The SEC might finally approve spot bitcoin ETFs on Wednesday after denying applications for more than a decade.
Valkyrie co-founder and CIO Steven McClurg expects $10 billion or more to enter spot bitcoin ETFs by the end of the year, with around $2 billion to $3 billion in the first anticipated week of trading. “This doesn’t account for market moves alone,” he said. “This is just new inflows that I expect. Counting market movements, it could be $20 billion total AUM in spot bitcoin ETFs.” Valkyrie is one of 11 applicants for a U.S. spot bitcoin ETF; the other firms are BlackRock, Grayscale and Fidelity, among others.
He also thinks bitcoin’s price will hit $150,000 or higher before 2024 ends. “As far as price, I think there will be a supply shock that moves [the] price forward,” McClurg said. “The ETF creates a lack of supply, so buying activity. After the halving, I expect us to go back into a bull cycle and from a macroeconomic perspective I do think the Fed is going to lower rates again in May/June ahead of the election which will cause risk excess to go up.”
We sat down with McClurg to chat about impending demand for spot bitcoin ETFs, why he thinks futures bitcoin ETFs will go away, which spot crypto ETFs could come next, and why the fee wars are “ridiculous.”
The following interview has been edited for length and clarity.
TC: When did you know that the SEC might actually approve a spot bitcoin ETF?
SM: We’ve been running hard for the last probably six weeks now on this, and it’s been quite exciting. But it was back in the end of September, beginning of October, when we’re launching our ETH futures ETF. Right when we were getting ready to launch, we received comments from the SEC on our spot bitcoin application, and we thought, “Well that came out of nowhere.” And once we got those comments, we realized that OK, they’re taking a look at it now. They wanted to get these future products behind them, and now let’s focus on this.
How did the launch of your futures ETH ETF product in September go?
So what we did was a little bit different. When we got an inclination that [the] spot bitcoin ETF was coming soon, we said OK, well, bitcoin futures ETFs are basically going to go away when a spot bitcoin ETF launches.
So we converted our bitcoin futures ETF into a strategy to invest in both ETH and bitcoin. That’s actively managed so that way we can kind of tie the market on those two asset classes, which is actually the easiest to do in futures. And even if there was an ETH spot available, then we could do a bitcoin ETF.
Why do you think bitcoin futures ETFs will go away?
Spot bitcoin ETFs are just so much more efficient. There’s always going to be slippage and you’re not going to get it exactly right with bitcoin futures compared to spot bitcoin.
As we near the anticipated Wednesday launch, what’s your confidence on timing?
Ninety-five percent confidence. It’s not like the SEC has said, “Yes, you’re definitely going to get it.” But there’s a lot of clues and a lot of things that happened that give you that indication. So myself and others are very confident that Wednesday it’ll get approved aftermarket with a Thursday launch to trade.
I always thought that it wouldn’t happen by the end of 2023. And I would say the summer was when I started getting the feeling that “OK, this is really happening.”
That was when we were working closely with NASDAQ on things like surveillance and so many other issues the SEC has brought up previously. But then we started seeing a lot more questions coming out from the SEC, making this most definitely a 2024 event. It seems like every time the SEC came back for comments and questions and discussions that that timeline constantly moved up. But I certainly didn’t think it would be this week.
What happens after it gets approved? Would you file for another crypto spot ETF?
I don’t know if we’re gonna file for anymore after this one. And it’s possible, but I do expect there’s a strong possibility that we see either an Ethereum or a Ripple spot ETF in the future. So we’ll see what happens there.
My problem with filing for a spot Ethereum ETF is that it’s much more of a consumer retail investment as opposed to bitcoin, which has more attention from institutions. So I don’t know if there’s gonna be a whole lot of demand for an ETH spot ETF. That’s something we have to evaluate.
Ripple is an interesting one because bitcoin and ETH both have futures ETFs, which is kind of a first step. But Ripple has that really interesting lawsuit that just got completed. So it’s almost as if the lawsuit has declared Ripple not a security, which means it has the ability to go into an ETF format. Would we be filing for one? Again, probably not. I don’t think there’s a strong market for that particular product, but somebody will. It wouldn’t surprise me if Ripple has a spot ETF before Ethereum. The lawsuit it just had really sets it up to go to market. And Grayscale did have Ripple back on one of its publicly traded trusts after it did a rebalance, so to me, that’s an indication that you can get access to Ripple in public markets again already.
Federal court rules Ripple’s XRP token can be treated as a security… sometimes
Valkyrie was one of the filers that lowered its spot bitcoin ETF fee structure from an initial 0.80% to 0.49% today. Other potential issuers like Bitwise, Invesco Galaxy and WisdomTree have lowered their fee structure as well, with Bitwise’s now being the lowest at 0.20%. What are your views on this fee war that’s going on?
I think it’s ridiculous. I mean, the fact that people are going as low as in the 20s for their spot bitcoin ETFs — there’s a lot of issues with that. I mean, I think we’ll be lowering ours to a fair number. But I don’t think it helps being in the lower range when you factor in the risk of holding bitcoin in a custodian.
Say insurance is needed in the future on those assets; you won’t be able to buy because your fees are too low. That’s definitely something that we’re thinking about because what a lot of people are looking at is Coinbase (which is the custodian for the majority of the spot bitcoin ETF filers) has insurance, but that insurance is across all its assets, not a particular bucket. So that is something that might have to be rectified.
How much does insurance cost?
There’s insurance included already for the spot bitcoin ETF issuers from custodians, but that’s a broad coverage. But it could cost over 0.20% to just insure bitcoin, and I don’t think people are accounting for counterparty risk and other aspects.
As for the coins in the fund, to clarify, who holds the coins? Is it Valkyrie? What happens if the coins get stolen or Coinbase shuts down or something else?
Those are real concerns. So we’re holding coins at Coinbase and most other people are at Coinbase as well. So that’s really the way a lot of corporate ETFs work is that you have a third party that actually helps prevent things like that. It’s held at arm’s length so we hold it with Coinbase.
There is obviously a risk of cyberattacks. We did evaluate all the various custodians, and there’s a few that do a great job of offsetting.
Given that Coinbase is a custodian for so many of these spot bitcoin ETF issuers, do you see it as the big winner here?
I see Coinbase as the biggest winner. Eight out of the 10 firms that filed for a spot bitcoin ETF are working with Coinbase for custody and also working with Coinbase on trading, financing and other areas. So yeah, they’re going to do quite well.
Is there a goal to eventually allow customers who buy bitcoin through your spot ETF to get direct ownership of their coins, or does that just defeat the purpose of the investment vehicle?
I mean, look, I encourage everybody to own bitcoin directly. But you know, my mom still has a flip phone and plays solitaire. I’m not going to expect her to create a hardware wallet for bitcoin. So a lot of people have different levels of expertise and comfort when it comes to owning bitcoin.
For those that know how to create a hardware wallet and how to maintain it, I encourage them to do so. Those that are less comfortable, I encourage them to take other methods like buying a spot bitcoin ETF for instance. This really is going to allow people that are uncomfortable with signing up for an exchange or might even have a brokerage account to allow them to have access.
What kind of demand do you expect for the spot bitcoin ETF during the first week of trading, then long-term?
I don’t think it’s gonna be this big blowout of $50 billion coming in on day one. I think it’s gonna be a lot slower because at this point in time a lot of people [who will get in] are those that have had access to bitcoin in the past.
What I do expect to see is some of the bitcoin futures ETFs like GBTC have outflows. A lot of [existing customers will] switch over into pure ETFs. Then I do expect to see new flows somewhere probably $2 billion to $3 billion in the first week. But, you know, getting into that $25 billion to $50 billion range will take one or two years. I think it’ll be a slower grind, and that’s just my experience in ETFs.
How would you break down demand between smaller retail investors versus institutions and high-net-worth individuals?
I think the first big group of people that are going to come in is going to be retail. I think the adviser network is going to be slower; they’ll trickle in throughout the year and then probably in a bigger way over the next year or two.
Institutions typically don’t buy ETFs, but when I say institutions, I mean like pension funds, insurance companies, sovereign wealth funds, they’re not your typical ETF buyer. Some of them might buy this ETF just so that they can have some access, but generally, they will access bitcoin through private placement and that’s where we work with institutions.
How do you expect this product to interact with the traditional finance world?
I think it’s already become traditional finance with players like Invesco, Fidelity and BlackRock who filed their own spot bitcoin ETFs. You’re starting to see that the traditional investors in bonds and equities are making allocations.
My expectation is that somewhere around 1% to 2% of a lot of portfolios will be in bitcoin over the next three years, which is a massive windfall just for that alone. What’s bigger than the intermediary or the financial adviser network is the institutional world. And I think this will legitimize bitcoin to a point where that world will actually start investing. That won’t be through an ETF but through other vehicles. So, in the end, we’re probably talking about 1% allocations there, but that’s a large amount of capital.
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