: an e t F that let's say the e t
Speaker 1: F s get filed, I mean launched. What about pacity?
Speaker 1: Somebody brought up capacity where they thought, well maybe the
Speaker 1: mutual phone is approved, because the mutual phone can always
Speaker 1: stop taking new assets. The e t s can't. Do
Speaker 1: you think if there's futures et f s approved and
Speaker 1: they really get a lot of flows, is their capacity
Speaker 1: concerns that you and you can't close you know, the
Speaker 1: e t F to new creations or I guess you can,
Speaker 1: but it would just annoy everybody. Yeah, I mean there's
Speaker 1: a couple of pieces to that. First, the uh um,
Speaker 1: it's it's likely that capacity limits is something that will
Speaker 1: increase and and uh ameliorate over time. So there are
Speaker 1: limits two thousand limits on the front month traffic. That's
Speaker 1: about if you had it all up, it's about four
Speaker 1: underd and fifty million dollars in today's bitcoint price. But
Speaker 1: also remember we are active, so that gives us, that
Speaker 1: does give us the opportunity around the around the edges
Speaker 1: to manage that process. So I think it's manageable. Um.
Speaker 1: You know, we would have no intent to convert the
Speaker 1: mutual fund We have me as I said, profile and
Speaker 1: pro chairs has we have mutual funds and e t
Speaker 1: f s on the platform, so we would anticipate that
Speaker 1: those codesists for us. I would add to the Semings point,
Speaker 1: you can there's there. The see me has a limit
Speaker 1: on the front month that you can own, and it
Speaker 1: also has an overall limit. So like we had to
Speaker 1: build into our prospectives the ability to UM go to
Speaker 1: a certain limit on the overall fund and we could
Speaker 1: go we could move outside of sort of the the index,
Speaker 1: and we can actively manage the portfolio to the index
Speaker 1: based on what we were allowed to get exposure to.
Speaker 1: So if that meant owning the front month, the second month,
Speaker 1: the third month contracts UM so that we were approximating
Speaker 1: the performance of the front month or the rolling front
Speaker 1: month index, you know, that's what we had to do.
Speaker 1: And the Semings point, as there are more and more
Speaker 1: products that are coming to marketplace, um, you know, there's
Speaker 1: significantly more trading volume in those underlying bitcoin futures, which
Speaker 1: we've seen effectively pick up almost every month since they
Speaker 1: launched into seventeen. There was a bit of a lull
Speaker 1: in twenty eighteen, but like the number of contracts outstanding
Speaker 1: basically has increased every single month, which is and it's
Speaker 1: provided more depth to marketplace, more liquidity for us to
Speaker 1: be able to trade and you know, we have been
Speaker 1: in discussions with the CME UM I can openly say
Speaker 1: for over two years now to try and get them
Speaker 1: to move those contract limits and give us exemptions away
Speaker 1: from those contract limits. And you know, because we actually
Speaker 1: you know, licensed the semi features UM you know, pricing
Speaker 1: and index that the that they had UM. You know,
Speaker 1: they've been very very open to talk to spend it
Speaker 1: and understand the issues. And you know it's something that
Speaker 1: we have to deal with our market makers all the time.
Speaker 1: But to your point, Eric, you know, under Canadian law,
Speaker 1: we have the ability to cap the et F very
Speaker 1: very quickly and easily. And you know the one thing
Speaker 1: we don't want to happen though, is we don't want
Speaker 1: this to turn into a closed end fund UM. You know,
Speaker 1: we wanted to stay an open ended fund that you
Speaker 1: know people have the We don't want to trading in
Speaker 1: a premium. It's a closed in fund. You will never
Speaker 1: have day to discount because they always have the ability
Speaker 1: unit holders always have the ability to sell and readeem UM.
Speaker 1: But buying it, if we have no more capacity to
Speaker 1: add exposure, then it typically will end up trading like
Speaker 1: a closed in fund, and trading in a premium. We
Speaker 1: just don't want that. So we're hoping to see me
Speaker 1: to hoping that everybody. You know, we're putting a little
Speaker 1: pressure on the CEME and as that market has become
Speaker 1: significantly deeper, will relax those individual contract limits that we're
Speaker 1: up against the currently, Steve, how big do you think
Speaker 1: your product can get? Then? What do you think the
Speaker 1: potential is? Well, I mean we saw like if we
Speaker 1: were first to market list I'm just gonna say hypothetically, like,
Speaker 1: you know, we saw a billion dollars come in in
Speaker 1: the first week, right, I mean like if we had
Speaker 1: brought a billion dollars in in the first week, um,
Speaker 1: and used dollars like we would have been capped out
Speaker 1: in the front month contract. We would have been moving
Speaker 1: in the second month. Um. Wait wait, wait, time out,
Speaker 1: time out. So let's actually that's fascinating. Let's actually grow
Speaker 1: this too, because you're using the same futures. So how
Speaker 1: how much could Bitcoin futures et F as a whole
Speaker 1: as a group have in assets US dollars before you're
Speaker 1: capped out? Any One fund is capped right, but multiple
Speaker 1: funds are not. I say, okay, so but one fund
Speaker 1: would be a billion, one fund could be a billion dollars. Yes, yeah,
Speaker 1: it could be a little bit different for pro shares
Speaker 1: between because the one having a fund and one having
Speaker 1: an e t F and both of them, I don't
Speaker 1: believe that both of them from my own personal view,
Speaker 1: I don't believe both of them have the ability to
Speaker 1: go up to that two thousand front month contract limit
Speaker 1: um under the way that I've read the semi rules.
Speaker 1: But I could be mistaken, and I'm I'm not Simon's lawyer,
Speaker 1: and I'm not going to give him advice there. But
Speaker 1: you know, it's an entity uh limit per se and
Speaker 1: to the extent. And you know, one of the issues
Speaker 1: that we were running into is the trading partners when
Speaker 1: it comes to the you know that there there's a
Speaker 1: limited number of fcms in the US that are willing
Speaker 1: actually to trade at the bitcoin features, and then the
Speaker 1: margin around those is significantly different. Like when you're putting
Speaker 1: up you know, five percent margin on a on a
Speaker 1: gold features contract, we're putting up forty two on a
Speaker 1: bitcoin futures contract. Very very different way of of operations
Speaker 1: for us and managing these underlying portfolios. The one really
Speaker 1: nice thing that's happened though, you know, recently this year though,
Speaker 1: is the addition of the mini Bitcoin features, so that
Speaker 1: in itself has actually allowed us to really give us
Speaker 1: the ability to define tune the exposure in the ets
Speaker 1: to making sure that we're almost a hundred percent matching
Speaker 1: all the time, so you know, we have up to
Speaker 1: you know, one one bitcoin future when when big bitcoin
Speaker 1: features five contracts and if we're able to add in
Speaker 1: a you know, a mini contract to round out the
Speaker 1: exposure where we need to. Um, it's been a lot
Speaker 1: better for us to manage that way. And Timmy and
Speaker 1: how how how about you? How big do you think
Speaker 1: your product can get? And then how would that compare
Speaker 1: if the if the et F version were approved. Yeah,
Speaker 1: I don't I don't want to throw a specific number
Speaker 1: out there because again, because we're active, that gives us
Speaker 1: a little bit of an ability to to manage around
Speaker 1: if there's enough liquidity to put a little bit past
Speaker 1: the front month to you know, to to think cleverly
Speaker 1: about how uh and effectively we could uh we could
Speaker 1: manage the the the the collateral in the margin to
Speaker 1: get a little bit more exposure. So it's it's a
Speaker 1: little bit softer when when you're in uh when when
Speaker 1: you're on the active side. Okay, they could also own
Speaker 1: e t F inside. So if they get capped out
Speaker 1: on a pro funds basis for the maximum number of
Speaker 1: futures contracts they own, they can easily backfill with other
Speaker 1: either futures based yes, or even some of the the
Speaker 1: digital currency back etf here in Canada. Okay, so this
Speaker 1: is fascinating. We went way down some wormholes. I want
Speaker 1: to actually just back up for a second and and Simon,
Speaker 1: I'll just ask you, how hard is it to actually
Speaker 1: just compete with like robin hood on this front? Like
Speaker 1: I could just open robin hood as a consumer you know,
Speaker 1: the day trading Yahoo if you will, and like just
Speaker 1: buy some BTC, Like, how hard is it to compete
Speaker 1: with that? Oh? I don't think it's hard to compete
Speaker 1: because I think it's as an alementor of mine once said,
Speaker 1: let a thousand flowers bloom. There will be multiple ways
Speaker 1: to get exposure to bitcoint that that will be uh,
Speaker 1: that will have pros and cons and that will have
Speaker 1: uh have advantages for different constituencies. Uh. There's a heck
Speaker 1: of a lot of people out there that would not
Speaker 1: be would not be pursuing their exposure the way you describe.
Speaker 1: But man, when you tell them, wait, there's a mutual fund.
Speaker 1: Oh that's pretty clean. So I think I think there's
Speaker 1: plenty of room for for lots of ways to get
Speaker 1: exposure and and there was certainly from our perspective and
Speaker 1: underserved or not served at all constituency that will find
Speaker 1: the forty act vehable vehicle to be uh quite the
Speaker 1: attractive alternative. All right to close, Simeon, We've got Steve
Speaker 1: this before, although I can't remember what it was, and
Speaker 1: I'll probably asked him again. We always ask folks, what
Speaker 1: is your favorite et F ticker that is not your
Speaker 1: own favorite e t F ticker that is not my own? Well,
Speaker 1: tell you to prepare, Simeon. Oh I didn't. I thought
Speaker 1: I was going to get a list of the secret
Speaker 1: question how can you go wrong with g L D?
Speaker 1: So that's that's pretty And Steve, have you changed yours?
Speaker 1: I do? I have a new favorite now, and is
Speaker 1: because we're getting at the space specifically, but uh C
Speaker 1: S I C K is my new favorite, especially from
Speaker 1: the U S E T S so amazingly I don't
Speaker 1: think we've had that one before. Yeah, they're healthcare. You know,
Speaker 1: it's uh, it's it's it's just totally sick. So I
Speaker 1: like it. Well then that that one's got a good
Speaker 1: mirrored pair with Cure. I always like tickers that are
Speaker 1: also great bands like R. E. M. Cure. There's a
Speaker 1: couple of them there. Used to be Bono that was
Speaker 1: a Latin America bond fund, but that close. But yeah,
Speaker 1: good choice, Steve inspiring triple leveraged. Wow, look at you.
Speaker 1: What are you doing in your personal account these days?
Speaker 1: I'm playing the leverage marijuana. That's as well as inverse bitcoin.
Speaker 1: Those are my favorites that I like to trade daily.
Speaker 1: All right, Simme and Steve, thanks so much for joining
Speaker 1: us on Trillions. Eric, always a pleasure, Thanks for having soon.
Speaker 1: Thank you. Thanks for listening to Trillions until next time.
Speaker 1: You can find us on the Bloomberg Terminal, Bloomberg dot com,
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Speaker 1: We'd love to hear from you. We're on Twitter, I'm
Speaker 1: at Joel Weber Show. He's at Eric Falcinas. This episode
Speaker 1: of Trillions was produced by Magnet Hendrickson. Frincesca Leeby is
Speaker 1: the head of Bloomberg Podcast Bite