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Bitcoin ETF is the first step of a long road: Analyst

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Bloomberg Intelligence Senior ETF Analyst Eric Balchunas joins Yahoo Finance to discuss the launch of ProShares' Bitcoin ETF, the effect of this new Bitcoin ETF on the market, and the fate of crypto futures ETFs.

Video Transcript

BRIAN SOZZI: The first US Bitcoin futures exchange traded fund debuted today over in the New York Stock Exchange, as Ines just mentioned. What will it mean for the future of cryptocurrencies, though? Eric Balchunas is a senior ETF analyst at Bloomberg Intelligence and joins us now. Eric, good morning to you. Is this a good development more so for traders or investors?

ERIC BALCHUNAS: Traders in this case. So, you know, this is a Bitcoin futures ETF. And typically, the way I'd put it is this way. This ETF is more like the USO of Bitcoin, that oil fund that tracks futures, rather than the GLD of Bitcoin. That's going to come later, hopefully. But for now, the SEC was only comfortable approving ETFs to track futures.

And the problem with futures is they expire, and so you have to constantly go to the next month to keep exposure. And when you do that, you usually have to incur a little cost because the next month is usually a little more expensive. Do that for 12 months, you're going to end up with what's called roll costs. And that will be how much you missed the price of Bitcoin by.

That said, in the near term, this will track very well. Both daily correlation to the spot Bitcoin of BITO is going to be almost perfect. And it's going to be really good weekly and even monthly. But over the course of a year, two years, three years, it will probably miss the price of Bitcoin by 5% to 10%. So if you look at that as a cost, you'd be like, wow, it's pretty expensive. That's why advisors probably won't buy it.

But that liquidity it's going to get and that daily sensitivity to spot Bitcoin and the options market, people are going to start buying calls and puts on this thing. It's going to get exciting. And I think that excitement really will be driven by the traders, not long-term investors.

JULIE HYMAN: Hey Eric, it's Julie here. It's good to be reunited with you. For those of you who don't know, Eric Balchunas probably knows more about ETFs than anyone I know and literally wrote a book about them, which if you're super into ETFs, you should check out.

So Eric, there's been this feeling that the whole crypto industry was just waiting for one of these ETFs to come to market, and then this would unlock yet another phase of adoption, which has been one of their big buzzwords. It sounds like, from what you're saying, that's not necessarily the case, perhaps, until we get a spot ETF.

ERIC BALCHUNAS: Yeah, that's a good way to put it. I think crypto-- the crypto crowd loves to get excited about anything. You know, they're, as you know, they just want to see the price go up. So they really rallied around this. And our team was very bullish on the approval. And so they definitely loved what we were saying, even though we just wanted to be right. We weren't trying to please them. But they certainly were-- I could tell the excitement was there.

That said, look, these ETFs attract futures. Maybe they get four or five, maybe even 10 billion over a year. But that would be only 1% of ETF flows, and that would only be less than 1% of the whole Bitcoin market. So you got to put that into context. What I tell them is that this ETF isn't the big deal. The big deal is that it represents the first step down a long road that will ultimately lead to this.

You'll have a Bitcoin ETF that's physically backed, an Ether ETF, a crypto basket. Cathie Wood will start doing crypto-picking ETFs. And most of it will be very liquid and very cheap. There could even be a Vanguard Total Crypto Market Index Fund for, like, five basis points in five years. That's the dream. That will bring the advisor money. That's where $30 trillion lies. And that's, ultimately, what's going to happen. ETFs have done this to every asset class. That's what they do. So it just takes 5 to 10 years to pull it off.

BRIAN CHEUNG: Hey Eric, it's Brian Cheung here. I mean, this is just kind of the jackpot, if you will. ETFs have been high. You see mutual funds converting to ETFs. You see all these ESG ETFs. And then you have Bitcoin, and we already know the buzz around that. But what's been interesting to me has been in response to BITO, the scrambling that's been going on among those out of file or were thinking about filing ETFs to whether or not they wanted to do Bitcoin futures or do Bitcoin spot, right?

We know Grayscale is really kind of in the latter, but what was interesting was that Invesco actually dropped out of their filing for a Bitcoin futures ETF. So it's almost like "Squid Game." Everyone's trying to figure out what team they want to be on here. What are you seeing in that space in just the last 24 to 48 hours in terms of whether or not it's the Bitcoin spot or the Bitcoin futures now that's more lucrative?

ERIC BALCHUNAS: Yeah, our analyst Rebecca in Hong Kong compared it to "Squid Game." It really is. Or it almost reminds me of a campaign. Oh, my God, Kamala Harris dropped out. This one's getting this. This got endorsed by this. It very much feels like-- I kind of feel like Nate Silver, to be honest, a little bit, in terms of us trying to predict things and people looking to us.

But I agree with you. There's going to be a lot of real intensity over the next couple of days, and I'll tell you why. Because if you're going to be the ETF that the traders like, you've got to have volume. And if you're going to have volume, you kind of got to get the market quickly. It's hard to steal volume. It's easier to steal assets. So that's why you're going to find Valkyrie and VanEck and some of the other ones are going to fight as best they can to get out quickly.

Grayscale tried to tell everybody today and steal the thunder from the launch of the ProShares by saying they're going to actually convert their ETF, even though that'll take a while. You can see, people are just trying to step over each other, steal the thunder, get the spotlight, get out quickly, ultimately because the first couple of days, the clay will start to harden. You know, it's only, like, soft for, like, a week, two weeks, maybe a month. And then it kind of sticks, right?

GLD is still the most traded gold ETF and with the most assets. SPY is still the most traded ETF with the most assets. So everybody in the ETF world knows first to market is crucial. And that's why you see this sort of "Squid Game" activity.

JULIE HYMAN: So, Eric, your team, part of what you guys do is you try to game out who's going to be the first, right? If you're the Nate Silver of ETFs and you listed a bunch that are out there, give us sort of your breakdown of who you think is most likely to be next market.

ERIC BALCHUNAS: Yeah, so we think ProShares will probably take-- well, ProShares having just one-day lead is crucial. Valkyrie just said the exchange updated their effective date till tomorrow. But they still filed this one thing you need. So it's possible Valkyrie is out tomorrow. Who knows?

But even a one-day lead will help ProShares. Already look at the volume. The ProShares Bitcoin ETF has already traded close to $400 million in the first 40 minutes. That already puts it in the top 10 biggest launches of all time. It could break the record, which would make it have to get to a billion dollars. But it's only, what, 10:00 AM, and it's got $400 million. It's looking good. That's how much-- and that volume is going to be so hard to take away for anyone coming after.

But I do see Valkyrie out next. I see VanEck maybe in two weeks. And then after that, Bitwise, and then ARK will probably be in December sometime. And you will have people like Cathie Wood coming in ARK, and OK, she missed all the volume-- you know, maybe two ETFs have all the volume-- but she has an audience. And so some of these ones that come later will try to exploit some of their built-in audiences. And they'll do OK. They'll probably have enough assets to live. But there really can only be one liquidity king, maybe two. And so my money would be on ProShares to being it just simply because they got out first.

JULIE HYMAN: And let's talk GBTC also, speaking of having already an audience, right? Because it already exists as a trust. People are already invested in it. Now that the futures are out, we talked to Michael Sonnenshein, head of Grayscale, yesterday. He said they're in consistent discussions with the SEC about this. He said futures open the door. So how quickly do you think that could come out, if at all? And do you think we're finally going to see the gap between it and Bitcoin start to narrow if it ETF-izes?

ERIC BALCHUNAS: Sure, that's-- see, it's trading at a 20% discount. So there's people who are starting to get attracted to that, because if you buy that and they convert, you instantly make 20%. The question is, when could it convert? I am bearish on this because here's why. Gary Gensler, the head of the SEC, just isn't really comfortable with the 1933 Act. And that's what GBTC would have to convert under. That's what the physically backed ones would have to be approved under because Bitcoin is a security. It can't go under the 40 Act, which Gensler likes. Only futures can.

So the question that Grayscale should be asked any time they're on is, when will Gary Gensler be comfortable with the 1933 Act, which has much less investor protections than the 40 Act. If and when that happens, then GBTC will convert probably when the other physically ones get approved. If you force me to pick a date, I would go with probably a year to 18 months for that. But I just don't know.

JULIE HYMAN: Wow.

BRIAN SOZZI: Well, I just wrote that question down, Eric. We will put it to him. Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, really awesome insights here.