After a long delay, Bitcoin ETFs have made a spectacular debut. BlackRock’s IBIT currently ranks fifth among all ETFs in terms of year-to-date inflows, and rivals are faring just as well.

It remains to be seen whether this growth will match the bullish forecasts from the likes of Standard Chartered Bank and Fidelity of staggering year-end ETF valuations. However, it is clear that Bitcoin ETFs will not be a passing fad.

The question is how Wall Street, or traditional financial institutions, will approach this new product for gaining exposure to Bitcoin (BTC), and whether retail investors will want to participate.

Hybrid fund that reduces risk

“We think Bitcoin has the potential to be one of the most talked about brands on Wall Street over the next 10 years,” said Mike Willis, founder and CEO of index fund ONEFUND. “The ‘Bitcoin era’ on Wall Street has begun,” he said.

Although he declined to give a price prediction, Willis believes it will be easy for Bitcoin to catch up to gold’s market cap.

It’s an interesting prediction given ONEFUND’s strategy to launch multiple Bitcoin ETF products. The company is known for its $106 million (approximately 16 billion yen, equivalent to 150 yen to the dollar) INDEX ETF that tracks the S&P 500, and is a combination of Bitcoin and traditional stocks to appeal to risk-averse individual investors. We plan to launch several “Cyber ​​Hornet” funds that will hold both.

Most wealth managers won’t advise their clients to invest more than 1% to 3% in cryptocurrencies, Willis said. Even such modest advice can expose financial advisors to legal risk.

“Hardcore Bitcoiners may be used to it, but 90% of Wall Street and traditional investors are not used to seeing prices drop 40% in a month.”

“If it goes down 40%, you’re going to get a lot of phone calls from customers; if it goes down 50%, you’re going to have no customers. If it goes down 60%, 70%, you’re facing fiduciary liability, which could lead to lawsuits.” Yes, advisors recognize that,” said Willis, who co-founded ONEFUND in 2015 after stints at UBS, Paine Webber and Smith Barney.

The company’s soon-to-launch ETF, which received approval from the Securities and Exchange Commission (SEC) under the ticker “ZZZ,” will allocate 75% of its capital to S&P and 25% to Bitcoin futures. Willis said there is also the option of holding physical Bitcoin.

It aims to mitigate Bitcoin’s potential downside risk and significant volatility by investing in “Wall Street’s most widely held index strategy.”

Willis predicts a number of “hybrid funds” will emerge with strategies to reduce Bitcoin’s downside volatility, perhaps using U.S. Treasuries or other lower-risk asset classes.

Differentiation

It could also be a way for funds to differentiate themselves, given the increased competition with 11 Bitcoin ETFs approved on the same day.

Willis, like many others, believes there is a “race to the bottom” in terms of management fees for Bitcoin ETFs. Because it’s one of the few ways you can beat your competition.

Some companies run campaigns like Bitwise, which charges zero fees for the first six months or until a certain amount of assets under management is reached. However, this type of marketing method only works for a limited period of time.

Another way companies can compete is how they handle Bitcoin. In other words, use it to increase yield or keep it in cold storage.

Some funds may re-pledge (or lend out) Bitcoin to earn a return, Willis said, in which case they could earn “hundreds of basis points.”

ONEFUND does not intend to compete on fees and believes it can charge higher fees by guaranteeing in its prospectus that Bitcoin will never be moved from cold storage. The company is in talks with Caitlin Long’s Custodia Bank about custody services. But there are other ways to escape competition and diversify.

For example, one firm that maintains high fees is Grayscale, which charges a 1.5% fee on the popular GBTC.

GBTC began operating as a closed-end trust in 2013 and has built a brand as the first traditional fund to enter Bitcoin.

The fund has seen significant outflows since converting to ETFs this year, but Willis said he was surprised that it hasn’t lost as much as he expected.

“It’s loyalty, it’s inertia. And then there’s also the fact that Bitcoiners don’t want to go to BlackRock or Fidelity. They want to stay within the community.”

branding

ONEFUND is a kind of non-institutional institutional investor that wants to take advantage of this sense of community in Bitcoin. That’s one of the reasons we chose the name Cyber ​​Hornet. Cyber ​​Hornet is a term closely associated with Michael Saylor of MicroStrategy (he is not affiliated with this product).

The company, which made headlines for allowing index fund investors to vote by proxy, has also secured multiple attractive tickers for various ETFs with different allocations between Bitcoin and the S&P 500.

Willis mentioned his company’s ticker “ZZZ” for Bitcoin ETFs, explaining that three-letter tickers like Nasdaq’s “QQQ” are valuable assets.

In fact, Valkyrie’s BRRR (derived from the “money printer go BRRR” meme that poked fun at the Federal Reserve’s monetary easing policies during the pandemic) and VanEck’s HODL (a term used to describe long-term Bitcoin holdings) Many recently launched ETFs have names derived from memes.

“We believe that branding becomes a symbol of doing it the right way, a non-institutional option that represents the community,” Willis said.

“We are not owned by BlackRock, we are not owned by any major financial institution.”

In some ways, though, Mr. Willis’ strategy revolves around bringing in Wall Street. While it may not be the most orthodox way to get people to use Bitcoin, it is the easiest and safest way to get more people into the Bitcoin economy through ETFs, and will likely reach 10 million Bitcoiners. Willis said he could fulfill the dream of Cory Klippsten, CEO of Bitcoin financial services company Swan.com, to create a Bitcoin.

The first steps in a big wave began last year when BlackRock announced plans to launch a Bitcoin ETF, in a way giving other Wall Street firms the opportunity to participate.

ETFs will drive a lot of capital into Bitcoin over the next decade. It starts with model portfolios, retirement accounts and pension plans and eventually becomes a “mainstream asset class,” Willis said.

“Bitcoin has been around for 15 years, but it didn’t exist on Wall Street. It’s going to change everything,” Willis said confidently.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Shutterstock
｜Original text: Welcome to the ‘Bitcoin Era’ on Wall Street