Compiled by Wu Says Blockchain
Original link:
https://x.com/defidecodedpod/status/1910732504790642921
Content overview:
Defidocode interview invited James Seyffart, ETF research analyst at Bloomberg Intelligence, focusing on the rise of cryptocurrency ETFs, particularly innovative ETF products in Bitcoin and Ethereum, and how retail investors and institutions respond to market panic and changes in fund flows. It points out that current fund flows are primarily into stock ETFs, while bond market funds are flowing out, showing that the market is undergoing structural rebalancing. Additionally, it explores how ETF products serve as risk-adjusted tools and meet different investor needs, including the differences between long-term investors and short-term traders. James also discusses the performance differences of stocks from companies like MicroStrategy and Coinbase, suggesting that cryptocurrency mining companies and gold mining companies share similarities in volatility and emphasizing that the intersection of AI and cryptocurrency may bring new opportunities to the market.
Introduction of guests: James Seyffart, ETF research analyst at Bloomberg
Alex Tapscott: Today we are very fortunate to have James Seyffart with us to tell us what is happening in the market, the changes in fund flows, how investors are reacting, and how retail investors are responding to these changes. James Seyffart is an ETF research analyst at Bloomberg's industry research department, recognized globally in 2024 for his expertise in cryptocurrency ETFs. However, James is not only focused on cryptocurrencies; he is also very knowledgeable about market dynamics and can provide us with insights about the broader market. If time permits, we can also discuss the fund flows in crypto asset ETFs and the discussions regarding new products over the next six to nine months, as well as changes in U.S. cryptocurrency regulations, especially with respect to the SEC. But first, let’s welcome James.
The SEC's stance on ETF staking: The floodgates for ETFs are wide open
Andrew Yang: Let's shift to the cryptocurrency topic. It feels like the last time we chatted was before Trump was elected, and now the flood of cryptocurrency ETFs has completely opened up; I can't even count how many new cryptocurrency ETFs have launched. It's just crazy. From the range of asset classes covered, including leveraged Bitcoin ETFs to, say, ETFs for L1 projects that haven’t officially launched, even products like 'Memecoin ETFs.'
Alex Tapscott: It's like the floodgates have completely opened, and they can now experiment to their heart's content. It feels basically like 'throwing spaghetti against the wall' to see what sticks, trying to apply for all possible asset classes and experiment to see which one succeeds. But I noticed some applications for a Solana spot ETF have removed the staking feature. Is that correct? So I'm a bit curious, if even an ETF is allowed to unstake assets, how open can the SEC be right now? So what exactly happened? I'm just a bit curious and want to understand more.
James Seyffart: I'll start with what Andrew said and then answer your question. Yes, indeed, when Trump was elected, the floodgates for ETFs had already opened. Everyone started applying for various ETFs, and now we have many upcoming dates when these ETFs might start rolling out. In fact, we have already seen a 2x leveraged XRP ETF launched in the U.S., even though we don’t even have a futures market. This is a complete shift, right? So the SEC is actually returning to their traditional way of handling these matters. Yes, it is indeed an open signal, but issues like staking or physical creation and redemption belong to the same line of thought. I think there are still many unresolved issues. For instance, specific rule changes are needed to allow these operations. So for Solana's spot ETF, basically, it needs to be listed like Bitcoin or Ethereum's spot ETFs, with Ethereum possibly being the more appropriate example because it involves staking. So I think what you're saying here is that they will eventually approve spot products and then deal with staking issues separately in the future for any assets involving staking. That’s my view on that. So I don’t think it means 'we will never allow this, staking must be removed'; it’s more like 'let's launch the spot products first, and we will address the staking language later.' That’s my basic assumption. But I agree with your view; I think in many cases, everyone is just randomly applying, testing the SEC's parameters to see what they allow and what they don’t.
But you would see that if an ETF is very successful, like MicroStrategy's ETF, or Nvidia's ETF, with billions and hundreds of billions inside, if as an issuer you can charge more than 1% in fees, that would be fantastic. You know, I’d rather throw 50 products at the wall and see what sticks if I can have one that attracts $10 billion in funding and I can charge more than 1% from it; that would be worth it. So that’s the direction for future development. One question I look forward to seeing is how the SEC will handle physical creation and redemption, how they will handle staking issues, and where they will ultimately draw the boundaries; that’s the key.
The advantages and limitations of ETFs: Why staking 100% of assets may be more attractive than ETFs?
Alex Tapscott: Regarding the topic of staking, I don't know if you've seen the news yesterday that Janover was taken over by a group of former Kraken executives, including Marco Santori, who raised $42 million from several venture capital firms, essentially their proposal is to become a MicroStrategy for all other assets. I don't know if this news has appeared in your Twitter feed. But let me roughly tell you what this is about.
I feel like they basically believe they can stake 100% of their assets, and any staking returns can compound, which is better than an ETF. In their marketing materials, they explicitly state 'this is better than an ETF,' which is interesting because I’ve always thought MicroStrategy sees itself as an operating company with a fiscal strategy like Bitcoin through its balance sheet. And now they’ve made that argument even clearer, perhaps because the regulatory environment has changed. However, I wonder if they are launching this strategy in anticipation that ETFs might not allow staking or might not fully support it for a while? A structure like this that allows for 100% staking and compounding might actually be a better way to accumulate assets and may provide a better entry point for investors into this space. I don't know what you think about that.
James Seyffart: I actually haven’t seen this, but I have a few thoughts. First, you already have staking services for Ethereum ETFs in Canada, and we will follow suit in the U.S. The downside is, as you mentioned, you may not be able to stake 100% of the assets. Now there are many service providers looking for ways to maximize the proportion of assets you can stake to boost yields. There are also some third-party companies, which should be considered service providers rather than software companies, trying to do this. I've seen some ETF issuers acquiring different staking service providers to try to enter the staking space. I think this will become an important part of the ETF competition, like how much staking yield you can pass on? Do you choose not to charge fees and just take a certain percentage from the yields you receive? There are many ways to do this and make the market profitable. We have already seen similar situations in some European markets where being able to obtain 100% staking yields is very advantageous.
But the benefits of ETFs are not just about acquiring these assets and generating returns; the real benefits lie in the creation and redemption mechanisms I mentioned earlier, similar to high-yield municipal bond ETFs. The benefit is that ETFs will follow the trading situation of their underlying assets, right? For instance, you will see MicroStrategy on certain days, even when Bitcoin is down, its stock price goes up, and vice versa. Its trading doesn't completely track the underlying assets held on its balance sheet, as you mentioned. Therefore, companies launching such products, like Real Estate Investment Trusts (REITs), although their trading is related to the real estate market, they do not completely track the performance of the real estate market; they are affected by other stock market risks and volatility. The creation and redemption process of ETFs always forces them to align with the market price of the underlying assets.
So, like this company, they will definitely have their advantages, possibly able to leverage like MicroStrategy. But the real benefit of an ETF is that you can always exchange the underlying assets for ETF shares, and vice versa, this exchange mechanism ensures that they always align with the underlying assets.
Products like the one you mentioned, if they collapse, the likelihood that the underlying asset's value is close to its trading price is very low. Historically, we have many examples showing that it doesn't always work that way. So I’m sure there will be specific times and use cases where many might prefer this approach. But that doesn't mean this approach will ultimately be better than how ETFs operate.
Premiums and discounts in the cryptocurrency market: The current state and future trends of Solana
Alex Tapscott: Speaking of premiums and discounts, regarding Grayscale's product line, I don't know if you've looked at their website. For example, gsolve, if you actually look at the charts of net asset value (NAV) and unit price, it's just crazy. Yes, the charts are really wild. At one point, its trading price was 6700% of NAV, so at that time, NAV was $14, and its trading price was around $90. I looked again yesterday. This chart is just like a crazy Bart Simpson hairstyle graph. But in fact, it’s the P/NAV (price to net asset value ratio) that is guiding this trend, right? Now we are at a point that is roughly close to NAV, but still, in the ordinary ETF space, any fund trading at a 15% premium would be considered an extremely high premium, but in the cryptocurrency world, it’s different. So this chart tells me that the Solana ETF is just a matter of time, not 'if it will happen,' and they will likely arrive very soon. Because remember last year, or about a year ago, GBTC was trading at a 50% discount, and later its discount gradually narrowed, eventually arriving at about a 5% discount, 4% discount. That basically represents the time value between us and the approval, and it eventually got approved and then merged, right? So what this chart tells me is that it’s like an upcoming trend; how do you view this chart?
Andrew Yang: Sorry to interrupt. Isn't it also because enthusiasm for Solana has declined over the past two to three months? Or is this difference solely because people are shorting it and buying spot ETFs?
Alex Tapscott: No, I definitely think it's a combination of the three. I believe there are three factors. First, interest in Solana is certainly fluctuating; secondly, there was indeed a huge event last fall when a large-scale private placement turned into freely tradable, allowing investors to exit at a premium. But for me, the most important factor is the movements in premiums and discounts of ETFs. So, James, what do you think?
James Seyffart: I think looking back at the situation with GBTC, the question is, how likely is this ETF to be approved? Although Eric Balchunas and I were very optimistic months before approval and set the probability of approval very high, the market just didn’t believe it. I know many very smart people who sincerely believed the SEC would not approve a Bitcoin ETF until a week before the approval, we thought the probability exceeded 80%. So that’s the key. This thing will eventually turn into an ETF, and the premium will disappear; that’s the most critical point. Secondly, as Andrew said, Solana has indeed lost a lot of attention in the past. Ultimately, the question is whether this product will become an ETF; market participants have recognized this and started selling off due to its high premium.
Bitcoin and 'Mag 7' tech stocks move in sync; how should the market interpret this?
Andrew Yang: I want to ask one more question. I know you mentioned in the podcast that you've been focusing more on macro issues over the past week, but I’m curious about the topic over the weekend regarding Bitcoin's performance stability. We also mentioned gold, which has performed relatively well. I'm curious what the institutional market's view on Bitcoin is against the backdrop of a potential global trade restructuring. Logically, this situation should be favorable for Bitcoin. I just want to know if institutional investors share this view or if they are simply more focused on ensuring their survival in the coming weeks.
James Seyffart: Yes, in fact, I myself am paying attention because I am shocked by the actual decoupling of risk. Basically, at least over the past few years, the correlation between Bitcoin and NASDAQ has been very high. That is to say, when risk assets fall, Bitcoin also falls; when risk assets rise, Bitcoin usually rises more, regardless of the direction. However, in recent weeks, this situation has changed, especially last week, when Bitcoin actually rose against the trend while all other assets, including gold, were falling. This phenomenon is very strange, and many people are analyzing why this is the case. Is it because GameStop is buying, or is Saylor buying? Who knows? It turns out that's not the reason.
James Seyffart: However, that brief period of Bitcoin outperforming other assets faded by Sunday evening, and Bitcoin began to drop below $80,000. Currently, at the time of recording, Bitcoin is still below $80,000. What I want to say is, although Bitcoin has dropped significantly, if you look at it since risk assets started to decline, Bitcoin's drop is about on par with NASDAQ's, both dropping about 20%. As for the 'Magnificent Seven' (the seven tech stocks), they have dropped about 26%, and that was the situation before today. Now they have all seen slight increases, but Bitcoin's trading still typically aligns with these assets. Despite this, Bitcoin's volatility is much higher than these assets, but if someone had told me what would happen in the next few days a month and a half ago, I would have thought Bitcoin would drop to $60,000 or even lower. Relatively speaking, my view is that Bitcoin has held up quite well compared to its usual performance, after all, it typically trades like a leveraged risk asset, influenced by liquidity and other factors. On the other hand, obviously, Bitcoin has been dropping for a while now, and almost all cryptocurrencies are the same, but its trading trend runs counter to all fundamental trends, right?
Since all of this started happening, I've attended several conferences, talked to industry insiders, and communicated with ETF issuers like you, as well as many institutions looking to enter this space, and they are more optimistic about it than anyone I have seen before. Everyone is looking forward to a lot of things happening. Basically, from the Biden administration, Gary Gensler, the SEC, to all the constraints, these obstacles are gradually turning into favorable factors, or at least most of the resistance has disappeared, yet prices are still falling. So it's a strange contradiction: risk assets are all dropping, cryptocurrencies are also falling, but fundamentally, if you want to call it the underlying fundamentals or changing context, it should actually be favorable. You would expect things to get better.
One perspective I have is that Bitcoin has been anticipating these changes since Trump was elected, as everyone was particularly optimistic at that time. But when you talk to institutions, almost everyone is very optimistic about this situation. Honestly, a significant issue many investment advisors preparing to enter this space, especially in the U.S. and globally, face is: will advisors recommend these assets? Will they put these products into client accounts? They couldn’t do that before, but now with the shift of these platforms and large institutions, they are starting to allow them to offer products like Bitcoin to their clients. So typically, there are three different levels. The first situation is that clients cannot access these assets at all. The second situation is that if clients request to purchase or meet certain criteria, they can be purchased for them. The final situation is that advisors can recommend these assets to specific clients, and many large institutions managing millions of dollars are getting close to being able to recommend these products to clients, if not in reality, at least in a scale of hundreds of billions.
Alex Tapscott: I think the trend you described is also leading to Bitcoin gaining a larger dominance among other crypto assets. Frankly, advisors can easily call their clients and recommend Bitcoin. They can say, 'Look, this is digital gold, Larry Fink and many other smart people are recommending it, it's a store of value. It's non-correlated. As part of a portfolio, our model portfolio recommends it, so we think allocating to Bitcoin makes sense, right?' It really doesn't require much justification. In contrast, with Ethereum or Solana, why hold those? It's because they are platforms. Even though there are reasons to do so, I actually think they do have compelling investment cases, it just feels like there's justification on both sides.
It's a platform supporting decentralized applications and peer-to-peer value transfer of digital assets. What does that mean? I'm not quite sure. So I can't help but feel that Bitcoin is currently one of the biggest beneficiaries of the policy shift, especially as regulatory resistance has turned into a tailwind. Yes, although it has dropped since Trump took office, and has basically been moving in sync with the 'Mag 7' over the past two months, Bitcoin is still up since Trump took office. And this is not the case for stock indices, nor does it apply to most other crypto assets. Therefore, I think there is indeed a phenomenon of Bitcoin exceptionalism in the market; although everything is relative—despite still falling significantly, if you are an ordinary retail investor, you might say, 'Hey, the decline in this position is only 25%-30%, not 50%.'
For many people, this might be a cold platform, but I think that might be a result of this transformation. Now, regarding the stage we are in, well, I think if we can smoothly get through the current tariff trade dilemma, the latter half of the year will be extremely bullish for cryptocurrencies, right? For example, Circle is preparing for an IPO, and there are a dozen other similar companies in line. These companies will enter this queue.
Bitcoin's 'digital gold' status: How do institutional investors view its future?
Alex Tapscott: These companies now perfectly fit the requirements, many of them wanted to go public in the previous cycle but missed the opportunity because the SEC under the Biden administration was not particularly supportive. Now they are all going public. We will see an expanding field of public issuer investments, with audited financials and regular reporting, giving investors a deeper understanding of these companies, more fund managers will hold these stocks, and more fund managers and advisors will gain exposure to Bitcoin through ETFs. We might see a wave of cryptocurrency ETF approvals, although it will be a 'survival of the fittest' competitive game, some will succeed and some will not. But this means more funds will flow into these assets, especially since there is no longer the pressure of GBTC or ETHE like before. Last time we had to deal with massive redemptions, and now everything is net new creations. So I think these trends are gearing up for the second half of 2025, by which time everything will become very bullish, especially now that even the meme coin frenzy has subsided, so there is nothing negative or terrifying weighing on cryptocurrencies. We feel like we are ready. But I think it's still a 'tail wagging the dog' situation: in a world where risk assets are sold indiscriminately and investors are fearful, cryptocurrencies won't be able to succeed. I just can't see how both can develop in parallel. Perhaps Bitcoin might rise slightly due to decoupling, but I'm still skeptical about that. I think we still need to get through the current moment if we want to see these developments materialize in the latter half of the year.
James Seyffart: Yes, I’ll stop there. In fact, the situation is far worse than you described. As for Bitcoin, honestly, before the election, my view was that regardless of what happened, Bitcoin would be fine. It doesn't attempt to replace some of the things that DeFi is trying to do, which the SEC has been targeting, so it wouldn't be automatically classified as a security. Bitcoin is not a security, and even Ethereum hasn't been classified as a security by the Biden administration's SEC to some extent. I agree with your view; I think the promotion of Ethereum is far more complex than that of Bitcoin. If you ask me, I've even said on our own podcast that I used to think Trump's victory would be more beneficial for other categories of assets, such as Ethereum and Solana, because a lot of what they are doing and are trying to do is good. It’s just that under the pressure of the SEC, CFTC, OCC, and other regulatory agencies, many things cannot be pursued, and these institutions have been opposing these innovations.
And Bitcoin is a digital store of value and digital value transfer, which it has already completed, and for most of the time, it hasn't faced much opposition, right? However, as you mentioned, the benefit of Bitcoin is that its acceptance is far higher. The narrative of Bitcoin is very easy to understand. It's digital gold, a store of value. I see it as an option for digital value storage; although it hasn't fully realized that yet, it is still a risk asset. Could it potentially happen in the future? Some say no, but I believe, without a doubt, from a price perspective, the likelihood of it happening has increased. Whether it actually happens is another topic of discussion, but undoubtedly, the market has made a decision that the likelihood has increased. That's my view. So I think all these factors, along with different platforms starting to accept and promote Bitcoin, will make the promotion of these other assets slower.
We were very bearish on the amount of assets Ethereum ETFs could acquire compared to those hardcore supporters of cryptocurrencies and Ethereum. Compared to the maximalists of Bitcoin, they say Ethereum ETFs get almost nothing, but we believe it will receive inflows at a discount ratio to the market cap of Bitcoin. In fact, we even underestimated that ratio because the launch of Ethereum ETFs in the U.S. faced net outflows due to the EPE pressure you mentioned earlier until Trump was elected. Earlier this year, they flipped from $60 billion outflows to $3.2 billion inflows, but since then, some funds have flowed out again, especially at the end of January and early February. So the push for Ethereum is indeed more challenging. If you listen to different people's opinions, they would say that investors holding 'Magnificent Seven' stocks should have some exposure to Ethereum, Solana, or other altcoins that have submitted ETF applications; that would be the actual recommendation. But in reality, promoting that is much more complex than promoting Bitcoin, as you mentioned earlier, Bitcoin's dominance is gradually increasing.
The performance difference between Bitcoin and cryptocurrency company stocks: Why do Coinbase and MicroStrategy perform better?
Andrew Yang: I'm also curious about your thoughts on another issue, which is the difference between Coinbase and some other cryptocurrency stocks compared to Bitcoin. Like Bitcoin and MicroStrategy, they have clearly outperformed other cryptocurrency-related stocks and assets over the past three to six months. Their performance far exceeds that of other cryptocurrency-related sectors, while those cryptocurrency-related stocks seem to have little response. I wonder how you view this difference.
James Seyffart: I think this goes back to the risk issues surrounding other crypto assets that I mentioned earlier. MicroStrategy is an independent entity; it is a leveraged play on Bitcoin. Coinbase, on the other hand, is like an index fund in the cryptocurrency space, at least in some aspects I believe that. But overall, Coinbase is an investment in the broader cryptocurrency ecosystem, while MicroStrategy is completely dependent on Bitcoin.
But another issue is that although I say Bitcoin is a risk asset, when you have a company doing many other things and it’s traded on the stock market, the situation is different. It's like Real Estate Investment Trusts (REITs) or other assets I mentioned earlier; the value of stocks doesn't always perfectly reflect the underlying value. Markets are not completely efficient; their value does not reflect future cash flows but rather fluctuates with the overall risk market. In this case, I think Coinbase has been affected by this, and its stock price has been dragged down; time will tell. But in terms of optimism, the level of optimism about them is unprecedented now. They are winning case after case in court, but that doesn't mean that if the entire cryptocurrency ecosystem continues to lose value, they will necessarily make more money.
Alex Tapscott: Yes, exactly. This is actually why I'm most looking forward to the IPO boom, hoping it happens because it will add more diversity to the investment landscape for cryptocurrency companies. Because right now, the market primarily consists of Coinbase, which is both the largest exchange and the creator of Base, holding a range of assets and some cryptocurrencies on their balance sheet, but primarily it's a brokerage. Then there's MicroStrategy, as you said, it's a leveraged play on Bitcoin. Then there's the entire mining sector. In fact, there are a few issuers that are mining companies, but they are now being traded more as AI data center stocks rather than as cryptocurrency companies, which is one reason why they are not performing as well as Coinbase, Bitcoin, Ethereum, etc. The decline in cryptocurrencies combined with the DeepSeek news completely shattered the entire investment logic, making investing in these companies quite challenging because you don't know which companies you can still invest in, right? Therefore, having more options in the market is very important for me, as it will help broaden the investor base, since there will be more real companies to invest in. I believe this will contribute to the healthy development of the market.
James Seyffart: I completely agree with what you said. I would also like to add that mining companies, especially gold mining companies, particularly smaller gold mining companies, have similarities with Bitcoin mining companies. Although these Bitcoin mining companies are not small, if you look at their stock trading in the U.S. market, they are relatively small companies. These companies operate similarly, depending on their fixed costs; if they can scale up, they can achieve larger profits. One of the most unstable products in the world is a threefold leveraged small gold mining company ETF. It consists of many small mining companies. The reason you see these companies' extreme volatility is that their profits highly depend on the fluctuations in gold prices. If their fixed costs are capped, when the gold price rises to a certain level, exceeding their costs, their variable costs will also rise but still be profitable, and as prices continue to rise, it turns into leveraged profits. The same situation applies to Bitcoin mining companies.
My personal view is that many of these companies are not the best in the world; they are completely dependent on one factor. If your energy costs rise, for example, the risks are quite high. Therefore, I think that's another reason why many people understand this; when they see these companies, they find that they are highly capital-dependent and involve many other issues. So I generally believe they are starting to diversify and move towards a more generalized direction, like AI computing, rather than just Bitcoin. I think the most successful companies will be a combination of both; for example, if they don't use the energy for AI computing, they can use it for Bitcoin mining, and so on. But obviously, I'm not a mining analyst, but for those trying to figure out why these companies are so volatile, they are basically leveraged investments. Once Bitcoin's price exceeds a certain point, and the company's mining costs are determined, for them, it's like a leveraged upside exposure.
Alex Tapscott: Exactly, I think AI and cryptocurrency are separate yet related technologies. There is some overlap between them. You need computing power to secure these blockchains, at least Bitcoin, and you also need computing power to handle all the AI-related work. So it’s really interesting to see how they evolve together.
