Nasdaq’s LaValle: Bitcoin ETF A Turning Point

August 06, 2014

Proposed fund will be a credibility milestone to the digital currency and the exchange-traded fund industry.

There are a lot of questions about the viability of, and the role that the Winklevoss twins’ Winklevoss Bitcoin Trust ETF (COIN) would play in a portfolio. The fund, which remains in the regulatory pipeline awaiting SEC approval, has certainly sparked a conversation about how far is too far when it comes to niche exposure, and piqued many investors’ interest.

But to David LaValle, vice president of transaction services for Nasdaq OMX and head of ETF business, the first-of-a-kind ETF is nothing short of yet another major innovation in the quickly growing ETF market. LaValle, who not only oversees the exchange-traded product platform at Nasdaq, but also faces off daily with issuers, liquidity providers and trading firms, argues that the bitcoin ETF—which will be listed on the Nasdaq—is a win-win for investors, traders, the issuer and the exchange itself. The Winklevoss Bitcoin Trust would mark the first time an asset comes to market in an ETF wrapper before it does in a mutual fund. Is that significant?

David LaValle: I think it’s significant that we’re on the precipice of a new investable asset that’s coming to market or becoming available to investors first in the form of an ETF. In some ways, it gives the ETF credibility, and it accentuates many of the benefits of the ETF as an investment wrapper. To that extent, it’s important for the ETF industry. One of the criticisms we hear about the concept of a bitcoin ETF is that you can own bitcoins directly pretty easily, so why would you want to pay the fees on top of it that come with an ETF wrapper?

LaValle: We view this ETF as an analogue to some of the physically backed commodity products in the industry. The IRS’ ruling classifying bitcoins as commodity and not a currency would also support that.

But perhaps as an investment tool, it’s more easily manageable for a retail investor to hold their investments all in investment products. You can make a similar analogy to gold: I could buy lots of gold coins and hold them physically as well, or I could purchase them through an investment product like an ETF.

There’s availability for accessing the investment in different ways, and each investor is able to pursue that investment thesis through whichever wrapper they’re comfortable with. But I think bringing it in an ETF wrapper gives bitcoins more credibility. Will a bitcoin ETF have a broad appeal?

LaValle: I think bitcoin is evolving. It’s quite dynamic. We first saw consumers and merchants begin to be open to using it for transacting. But now, as we move toward bringing it in the form of an investment tool, I think it certainly broadens the exposure of potential users. But the Winklevoss Bitcoin Trust ETF could be used really as an investment tool or a trading tool. How big a win is it for Nasdaq to get this listing?

LaValle: We certainly view it as a win. The reality is that we believe Nasdaq to be the home of innovation across all of our business channels, ETF listings included. To the extent that the industry and the investing community are viewing this as an innovation in investment product, we certainly feel we’re at the forefront of that. Does it make a difference to retail investors which exchange an ETF is listed on? Should they expect different levels of, say, liquidity or spreads or execution?

Lavalle: That’s a good question. The reality is, given our current market structure, regardless of where your product is listed, it can be traded in several different pools of liquidity. Your access to the marketplace—which broker-dealer you’re using—will really be a greater determinant of where you’re going to get an execution.

But the reality is regulation will dictate that. Your broker-dealer has an obligation to get you the best price in the marketplace, and we’re confident that our broker-dealer partners abide by that. So I think your listing-venue decision has less of an impact on the end investor’s execution quality.

But we do believe that your listing decision will have benefit to the issuer. To the extent that that is beneficial to the issuer, it’s beneficial to the industry, and it can bring more awareness about a particular product, which can broaden the appeal to the end-investor community, and perhaps inform more liquidity and better price discovery. When you look at innovation in ETFs, first came the SPDR S&P 500 (SPY | A-98), and the next big leap was the SPDR Gold (GLD | A-100). How do you characterize the proposed bitcoin ETF as an innovation? Is this another big leap, or are we just facing the risks of overly niche-y exposure?

LaValle: We’ll see what it ends up being, but I think it is positive on both fronts. It’s innovation in the reality that this is a new type of investment, or a new investable asset that’s coming to market in the form of an ETF. It’s also a next step in product generation.

Time will tell how big of an innovation this is, but you’re right: The ETP industry is continuing to evolve by bringing more efficient products to market that are targeting investment opportunities that already exist, and we’re also seeing innovation in the new types of products that are coming to market in terms of what you’re able to access through an ETF.


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