Interview: Defidocode
Compiled by: Wu Blockchain about Blockchain
Defidocode interview invited James Seyffart, ETF research analyst of Bloomberg Intelligence, to focus on the rise of cryptocurrency ETFs, especially innovative ETF products in the fields of Bitcoin and Ethereum, and how retail investors and institutions respond to market panic and changes in capital flows. It also pointed out that the current capital flow mainly flows into stock ETFs, while funds flow out of the bond market, indicating that the market is undergoing structural rebalancing. In addition, it also explored in depth how ETF products can be used as risk adjustment tools and how to meet the needs of different investors, including the differences between long-term investors and short-term traders. James also discussed the performance differences of stocks of companies such as MicroStrategy and Coinbase, believed that Bitcoin mining companies and gold mining companies have similarities in volatility, and emphasized that the intersection of AI and cryptocurrency may bring new opportunities to the market.
Opening guest: James Seyffart, ETF research analyst at Bloomberg
Alex Tapscott: Today we are very lucky to have James Safeart here to tell us what is happening in the market, how capital flows are changing, how investors are reacting, and how retail investors are reacting to these changes. James Safeart is an ETF research analyst at Bloomberg Industry Research and has been recognized globally for his expertise in the field of cryptocurrency ETFs in 2024. However, James is not only focused on cryptocurrencies, he also understands market dynamics very well and can provide us with insights on the broader market. If time permits, we can also discuss the capital flows of crypto asset ETFs, as well as discussions on new products in the next six to nine months and changes in the United States regarding cryptocurrencies, especially the relevant developments of the SEC. But first, let's welcome James.
ETFs are now open: SEC’s stance on ETF pledges
Andrew Yang: So let's move on to crypto. It feels like the last time we talked was before Trump was elected, but now the flood of crypto ETFs has completely opened up. I can't even count how many new crypto ETFs have been launched. It's crazy. From the range of asset classes covered, including leveraged Bitcoin ETFs to ETFs for projects like L1 that haven't been officially launched yet, and even products like the "Memecoin ETF."
Alex Tapscott: It's like the door is completely open and they can now test it out. It feels to me like basically "throwing spaghetti at the wall" and trying to apply for all possible asset classes, run some experiments and see which ones succeed. But I noticed some of the applications for the Solana spot ETF, they removed the staking feature. Is that right? So I'm a little curious, if even an ETF is allowed to have staking assets, how open can the SEC be now? So, what's going on? I'm just a little curious and want to understand.
James Seyffart: I'll start with what Andrew said and then answer your question. Yes, it's true that the door to ETFs was already open when Trump was elected. Everyone started applying for various ETFs, and now we have a lot of dates coming up where these ETFs may start to launch. In fact, we've already seen the launch of a 2x leveraged XRP ETF in the United States, even though we don't even have a futures market. This is a complete change, right? So, the SEC is actually going back to their traditional way of dealing with these kinds of things. Yes, it's indeed a signal of opening up, but issues like staking or physical creation and redemption, I think they belong in the same category of thinking. I think there's a lot more to be done with these issues. Like, it does require specific rule changes to allow these operations. So, for Solana's spot ETF, it's basically going to be listed in the same way as a spot ETF for Bitcoin or Ethereum, Ethereum is probably a more appropriate example because it involves staking. So I think what you're saying here is that they will eventually approve the spot product and then deal with the staking issue separately, and will deal with it accordingly for any assets that involve staking in the future. That's my view on this issue. So I don't think it's like, "We're never going to allow this, we have to get rid of the staking feature," I think it's more like, "Let's get the spot product out first, and we'll work on the staking language later." That's my basic assumption. But I agree with you, I think in many cases, people are just applying casually to test the parameters of the SEC to see what they allow and what they don't allow.
But you see, if there's an ETF that's very successful, like the MicroStrategy ETF, or the Nvidia ETF, with billions and tens of billions of dollars in it, if you can charge more than 1% as an issuer, that's great. You know, I'd rather throw 50 products at the wall than have one that attracts $10 billion and I can charge more than 1% on it, that's worth it. So, that's where it's going to go. One of the things I'm looking forward to seeing is how the SEC handles physical creation and redemption, how they handle pledges, and where they ultimately draw the line, that's the key.
Advantages and limitations of ETFs: Why staking 100% of assets may be more attractive than ETFs?
Alex Tapscott: On the topic of staking, I don't know if you saw the news yesterday that Janover was taken over by a group of former Kraken executives, including Marco Santori, and they raised $42 million from several venture capital firms, and basically their proposal was to become the MicroStrategy of all other assets. I don't know if this news appeared in your Twitter feed. But let me give you a general idea of what this is about
I think they're basically arguing that being able to stake 100% of the assets and compound any staked earnings is better than an ETF. In their marketing materials, they explicitly say "this is better than an ETF," which is interesting because I've always thought that MicroStrategy has always treated itself as an operating business with a fiscal strategy like Bitcoin through its balance sheet. And now they're making that argument more explicit, probably because the regulatory environment is different now. I wonder, though, if they're launching this strategy, are they doing it in anticipation that an ETF might not allow for staking or fully support staking for a while? A business vehicle like this that can be 100% staked and compounded might actually be a better way to aggregate assets and a better way for investors to get into this space. I don't know what you think about that.
James Seyffart: I haven't seen this, but I have a few thoughts. First, you already have staking services for Ethereum ETFs in Canada, and we're following suit in the U.S. The downside is, as you said, you may not be able to stake 100% of your assets. There are a lot of service providers looking for ways to maximize the percentage of assets you can stake to increase your yield. There are also some third-party companies, which should be considered service providers rather than software companies, who are trying to do this kind of thing. I've seen some ETF issuers acquire different staking services to try to get into the staking space. I think this is going to be an important part of the competition in ETFs, like how much staking returns can you pass on? Do you choose not to charge fees and just take a percentage of the returns you get? There are many ways to do this and make the market profitable. We've seen similar situations happen in some markets in Europe, and it's very beneficial for companies to be able to capture 100% of the staking returns.
But the benefit of an ETF is not just to take these assets and get the yield, the real benefit is the creation and redemption mechanism that I mentioned earlier, just like the high yield municipal bond ETF. The benefit is that the ETF will follow the trading of its underlying assets, right? For example, you will see MicroStrategy's stock price rise on some days even if Bitcoin falls, and vice versa. It will not trade exactly like the underlying assets held on its balance sheet, as you mentioned. So the company that launches this product, like a real estate investment trust (REIT), although it trades related to the real estate market, it will not track the performance of the real estate market exactly. It will be affected by other stock market risks and fluctuations. And the creation and redemption process of the ETF always forces it to be in line with the market price of the underlying assets.
So companies like this one certainly have their advantages and may be able to use leverage and so on like MicroStrategy did, but the real benefit of ETFs is that you can always exchange the underlying assets for ETF shares and vice versa, and that swap mechanism ensures that they are always aligned with the underlying assets.
For a product like what you're talking about, if there's a crash, the chances that the underlying asset is anywhere close to where it's trading are are very slim. We have plenty of examples in history that show that it's not always going to be that way. So, I'm sure there are specific times and use cases where a lot of people might be willing to go that route. But it's not like that's ultimately going to be better than the way ETFs work.
Premiums and Discounts in Crypto Markets: Solana’s Current State and Future Trends
Alex Tapscott: Speaking of premiums and discounts, Grayscale's product line, I don't know if you've ever looked at their website. Gsolve, for example, actually, if you look at a chart of the net asset value (NAV) and the price per unit, it's crazy. Yeah, the chart is crazy. At one point, it was trading at 6,700% of NAV, so the NAV was $14 and it was trading at about $90. I looked at it again yesterday. It's like a crazy Bart Simpson haircut. But it's really the P/NAV that's driving this, right? Now we're at a point where it's roughly close to NAV, but still, like in the normal ETF world, any fund that trades at a 15% premium would be considered an extremely high premium, but it's different in the crypto world. So this chart tells me that the Solana ETF is just a matter of when, not if, and they're likely to come soon. Because remember last year, or about a year ago, GBTC was trading at a 50% discount, and then it gradually narrowed, and it ended up being about 5%, 4%. That was basically the time value between us and the approval, and it ended up getting approved, and then it merged, right? So what this chart tells me is that this is like an upcoming trend, what do you think of this chart?
Andrew Yang: Excuse me, but I'll just jump in. Isn't this also because the enthusiasm for Solana has kind of dropped off in the last two or three months? Or is this difference just purely because people are short it and buying the spot ETF?
Alex Tapscott: No, I think it's definitely a combination of all three. I think there are three factors. First of all, there's definitely been ebbs and flows in interest in Solana, and secondly, there was really a huge event last fall when one of their large private placements became freely traded and investors were able to exit at a premium. But the most important factor to me is the movement of the ETF in terms of discounts and premiums. So, James, what do you think?
James Seyffart: I think looking back at the GBTC situation, the question is, what are the chances that this ETF will be approved? Even though Eric Balchunas and I were very optimistic in the months leading up to approval and set the odds very high, the market just didn't believe it. I know a lot of very smart people who sincerely believed that the SEC would not approve a Bitcoin ETF, and until a week before approval, we thought the odds of approval were over 80%. So, that's the point. This thing will eventually be converted into an ETF and the premium will disappear, and that's the key. Secondly, as Andrew said, Solana has indeed lost a lot of attention in the past. At the end of the day, the issue is that this product will eventually become an ETF, and market participants have identified that and are starting to sell because it's too expensive.
Bitcoin and the “Mag 7” tech stocks are moving in the same direction. How should the market interpret this?
Andrew Yang: I want to ask another question, I know you mentioned before the podcast that you've obviously been more focused on macro things over the past week, but I'm a little curious, there was a topic over the weekend about how Bitcoin has been stable. We also mentioned gold, which has performed relatively well. I'm curious, what is the institutional market's view on Bitcoin right now in the context of this potential restructuring of global trade. Logically, this situation should be good for Bitcoin. I just wonder if institutional investors also share this view, or are they just more focused on ensuring their survival in the next few weeks?
James Seyffart: Yeah, actually, I'm watching myself because I'm struck by the actual decoupling of risk. Basically, at least for the past few years, the correlation between Bitcoin and NASDAQ has been very high. That is, when risk assets go down, Bitcoin goes down, and when risk assets go up, Bitcoin usually goes up more, either way. However, in recent weeks, this has changed, especially last week, when Bitcoin actually went up against the trend when all other assets, including gold, went down. This phenomenon is very strange, and many people are analyzing why this is happening. Is it because GameStop is buying, or Saylor is buying, who knows? It turns out that this is not the reason.
James Seyffart: However, that brief period of Bitcoin outperforming other assets faded on Sunday evening, and Bitcoin began to fall below $80,000. At the time of recording, Bitcoin is still below $80,000. I would say that Bitcoin has fallen badly, but if you look at the decline in risk assets since the decline began, Bitcoin has fallen roughly in line with the NASDAQ, which is down about 20%. As for the "Magnificent Seven", they are down about 26%, which was the case before today. Now they are all up a little bit, but Bitcoin is generally trading in line with these assets. Having said that, Bitcoin is much more volatile than these assets, but if someone had told me a month and a half ago what would happen in the next few days, I would have thought that Bitcoin would fall to $60,000 or even lower. Relatively speaking, my view is that Bitcoin has held up pretty well compared to its usual performance, after all, it usually trades like a leveraged risk asset, subject to factors such as liquidity. On the other hand, obviously, Bitcoin has been falling for a while, as has almost all cryptocurrencies, but it is trading against all fundamental trends, right?
Since this all started happening, I've been in a few meetings, talking to people in the industry, talking to ETF issuers like yourselves, a lot of institutions that want to get into this space, and they're more bullish on this than anyone I've ever met before. There's a lot of things that are expected to happen. Basically, from the Biden administration, Gary Gensler, the SEC, all the constraints, these headwinds are gradually turning into tailwinds, or at least most of the headwinds are gone, and yet prices are still going down. So it's a very strange paradox: risk assets are all going down, crypto is going down, but fundamentally, if you want to call it fundamentals or the background that's changing, it should actually be tailwinds. You would expect things to get better.
One of my thoughts is that Bitcoin was preempted by these changes after Trump was elected because everyone was so optimistic at that time. But when you talk to institutions, almost everyone is very much looking forward to this situation. To be honest, a big question facing a lot of investment advisors who are about to enter this space, especially in the United States and globally, is: Will the advisors recommend these assets? Will they put these products in client accounts? In the past, they could not do this, but now the transformation of these platforms, these large institutions, is beginning to accelerate, allowing them to provide products such as Bitcoin to their clients. So, there are usually three different levels. The first case is that the client cannot touch these assets in any way. The second case is that if the client makes a purchase request or meets certain other criteria, it can be purchased for them. The last case is that the advisor can recommend these assets to specific clients, and many large institutions that manage millions of dollars in assets are close to being able to recommend these products to clients, if not in reality, at least tens of billions of dollars.
Alex Tapscott: I feel like the trends that you're describing are also leading to greater dominance of Bitcoin over other crypto assets. Frankly, it's very easy for advisors to call their clients and recommend Bitcoin to them. They can say, look, it's digital gold, Larry Fink and a lot of 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 it makes sense to have an allocation to Bitcoin, right? It doesn't really take much of a reason. In contrast, like Ethereum or Solana, why would you own those? Because they're platforms. While there are reasons to do that, and I actually think they do have attractive investment cases, it feels like there's a case for both.
It’s a platform that enables decentralized applications and peer-to-peer transfer of value in digital assets. What does that mean? I don’t really know. So I can’t help but feel that Bitcoin is one of the biggest beneficiaries of the policy shift right now, especially as regulatory resistance becomes a driving force. Yes, although it’s down since Trump’s inauguration, and it’s been moving in tandem with the “Mag 7” for the last two months, Bitcoin is still up since Trump’s inauguration. This is not true for stock indices, and it’s not true for most other crypto assets. So I feel like there’s really some Bitcoin exceptionalism in the market, even though everything is relative — even though it’s still down, and it’s down a lot, if you’re an average retail investor, you’re going to say, “Hey, this position is only down 25%-30%, not 50%.”
It may be a cold platform for a lot of people, but I think that may be a result of this transformation. And then, in terms of where we are right now, well, I think if we can get through the current tariff trade dilemma, the second 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 waiting in line. These companies will enter this queue.
Bitcoin’s “Digital Gold” Status: How Institutional Investors View Its Future?
Alex Tapscott: These companies are all very well-qualified right now, and a lot of them would have liked to go public in the last cycle but missed out because the SEC under the Biden administration wasn't particularly supportive. Now they're all going public. We're going to see an expanding universe of public issuers that have audited financials and regular reporting that investors can get a deep understanding of, more fund managers will hold these stocks, and more fund managers and advisors will get exposure to Bitcoin through ETFs. We may see a wave of cryptocurrency ETF approvals, although it's going to be a "survival of the fittest" competitive game, some will succeed and some won't. But it means more inflows into these assets, especially because there's no pressure like there was before with GBTC or ETHE. Last time we had to deal with a lot of redemptions, and now everything is net new creation. So I think these trends are setting up for the second half of 2025, when everything is going to be very bullish, especially now that even the meme coin craze has subsided, so there's nothing negative, scary weighing on crypto right now. We're like, ready for it. But I think it's still a case of the tail wagging the dog: crypto can't succeed in a world where risk assets are sold indiscriminately and investors are fearful. I really don't see how the two can go hand in hand. Maybe Bitcoin will rise a little bit because of the decoupling, I still doubt it, but I think we still need to get through this moment if we want to see these things come to fruition in the second half of the year.
James Seyffart: Yeah, I'll stop there. It's actually much worse than you're saying. As for what you're saying about Bitcoin, honestly, before the election, my view was that Bitcoin was going to be fine no matter what happened. It's not like decentralized finance (DeFi) is trying to replace some of the things that the SEC has been going after, so it's not automatically classified as a security. Bitcoin is not a security, and even Ethereum has not been deemed a security to some extent by the SEC under the Biden administration. I agree with you that I think the Ethereum pitch is far more complicated than Bitcoin. If you ask me, and even I've said this on our own podcast, I thought a Trump victory would be more favorable to these other asset classes like Ethereum and Solana because a lot of what they're doing and what they're trying to do is good. It's just that a lot of things can't be done under pressure from regulators like the SEC, the CFTC, the OCC, who have been fighting against these innovations.
Whereas Bitcoin is digital store of value and digital transfer of value, it's already done that, and most of the time it hasn't been met with much opposition, right? But the good thing about Bitcoin is, as you said, it's far more accepted. The narrative of Bitcoin is very easy to understand. It's digital gold, digital store of value. I see it as an option for digital store of value, and while it's not fully realized yet, it's still a risk asset. Is it possible in the future? Some people say no, but I think there's no doubt that the probability of it happening has increased based on the price. Whether it actually happens is another topic of discussion, but there's no doubt that the market has made a decision and the probability of it happening has increased. That's my view. So I think all of these factors and 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 that an Ethereum ETF would be able to get compared to the crypto faithful and Ethereum supporters. Compared to the Bitcoin maximalists, who said that an Ethereum ETF would get almost nothing, we thought it would get inflows at a discount to the market cap of Bitcoin. In fact, we even underestimated it because the Ethereum ETF launched in the United States, due to the EPE pressure that you mentioned earlier, the ETF share had experienced net outflows until Trump was elected. Earlier this year, they went from $60 billion in outflows to $3.2 billion in inflows, but since then some of the funds have flowed out again, especially in late January and early February. So Ethereum is indeed more challenging to promote. If you listen to different people, they will say that investors who hold the "Magnificent Seven" stocks should have some of their funds exposed to Ethereum, Solana or other Altcoin that have submitted ETF applications, and this is the actual promotion. But in fact, promoting this is much more complicated than promoting Bitcoin, which, as you said earlier, is gradually increasing in dominance.
Performance Differences Between Bitcoin and Crypto Stocks: Why Coinbase and MicroStrategy Perform Better
Andrew Yang: Another thing I'm curious about is your thoughts on the difference between Coinbase and some other crypto stocks and Bitcoin. Like Bitcoin and MicroStrategy, they have performed significantly better than some other crypto-related stocks and assets in the past three to six months. They have far outperformed the rest of the crypto-related space, while those crypto-related stocks don't seem to react much. I'm wondering, how do you think about this difference?
James Seyffart: I think this goes back to the question I raised earlier about the risks of other crypto assets. MicroStrategy is a standalone entity, it's a leveraged play on Bitcoin. Coinbase is like an index fund in the cryptocurrency space, at least in some ways I think so. But overall, Coinbase is an investment in the broader crypto ecosystem, while MicroStrategy is completely dependent on Bitcoin.
But the other thing is, even though I say Bitcoin is a risk asset, it's a different story when you have a company that does a lot of other things and it's traded on the stock market. It's like a real estate investment trust (REIT), or the other assets I mentioned earlier, the value of the stock is not always a perfect reflection of the underlying value. The market is not perfectly efficient, and its value is not because of the discounted future cash flows, but it goes up and down with the fluctuations of the entire risk market. In this case, I think Coinbase was affected by this and the stock price was dragged down, and time will tell. But in terms of optimism, there has never been more optimism about them right now. They win case after case in court, but that doesn't mean that they will necessarily make more money if the entire cryptocurrency ecosystem continues to lose value.
Alex Tapscott: Yeah, that's right. In fact, that's why I'm most looking forward to the IPO boom and I hope it happens because it will add more diversity to the investment universe of cryptocurrency companies. Because right now you have Coinbase, which is the largest exchange and the creator of Base, and they have a range of assets, and they have some crypto on their books, but they're primarily a brokerage firm. Then there's MicroStrategy, which is, as you said, a leveraged Bitcoin play. And then there's the whole mining sector. There are actually a few issuers that are mining companies, but they're being traded more as AI data center stocks right now than they are as cryptocurrency companies, which is one of the reasons why they're not performing as well as Coinbase, Bitcoin, Ethereum, etc. Because the decline in cryptocurrencies and the DeepSeek news completely broke the whole investment logic, which made it challenging to invest in these companies because you don't know what other companies you can invest in, right? So having more options in the market is very important to me, and it will help broaden the investor base because there will be more real companies to invest in. I think that will help the health of the market.
James Seyffart: I totally agree with what you said. I would also like to add that mining companies, especially gold mining companies, especially those small gold mining companies, are similar to Bitcoin mining companies. Although these Bitcoin mining companies are not small companies, if you look at their stocks trading in the US market, they are still relatively small companies. These companies operate in a similar way, depending on their fixed costs, if they can grow at scale, they can get greater profits. One of the most volatile products in the world is the triple-leveraged small gold mining company ETF. It contains a lot of small mining companies. The reason why you see extremely high volatility in these companies is that their profitability is highly dependent on the fluctuations in the price of gold. If they have a certain fixed cost ratio, when the price of gold rises to a certain level, it exceeds their costs, their variable costs will also rise, but they can still make a profit, and then as the price continues to rise, it becomes leveraged profit. The same situation is true for Bitcoin mining companies.
My personal view is that a lot of these companies are not the best businesses in the world, they are completely dependent on one factor. If your energy costs go up or something like that, then the risk is huge. So I think that's another reason that a lot of people understand this and when they look at these companies, they see that these companies are highly capital dependent and they are involved in a lot of other issues. So, I generally think that it's a good thing that they start to diversify and move into more general things like AI computing rather than just Bitcoin. I think the most successful companies will be a combination of the two, like if they're not using it for AI computing, you can use the energy to mine Bitcoin, and so on. But obviously, I'm not a mining analyst, but for those who are trying to figure out why these companies are so volatile, they are basically leveraged investments. Once the price of Bitcoin exceeds a certain point and the mining costs of the companies are determined, it's like leveraged upside exposure for them.
Alex Tapscott: Yeah, I think AI and crypto are separate but related technologies. There's some overlap between them. You need computing power to secure these blockchains, at least Bitcoin, and you also need computing power to do all the AI stuff. So it's going to be really interesting to see how they evolve together.
