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When investors should expect a Bitcoin ETF

Outlier Ventures Partner Rumi Morales, Davis Polk Capital Markets Group Partner Joseph Hall, and Grayscale Global Head of ETFs Dave LaValle join Yahoo Finance Live to discuss the future of Bitcoin ETFs.

Video transcript

BRIAN SOZZI: I want to direct my first question to Rumi. You were really team early on crypto. You've been an investor active in this space from the jump. At an extremely high level, what is a Bitcoin ETF? And why is there investor demand for one?

RUMI MORALES: Sure. Well, as I think many people know, an Exchange Traded Fund, or ETF, is a type of security that can be structured to track anything, right, from the price of an individual commodity, or in this case, Bitcoin. They'd be-- theoretically, be able to purchase or sold on the stock exchange.

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And it'd be a way for many investors to be able to access and take part of the economic opportunity of Bitcoin without having to deal with technical issues right now, like registration of wallets or storage of coins. It can make investing in Bitcoin a lot easier for more traditional investors. And I think that's why many people are excited about possibly seeing this out.

BRIAN SOZZI: Well, people are excited, but it seems like the regulatory headwinds are blowing against the Bitcoin ETF, at least for right now. So I want to turn this question over to Dave at Grayscale. I mean, you've been among the many waiting in the wings for a Bitcoin ETF. But in the meantime, you do have a Bitcoin trust that offers exposure to Bitcoin. So I guess the natural question is, is an ETF more exciting than a trust? What is it about this type of product that might bring in even new types of investors into the space?

DAVID LAVALLE: Well, it's a story that's very similar in the evolution of the broadest-- the broader ETF market. As new asset classes have been brought into an ETF wrapper, it offers the opportunity for an equitable investment opportunity for the broadest range of investors.

And so, currently, you're correct. We do have GBTC, which is our current product. And we have been committed to converting that product into an ETF when regulators will allow us to and permit us to do such. However, right now, our investors-- investor base is more narrow. And if we're able to get regulatory approval for an ETF, all investors will be able to participate in the investment in the form of an ETF.

BRIAN SOZZI: Well, if we get regulatory approval. So Joe, you watch the regulatory developments pretty closely that's coming out of DC. So give us a sense of the regulatory reasons for why we have yet to see a Bitcoin ETF. It's really the Securities Exchange Commission that has say over this. So what have you heard from Gary Gensler, who's only been in place for a few months so far, about what we should expect and whether or not the winds are blowing in favor or against the ultimate approval of one?

JOE HALL: Sure, you're right. It's within the-- it's on the SEC's plate. It's a decision that the SEC needs to make. And historically-- and this space historically goes back four or five years-- the SEC has refused to approve a Bitcoin ETF on the basis of their concerns about manipulation in the market for the underlying.

And I'm not talking about manipulation on Coinbase or on any of the US-based exchanges, but largely manipulation meaning like wash trading, other non-economic kinds of trading that might be going on in markets outside of the United States that could nevertheless have an impact on pricing of the commodity inside the United States. That's been the basis for the SEC's disapproval of the various applications that have been made to list an ETF so far.

I would say we actually have had some encouraging news from the SEC recently. And Chairman Gensler, in a speech back in the beginning of August, seemed to open the door to 40 Act funds or Investment Company Act funds that are trading in Bitcoin futures, so a product that's actually traded on the CME market, and the funds would invest in those.

And the reason that I think that that's potentially a positive sign for the broader ETF market as a whole, including spot funds, is that if there's manipulation happening outside the United States, it's impacting the price of the commodity. Then that's going to show up in the pricing of the futures market as well.

So it seems to me that if the SEC is moving towards authorizing or allowing funds that invest in Bitcoin futures, that the rationale that they've used in the past to disapprove of commodity funds seems to be dwindling. So very early stages yet. We haven't heard any definitive movement from the staff of the SEC who processes these things. But at least, I would say there's some glimmer of hope in the orientation that Chair Gensler seems to have here.

BRIAN SOZZI: OK, some glimmer of hope. At the same time, a Bitcoin futures is not the same as a Bitcoin spot ETF. So Dave, pinging this over back to you, what is the difference between a Bitcoin futures versus a Bitcoin spot ETF? And why is one-- or maybe is one more attractive than the other?

DAVID LAVALLE: Well, historically, in instances where you have an ETF that's holding an actual commodity that can be reliably stored from a commercial perspective, the physical or spot-based product has been much more successful. Keying on GLD for an example, the physical gold ETF is certainly far more commercially successful than some of the other physical gold products on a relative basis to their counterparts that are holding futures.

Similarly, with Bitcoin, we feel that since there's reliably a very strong case to be made that the Bitcoin can be reliably stored, the physical Bitcoin ETF will be far more commercially successful. And the reasons are that it's less complex. It's easier to trade. It's less costly, and therefore, a better option for investors for their Bitcoin ETF exposure.