GTS Principal Reggie Browne, a longtime market maker for launching ETFs, spoke with ETF.com on Thursday about how he’s looking at the new bitcoin futures ETFs that launched last week and prospects of a physically backed bitcoin ETF.
This interview has been edited for clarity and brevity.
ETF.com: In its first two days of trading, we've seen BITO gather a little over $2.25 billion in dollar volume, and ProShares claims there's about $1.1 billion in AUM. What do you make of this so far as the first Bitcoin-linked ETF product?
Browne: Based on market activity, retail investors are eager to have exposure to digital assets. And Bitcoin being the flagship, oldest digital asset known, the exchange-traded product that was brought out gives opportunity for investors to get exposure on a regulated exchange in a security that's regulated. And it seems there's great appetite for that exposure.
ETF.com: What do you make of how the ETF wrapper provides exposure to Bitcoin so far? And what do you think might happen once we hit the final Friday of the month when the futures contracts start to roll?
Browne: I can't forecast behavior of the Bitcoin futures market given enhanced retail exposure, and more trading. Participants have come to the marketplace to now make markets in exchange-traded products linked to futures.
Given there are more liquidity buyers, I suspect the characteristics of the roll and the roll process will be competitive with the number of participants that are offering liquidity, between the months.
Looking at other future-linked products, the roll is a material risk to the underlying shareholders of BITO [as is] how ProShares approaches the roll. So I think we have to just see it happen and get some empirical evidence.
ETF.com: How do you think the roll risk and the general performance of BITO are going to be affected by Valkyrie’s and VanEck’s launches? What do you think having three funds doing essentially the same thing will do to the performance of BITO and the demand we're seeing overall?
Browne: Digital assets have been in ETF format, first in Europe and then for six months or so in Canada. There's a lot of empirical evidence around the behavior of these products and how they operate.
Particularly in Canada, there are several products offered by competitors, and as more asset managers come into the marketplace offering a very similar product, there'll be pressure on fees by the asset managers or the advisors just bringing out these exchange-traded products.
Retail investors and other investors are the natural winners here. We want more competition. We want more products. As you bring more products, the ecosystem and the layers of liquidity become even deeper, and the observations around expected behavior will become materially important because a lot of people, a lot of products have entered the marketplace. Some of the heightened demand will even out and go to other products.
But largely, it's a good thing to see other managers who wanted to bring out a Bitcoin product for a number of years. This started in 2013; it's taken this long to get approval. But the holy grail will be Bitcoin spot and the ability for the regulators to regulate Bitcoin as a security and to offer investor protections around wallets.
There are 400 different digital asset exchanges that I know of in existence. And until there's some harmonization between the 400 or so, the ecosystem needs for Bitcoin to continue to grow, adapt, innovate and mature. We're just at a tipping point.
ETF.com: To your point on competition, VanEck already is doing a 30 basis point haircut on what they're going to be charging versus ProShares and Valkyrie. Do you have a sense of the equilibrium that has to be struck here between a fee war going on and this being just an extremely in-demand way to get exposure to Bitcoin?
Browne: The marketplace will be in perfect competition with several products. And the marketplace will determine where the fees should land through several iterations of repricing and innovation around how the products are built.
I'm pretty sure this is just the beginning of seeing different innovation around how a futures-based digital asset product will be brought to the market and underlying products, and how the roll works and reduction in risk, and even perhaps even some overlay of some derivatives to buffer some of the movement.
It's important to note that Bitcoin and digital assets are not a good store of wealth. If you look at the U.S. dollar compared to a basket of developed currencies, the average vol is seven. And if you look at Bitcoin to the U.S. dollar, it's 80-plus vol. And that just says that it's wild movements. I bet this is what the concerns are with regulators.
There are a few points I want to make. If you look at trading yesterday, I believe it was 20 million shares that traded [on Wednesday]. If you look at Bloomberg, the trade count was 279,000 different trades, and so if you're intuitive, you would say that the average trade size is probably 100 shares. That's mom-and-pop retail coming to this marketplace to get exposure.
And just like commodities, just like IAU and GLD, ETFs are doing what [the wrapper] does best: breaking down the barriers and providing access into a marketplace that’s traditionally difficult to enter as a retail player.
If you look at all the concerns of the regulatory bodies globally around Bitcoin, it's really around the storage of an actual bitcoin and underlying holdings. ETFs inherently are solving this problem by using futures. And then there are lessons to learn with the bilateral settlement of digital assets, Bitcoin, the instantaneous settlement between two counterparties; or, in some cases it's instantaneous. In most cases, it's T-plus one [day].
These are all lessons to learn around U.S. securities and all the dates around the future settlement cycle of U.S. stocks.
I wouldn't classify it as a fee war. I would classify it as innovation coming to the marketplace. And managers trying to find the right equilibrium between product innovation and pricing and performance, so they can get the best of it with their ideas into the community to see if their ideas resonate with the investor class.
Whether or not Bitcoin is suitable for asset allocation or long-term portfolio allocation remains to be seen, and that’s up to individual choice. But from the standpoint of U.S. market structure and the innovation around exchange-traded products and now Bitcoin through futures, the ETF industry is doing what it does best—recognizing there's a gap, recognizing there's demand, and recognizing that the marketplace is starving for exposure and doing it at a competitive way [that is] regulated on an exchange and giving opportunity for retail investors to get their exposure.
ETF.com: Do you view the futures-based funds as canaries in the coal mine for a potential spot Bitcoin ETF ahead of the potential SEC approval of the VanEck spot fund in mid-November? Are these funds are also canaries in the coal mine for other possible ETFs that would track larger cap cryptocurrencies like Ethereum?
Browne: Absolutely. We're at the beginning of a new wave of an asset class to be valued, and education to be pressed, and products to be developed and deployed for institutional and retail investors alike.
Whether or not a manager gets approval for a spot Bitcoin this month or next month or next year, we're just beginning to understand through analysis what works well and then how best to draw the regulatory framework around to present the best protections and education in a reasonable and methodical way.
So I'm not a betting man … well, I am a betting man; I clearly place bets. But it's premature to foresee a spot-based Bitcoin ETF based on Bitcoin Cash to be approved in this fiscal year. I think we're just starting to understand it from the lens of a U.S. regulator how best to approach this asset class. I think time is needed for scholarship to occur and deep probing on what we're learning and what we don't understand currently.