In this week’s episode, Josh and Austin are unraveling the mystery behind crypto ETFs. They start off by diving into the background of the world’s largest cryptocurrency, then cover what exactly an ETF is and the importance of Bitcoin in the United States. Join them as they discuss one of the hottest topics in the financial world these days!
Main Talking Points
[1:33] – What is an ETF?
[3:02] – Futures Contracts
[6:22] – Dad Joke of the Week
[7:18] – Bitcoin Introduces Crypto to the United States
[11:36] – The Grayscale Bitcoin Trust (GBTC)
[13:35] – BITO’s Performance Compared to Bitcoin and GBTC
[15:58] – Should You Consider Crypto?
[18:30] – What Does the Future of Crypto Look Like?
Links & Resources
031: ETFs vs Mutual Funds – The Invested Dads
Invest With Us – The Invested Dads
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments. Here are your hosts, Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey, welcome back to The Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. Today, we are going to be talking about and unraveling the mystery around crypto ETFs, because that’s a pretty hot topic these days.
Josh Robb:
Crypto ETFs? You know, we have been getting that question off from clients.
Austin Wilson:
All day, every day.
Josh Robb:
It’s been making me want to DOGE the question.
Austin Wilson:
DOGE the question.
Josh Robb:
You got it.
Austin Wilson:
I love it. I love it. Yes, that is what we’re going to talk about. A little background here.
Josh Robb:
Yes.
Austin Wilson:
On October 18th, the first exchange traded fund that is directly ish related to the world’s largest cryptocurrency began trading in the US.
Josh Robb:
And the world’s largest cryptocurrency is?
Austin Wilson:
Bitcoin.
Josh Robb:
Bitcoin.
Austin Wilson:
I bit a coin. My dentist was really mad. It was the pro shares Bitcoin futures ETF, ticker B-I-T-O. Not a great ticker. It’s okay. BITO. BITO coin?
Josh Robb:
If you’re the first one, it’s not like you’re fighting for space here.
Austin Wilson:
You would think B-I-T-C would be better.
Josh Robb:
Or CRYPTO or something.
Austin Wilson:
That is where we’re at.
Josh Robb:
Let’s unpack that. Let’s look through, you said a lot of words in that sentence.
Austin Wilson:
There were some words.
Josh Robb:
There was a lot of words. ETF.
[1:33] – What is an ETF?
Austin Wilson:
For specifics, please listen to our episode. We’ll link in the show notes where we actually compare ETFs and mutual funds but at a very high level. An ETF pooled investment vehicle, like a mutual fund? Similar, that’s traded in real time during market hours with transparent holdings, a lot like a stock, on an exchange. That’s the exchange traded part of the thing. These have gotten really popular over the last few years compared to mutual funds because they’re liquid, super transparent and often have affordable expense ratios and trading fees just like stocks.
Josh Robb:
Summarize that you could buy and sell like you do a stock. It trades all day long. At any point in the day…
Austin Wilson:
So great tickers.
Josh Robb:
You could say, I want to buy or sell this during the day, you get it just like a stock. It’s a pool vehicle, meaning there could be multiple holdings, but you’re buying one to get a bunch of things. That’s always nice. The liquid and transparency mutual funds, they trade at the end of the day. You can’t buy them throughout the day. You could place the order, but nothing happens till the end of the day. You don’t know what they hold except for once a quarter when they report them.
Austin Wilson:
Custody wise, the mutual fund company has custody at that point, but here you’re trading it on an exchange…
Josh Robb:
With somebody else. So supply and demand plays into that.
Austin Wilson:
A lot like stocks. That is ETF. The ETF piece there, number one.
Josh Robb:
Number two, you said in the ETF tracks Bitcoin directly ish. I don’t think you were adding that on.
[3:02] – Futures Contracts
Austin Wilson:
No I think I meant something by that. Good question. It’s very interesting. BITO is the ETF we’re talking about. It doesn’t actually mirror the move of actual Bitcoin as many ETFs attempt to do with other underlying securities. It offers exposure to Bitcoin by way of exposure to the futures contracts, presumably through the CME group in Chicago, because they handle almost all the futures contracts we have here in the states. These future contracts, I’m not going to go in the weeds because that’s complicated as well.
Josh Robb:
Futures are complicated.
Austin Wilson:
But these future contracts are in essence contractual agreements to buy or sell an asset at a later date for an agreed upon price. There are tons of these contracts available for commodities, for currencies and things like that. And they’re used for hedging.
Josh Robb:
Like farmer, for example…
Austin Wilson:
Lock in your prices.
Josh Robb:
They have a field of corn, and they say, I can buy a futures contract for a price to protect me, to hedge is what you call it, but protect me from crazy price movements. I could say, I’m going to buy a contract to sell this corn at this price at a future date. And then I lock it in.
Austin Wilson:
You’re limiting your downside and upside. You’re just locking in a price.
Josh Robb:
That’s a future contract.
Austin Wilson:
That is a futures contract and there are futures contracts for Bitcoin, and those relatively new as well. They were created to de-risk, you’d hedge your Bitcoin. It’s kind of funny, Bitcoin’s extremely volatile, right? So you could hedge your Bitcoin and you could do it that way.
Josh Robb:
Why are you doing that?
Austin Wilson:
I don’t know. Part of the beauty of cryptocurrencies is the volatility.
Josh Robb:
If you’re locking in a future price, that’s really not showing you the day to day move. So if I’m holding this ETF, which trades daily trades minute by minute, while the market’s opened, it’s not a really perfect way to track this.
Austin Wilson:
It’s not perfect. So while the direction of these contracts and the asset tend to move in similar directions, and I nerded out, so I adept some correlation, matrices that we’ll talk about later. But while they tend to move in a similar direction, they’re not perfectly correlated, which means there are people buying and selling the contracts, because you don’t have to let the contract actually, need to be fulfilled. In fact, most people don’t. There are people buying and selling these contracts that aren’t actually buying and selling the underlying asset, which means that prices move in different magnitudes. Generally the same direction, but different magnitudes. Originally created for hedging, even hedging Bitcoin, but you’re actually, this ETF is using the Bitcoin futures contracts as the movement that they’re going to be tracking in terms price.
Josh Robb:
It’s really from a high level, if you’re buying into this fund, you’re buying into the sentiment of people’s opinion on Bitcoin. You’re in a sense saying, since it’s a futures contract, if they’re buying a price, they’re probably expecting it to be there.
Austin Wilson:
Move one direction or another.
Josh Robb:
You’re almost just buying into future contract owners’ opinion of where the Bitcoin is going to go. Not that you’re buying that you’re hoping, in the short term, to capture the price movement.
Austin Wilson:
It’s like speculating a speculative asset.
Josh Robb:
You’re double speculating.
Austin Wilson:
You’re double speculating.
Josh Robb:
Squared it.
[6:22] – Dad Joke of the Week
Austin Wilson:
So Josh, that is two of the couple things to break down points. That’s pretty deep stuff. I need a joke.
Josh Robb:
You need a dad joke.
Austin Wilson:
I need a dad joke.
Josh Robb:
I got one here and this really came about, because working from home during COVID, people started kind of businesses at home. Trying to find things to do. I started a home business. I build yachts at my house now.
Austin Wilson:
Nice.
Josh Robb:
Sails are through the roof.
Austin Wilson:
Sails are through the roof.
Josh Robb:
It’s a yacht and the sails are tall.
Austin Wilson:
Yachts don’t typically have sails Josh.
Josh Robb:
It’s a sailing yacht.
Austin Wilson:
That’s a sailboat.
Josh Robb:
I don’t know anything about boats.
Austin Wilson:
I mean I like boats. I think yachts are those, what’s Bezos got…
Josh Robb:
Probably a big one.
Austin Wilson:
$300 billion.
Josh Robb:
They got to have a sail somewhere.
Austin Wilson:
It’s got a motor on it.
Josh Robb:
They got to have a sail.
Austin Wilson:
If I’m getting a sailboat, I’m totally just going straight pirate ship.
Josh Robb:
You just need a pirate ship.
Austin Wilson:
I’m not going to mess around with a catamaran. That’s the dad joke of the week. Every Thursday coming at you, that’s where we’re at.
[7:18] – Bitcoin Introduces Crypto to the United States
Josh Robb:
This ETF, now Bitcoin’s been around for 10 plus years probably. This is the first ETF being traded here in the US. Is that right?
Austin Wilson:
Keyword there, in the US. Europe, Canada, those areas, they actually have already had, for some time, access to direct Bitcoin investment ETFs. Like where those exchange traded funds actually mirror the underlying asset of Bitcoin itself.
Josh Robb:
So other countries have direct investment vehicles.
Austin Wilson:
And probably futures contracts or whatever as well.
Josh Robb:
If you have direct access sometimes… Why is the US kind of trailing? Usually were ahead of everything.
Austin Wilson:
You would think right? Three letters Josh. S, E, get your mind out of the gutter, C, not the other one.
Josh Robb:
The SEC.
Austin Wilson:
SEC, the Securities Exchange Commission really has been a little bit less than supportive about anything that could get crypto in the hands of more people. Now there’s a couple ways to view this, depends on if you have your conspiracy theory hat on or not. Number one is, some say the SEC would say, that they’re trying to protect people to keep them out of trouble from an unproven, extremely volatile asset. That’s one view and a lot of main street finance and government are cool with that thinking. The cryptocurrency bulls say that it is because the SEC’s in big banks back pocket and banks view crypto as a threat to the traditional financial system as we know it. That would threaten them if it got in the hands of more people. They’re not usually a fan of that. Depends on which side of the fence you’re on, those are just the two theories.
Josh Robb:
My conspiracy theory is the SEC does not want to see the Big 10 do well. And so they are finding all different ways to stop.
Austin Wilson:
The same people.
Josh Robb:
I’m sure they’re the same organization, right? They’re probably the same people.
Austin Wilson:
This has changed a bit lately though, especially with the approval of BITO, the ETF we’re talking about today, the SEC didn’t formally endorse the ETF, but they didn’t stand in its way.
Josh Robb:
They didn’t say, yeah go for it. They just said, I’m not saying you can’t…
Austin Wilson:
Exactly. What this did is it’s really opened the doors for other futures based products, derivative based Bitcoin or cryptocurrency ETFs at this point.
Josh Robb:
So if the SEC, not the Southeastern Conference or anything like that, but the Securities Exchange Commission.
Austin Wilson:
Genzlinger, that’s the fed.
Josh Robb:
They’re saying they’re doing this because they want to try to keep people out of these assets…
Austin Wilson:
Keep them out of trouble.
Josh Robb:
That are unproven, extremely volatile and probably harder to understand. But yet they’re going to, in a sense, encourage, instead of direct investment, futures contracts, which are even more complex and harder to understand, as a replacement for direct investment.
Austin Wilson:
One would have thought that if you’re going to approve a Bitcoin or cryptocurrency ETF or not get in its way, I guess is another way to put it. You would’ve done that with the underlying asset itself instead of the futures contracts. But I’m wondering, so obviously the futures contracts, when there’s more people interested and in futures contracts, it’s good for cryptocurrency in general. When there’s more people interested in the derivative side of things as well, which is also good for the ETF. But I’m wondering if keeping people out of the ETF going and actually buying crypto is a way to keep a lid on some of the activity in the crypto market to keep it from going even crazier.
Josh Robb:
Because of volume trading?
Austin Wilson:
Yeah. Because it’s all about supply and demand. So you’re really increasing the supply and the demand for the derivatives, which is indirectly doing a bit for the underlying.
Josh Robb:
You don’t have directly hold the underlying asset.
Austin Wilson:
So that’s your other conspiracy theory. This is the SEC putting the kibosh on crypto prices.
Josh Robb:
That might be it.
Austin Wilson:
Even though…
Josh Robb:
So they’re not in the big bank’s pockets, they’re in the crypto, don’t let it get too out of control, people’s pockets, whoever those people are.
Austin Wilson:
Anyone who holds it, probably.
Josh Robb:
They don’t want it to go crazy.
Austin Wilson:
The Bitcoin whales.
Josh Robb:
That’s what it is, the whales.
Austin Wilson:
Yes, exactly.
[11:36] – The Grayscale Bitcoin Trust (GBTC)
Josh Robb:
I have heard and by heard, I mean, you hold this in your Investopedia account, the Grayscale Bitcoin Trust, GBTC, explain that to me. That seems like you’re directly investing. What’s going on there?
Austin Wilson:
GBTC is actually formed as an investment trust. It’s kind of pseudo in the neighborhood of a real estate investment trust, not exactly but similar. The investment does actually own Bitcoin. In fact, I think GBTC, Grayscale, is the largest holder of Bitcoin in the world. Other than, the quote unquote, mystery founder of Bitcoin. Other than that I think that they’re the second largest. So the investment does hold Bitcoin versus the derivatives we’ve just been talking about, but it comes at a very hefty price tag, a 2% management fee. That is a lot. Now when you’re thinking, an expensive mutual fund is like one. Usually a lot of these ETFs 0.5 or zero. There are zero commission ETFs.
Pretty expensive. The other difference is that it may be able to trade at a premium or a discount to asset value, kind of like a closed end fund would. That’s purely based on supply and demand. However, Grayscale is seeking to convert it to an ETF when authorities allow them to, which obviously that’s what we’ve been talking about, they haven’t allowed them to at this point. That means that whatever premium or discount is present when that happens, that’s going to vanish. If GBTC is trading in a discount Bitcoin value and their ETF gets approved, so GBTC becomes an ETF is what would happen.
Josh Robb:
Instant profit.
[13:35] – BITO’s Performance Compared to Bitcoin and GBTC
Austin Wilson:
Instant profit up to par or whatever. Or if it’s trading at a premium instant loss, regardless of the movement of Bitcoin at that point. That is kind of where we’re at there. So the real question, Josh, cause I’m a nerdy numbers guy is how has BITO performance been compared to actual Bitcoin? And because we’re just talking about it compared to Grayscale? Let’s talk about it. Ultra limited sample size. I want to put the disclaimer here.
Josh Robb:
What do you mean short terms are not a good again of this?
Austin Wilson:
So this just started trading in the middle of October and here we are recording this on the first November.
Josh Robb:
We got two weeks.
Austin Wilson:
You had a couple weeks, almost a couple weeks. Over that time, 10-19 to 11-1, Bitcoin is down 5.24%.
Josh Robb:
Rough, volatile, volatile.
Austin Wilson:
GBTC, the Grayscale Bitcoin Trust is down 0.1%.
Josh Robb:
Premium discount.
Austin Wilson:
I think it’s a discount that is becoming less.
Josh Robb:
So it’s working up.
Austin Wilson:
And then BITO, the one we’re talking about today, it’s down 7.08%.
Josh Robb:
The futures.
Austin Wilson:
So it’s down more than Bitcoin, and obviously a lot more than Grayscale. Because I have a fancy Bloomberg terminal and I like to do fun things. I ran a correlation matrix for these three tickers. Looking at daily correlation over that same time period. GBTC, Grayscale, has a 0.926 correlation with Bitcoin over that timeframe. A reminder is that 1.0 is perfectly correlated, they would move in lockstep.
Josh Robb:
Right together.
Austin Wilson:
0.926 is really high.
Josh Robb:
It’s pretty close.
Austin Wilson:
BITO has a 0.995 correlation with Bitcoin.
Josh Robb:
That’s pretty much in line.
Austin Wilson:
That’s dang close.
Josh Robb:
Does that look at the movement?
Austin Wilson:
Daily.
Josh Robb:
And the size of the movement, not just directional.
Austin Wilson:
Yes, exactly. And it’s reset every day. Is what that would be. If Bitcoin is up 10% and you are up 9.95, that’s what that’s saying. And then I also ran it the other way. BITO has a 0.939 correlation with GBTC. So everything’s really correlated.
Josh Robb:
It is a directional movement, it’s doing its job. If someone buys this BITO as a way of saying, I don’t want to own Bitcoin, but I want exposure. It’s at least directionally moving within the last two weeks. In the right way.
[15:58] – Should You Consider Crypto?
Austin Wilson:
Absolutely. So Josh, where you come in, because you’re my financial advisor, let’s discuss your thoughts on crypto in general, whether via ETFs, trusts, individual holdings, talk about risk, taxes, regulation as an investor wants to look at the crypto space in putting together and thinking about their financial plan and their financial situation. What are some things to think about?
Josh Robb:
The SEC does not consider Bitcoin or cryptocurrency in general, to be any kind of investment at this point. They do not regulate. In a sense, it’s still considered a commodity or currency, which means it’s income generating taxes.
Austin Wilson:
You can have long term capital gains on crypto?
Josh Robb:
I don’t know on crypto right now. That’s the question. And that’s really where we’re waiting to hear more direction from as more of these things come out, how are they going to be taxed? Is it going to be long term, short term capital gains? Is it going to be income tax? How are you going to tax these things? With ETFs or the investment trust, those type of things, we’re familiar with how those are taxed. That’s a little clearer, whereas holding currency and whether you offset some with loss, there’s a lot weird stuff going on there. In fact, the IRS now has on the tax form is a questionnaire that just says, did you trade currency in the last year?
Austin Wilson:
Then they give you a new form.
Josh Robb:
That says to fill this out and then take care of it. That’s an important part of the discussion. As this grows and there’s more options you’re going to see more and more look at, how do taxes play into this? Along with that, we’ve talked about with our cryptocurrencies is your risk tolerance and your goals. How does this fit in there?
Austin Wilson:
The risky end.
Josh Robb:
We know that cryptocurrency in general is a more volatile asset than you see normally for stocks or bonds or those type of things. Holding the ETFs and trusts, or those type of things appears to be just about as volatile. BITO was down 7% in the same timeframe, Bitcoin was down five and a half or so. It appears to be just as volatile or you’re going to experience about the same. So you got to factor that in. From a long term standpoint, with your goals, how does taking that additional risk? Does it offer the return potential to justify that risk? I don’t think it clears anything up, it just adds a couple more pieces to the picture of how can I invest if I decide it’s worthwhile.
[18:30] – What Does the Future of Crypto Look Like?
Austin Wilson:
What do we think is going to happen as we get more clarity on regulation going forward? Because some of the cryptocurrency bowls think that more regulation is actually kind of bullish because it makes people feel more safe in the space, which attracts more people which ultimately drives up prices. My personal opinion is that some level of that is a good thing for safety. However, I think the more regulation you have in the space, you’re ultimately limiting your upside, and how much of upside in the space have we already… Are you going to be able to get 10,000% returns on these things going forward? I think a lot of the easy money’s been made.
Josh Robb:
Going back to the taxes, I just looked it up real quick, cryptocurrency’s considered property and taxed the same way as property. When you sell, trade or dispose of cryptocurrency, that’s when you realize the gain.
Austin Wilson:
So you HODL. That’s what they say, HODL. You never sell.
Josh Robb:
Never sell. Then you never have tax.
Austin Wilson:
Exactly.
Josh Robb:
So just the reference point. But high level, like you said, there’s so much, it’s so new, new regulation actually could be a benefit. I’m on that pole. I think bringing in some form of regulation in security, if you want to call it that, there’s no guarantees in investing, but within account structures and those type of things there’s insurance. The government puts limits on fraud and those type of things that can help protect your assets. It can’t hurt in my opinion for it to grow and become more mainstream.
Austin Wilson:
But you know what you could do? Because cryptos move very drastically either direction, if you’re in a tax situation where you’re in a high tax bracket or whatever, you can now, through either GBTC or I guess there’s an Ethereum one or some more, or BITO you can hold things like this a Roth.
Josh Robb:
Oh yes, that’s true. Now you can get crypto inside of a tax free or tax deferred growth.
Austin Wilson:
Just something to think about. Wow, that’s a lot. That is an interesting question that is just on the TV right now. People are saying, hey, this is now trading. Is this good? Is this bad? Is it ugly? And the question is left to the individual investor because nothing we talk about is a recommendation here. And we’re not saying go buy BITO or GBTC or Bitcoin in general. But we are here to bring you the news. Two things. Number one, it’s still not too late, even though this is going to come out into November, it’s still not too late to enter our second half stock draft competition.
Josh Robb:
We go to the end of the year.
Austin Wilson:
Number two, as always check out our free gift to you. It’s a brief list of eight principles of timeless investing. These are overarching investment themes meant to keep you on track to meet your long term goals. We don’t talk about Bitcoin derivative ETFs one bit. Check it out, it’s free on our website. Josh, how can people help us grow this podcast?
Josh Robb:
Make sure you subscribe that way you get our new episode every Thursday. Leave a review on Apple Podcast if that’s where you listen and email us any questions or topic ideas. If you heard of something else and said, hey, this is kind of weird I want to understand more, shoot us an email at hello@theinvesteddads.com. And we’d love to respond to you. If you know somebody that was talking about future, Bitcoin ETFs, then share this episode with them and that would be really weird that that just happened to be a conversation you came upon.
Austin Wilson:
That’s right.
Josh Robb:
You know, if it did awesome.
Austin Wilson:
It could happen. All right. Well until next Thursday, have a great week.
Josh Robb:
All right. Bye.
Austin Wilson:
Bye.
Outro:
Thank you for listening to The Invested Dad’s Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management, all opinions expressed by Josh Austin or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management. may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.
