Ep. 64 Som Seif, Purpose Investments on the Bitcoin and Ether ETFs

Som Seif: [00:00:58] So look, I think that, you know, for the last number of years, Bitcoin and cryptocurrency in general, Has been a pretty hot topic. And as you I mean, you go back to the 2017, 28 timeframe, 18 timeframe. We saw a pretty big spike in prices and a lot of interest in the capital markets area.

You know, wall street, bay street, everyone was focusing on it. And at that time we saw a number of filings in the ETF space. Come in. Both in us and Canada. And at the time, you know, the reality was that the regulars were facing two questions. They were, one was the concern of do they want to give people access to this asset class and effectively legitimize it, and two is, is the infrastructure, effectively there today to allow for such a vehicle to exist.

In ETF is a very important and elegant structure, but it has to. Actually make sense, be efficient and be executable. And, frankly I've said this before, is if they had allowed it back in 2017, 2018, either Canada or us it would have been a failure, mainly because of the second point, which was that the kind of structure an infrastructure to support an ETF just wasn't there, there wasn't liquidity in the marketplace. It wasn't there wasn't good market makers that wasn't a good institutional custody solutions, all those things just weren't there. And, and frankly, the regulators were right to uh, to say no, but there's been a lot of progress that had been made over the last number of years, specifically on the infrastructure side.

That, really allowed for such a vehicle to now exist. And when we came to the marketplace in Canada to really work with the regulators back in 2020, starting to talk through and show them, it took us about eight months of work with the regulators to, to prove to them and show them that, that made sense. You know, we were able to overcome that and make them understand that the infrastructure really was there. And, of course on the first question, which was, should we give access then to people, to this asset? I think that the Canadian regulators recognize that people are going to get access to it, whether they liked it or not.

And if you're going to, it would be better if they did it in a regulated form versus some of the unregulated activities that have happened as and could cause significant loss and risk. So I think they just decided that was important. I will say that in the U S they're still debating this first question, which is, do they want to give access to it?

But the second question, I think we have proven to the U S marketplace that, that liquid efficient use of an ETF structure is available for the Bitcoin and ether spaces.

Joseph Lamanna: [00:03:31] One of the things I keep on asking myself is how do I get myself involved in this particular market? So what's the difference between how other issuers proposed to do this and yours?

Som Seif: [00:03:41] I don't, I think there's been different forms of filing over the years. People have tried to overcome. The regulator concerns based on size and scale. And, some people that use futures, which you know, is as had been used before some products were launched in Europe that were note spaced you know, derivatives of products.

But ours were the very first, physically, or I don't know, hard to say a digital world physically but you know where a hundred percent of the exposure is actually owning Bitcoin. So the fund directly owns and custody's Bitcoin. And then same in the case of our ether, ETF is a hundred percent backed by ether.

And that was the novel thing about what we did was, we had to. Prove to the regulators that you could build a, secure, uh, and liquid custody to solution. So in our case, we did it in what we call a cold wallet versus a hot wallet, which is an important differentiation from a risk perspective.

And then second is that you were able to actually trade in a liquid way and track the. Underlying exposure efficiently with market makers and your daily trading. And so those are the key differences. And look we, we spend a lot of time to prove that and, uh, w we're very happy and pleased with the outcome of what we've done.

And not only have we helped create a brand new asset category for the broad investor to access, but two is, we've also proven a unique and new way for ETFs to basically be deployed into digital based assets.

Joseph Lamanna: [00:05:08] How are you guys managing the transactional costs for trading in Bitcoin?

Som Seif: [00:05:14] Actually, it's, it's, it's interesting.

We've built a really strong going into the launch of the Bitcoin fund. We were anticipating that you see a pretty strong demand. And in fact, we were quite impressed and amazed by the size of the demand. The first couple of days, we traded over 700 million in, um, in underlying in the first few days.

Um, we had to make sure that we had done the work. But also that we had to. Get our execution. So we had signed up many different market makers and also execution partners. So there's of course the market makers who trade the ETF itself and make sure that the stock trades well, but to where the the, the counterparties that we were going to execute our trading through.

So directly trading in the. Bitcoin security. And you know, we had to we had to align all it up and we lined up, six substantial number of players, some of the best in the world, the biggest and the best in the world. But the second is that we also did it with with scale. So we could execute, up to 500 million us in a day if we needed to at any point.

And in fact, we could do much more than that on the first day. And you know, that was critical. The second was getting extremely competitive pricing. So we. Put our bidding of pricing against all of our market participants and we take the best pricing effectively. So we ensure the lowest cost of execution.

And that's been a very powerful component of this, I think that there's nobody in the industry that's done what we've done in terms of the size and scale of execution in such a short period of time. And I think that's the most important thing is to have that capability and it goes back to, look, we've been in this business for a number of years.

I launched. Ether capital back in 2018, because we had a deep thesis in this space. And back then you couldn't do, as I said, an ETF, but we launched a corporation. And so we've been custodying and directly involved in the securities for a long time and have got a lot of insight and knowledge of how to basically yeah, let's get it properly.

Joseph Lamanna: [00:07:01] Is there an advantage to buying the ETF versus buying Bitcoin directly?

Som Seif: [00:07:06] Look, I mean, just like any security or any asset, you can always buy it directly or you can buy an exchange traded fund or a mutual fund. And in this case, it's a little bit different though. So first off, if you look at before the Bitcoin ETF launch or the ether ETF launched, the only way you could access Bitcoin or ether was to.

Go and either open up an exchange account. So you know, now most of the exchanges other than in Canada, while simple are unregulated. So that's another question, even in Coinbase and all the other players, you have to go and you work within the unregulated space and that's always a little concerning, but two is then you're either going to custody that there, or you're going to, have your own cold wallet or, or your ledger or whatever it be.

And you're going to put the Bitcoin on that and there's always risk in. The cost of, uh, you know, are you going to remember the password? We've seen all these horror stories of that. So that was the clunkiness of the past. You couldn't buy it in your regular account at RBC or at TD or quest trader?

Simple or whatever it be. Today with the Bitcoin ETF, you can now buy it just like you can in any other account, but also like any security. So you can buy it in your TSA, your RSP, you could buy it in your regular accounts. You can trade it like a stock, but you don't also have to worry about this concern of risk of unregulated exchanges.

You don't have to worry about the risk of you know, losing your password on your ledger. It's just such a simple institutional. The vehicle, and then lastly is execution pricing. You know, one of the problems is, as Coinbase has just gone public and you start to see the profits that these exchanges have been making on the spreads of executing Bitcoin or ether or any of these securities.

And the reality is that, um, For investors they were paying a big spread. They were paying a lot of money with the ETF. The beauty of it is the cost of execution is institutional. So we don't pay those spreads or anything like it even close to it. So it's been a really nice solution and an efficient solution for investors.

Joseph Lamanna: [00:09:00] How well can investors expect the ETF to track the underlying.

Som Seif: [00:09:04] It should track exactly the underlying Bitcoin, unless it's management fee, just like every other ETF. And we've actually been really impressed with the early tracking in the first couple of months. We're coming up on three months of execution and it's just been amazing to see the underlying execution exactly in line during the day and today with the volatility of the underlying.

And you know, th that should be what we've done again, we've proven that the elegance, the ETF structure can work within the context of a digital asset like Bitcoin and ether.

Joseph Lamanna: [00:09:33] So what's your outlook for Bitcoin?

Som Seif: [00:09:36] You know, it's a good question. And you made a comment about, you're intrigued by this, you're trying to learn and you're trying to, um, uh, you figure out how to get involved.

Look, Bitcoin is a really powerful and interesting you know, innovation. A lot of people are confused about it. And, and even people who were involved in it or confused about it today, what Bitcoin is an amazing software platform that has ultimately proven right. That it's undestructible and that there will be because of the coding of it.

Uh, a limited number of Bitcoins ever produced so effectively, its utility is a store of value because just like gold and anything else, it's got a very specific set of characters, characteristics to it. It's not going to be a great value exchanger for payments. So all this concept of, oh, it's a bad payment solution.

It is about payments at a very linear model, but I continue to believe. That you have a known supply function and you're going to have an increasing demand function. And those are really nice metrics for a price approval. So I continue to believe that Bitcoin, over the next number of years will continue to be a very attractive space and we'll see price appreciation.

But again, lots of volatility. Much less volatility than those who've been around the space for the last number of years, because of course, as this thing continues to get greater acceptance the volatility has shown to continuously decline on ether. We have a very different view. Ether has high utility, right?

To me, it's the computing platform of the future. So it's, the next decade of computing power, after mobile will ultimately be a blockchain and Ethereum, and we believe that, ether, uh, the token that ultimately sits and owns a piece of each of the platform. Is one of the most powerful, unique technologies of its time.

It's, it's going to change the way that businesses and society are structured in many ways. And so we have a much more aggressive view on on ethers price appreciation. And, we think that over the next year that we could see ether, crossing over $10,000. And you know, we're excited, but again, lots of volatility, lots of still areas to be on, to be figured out and a lot of things to be determined around scaling and such on either specifically.

But I think the next 10 years of, of this space is going to be a very powerful one.

Joseph Lamanna: [00:11:49] For our audiences perspective. I think it would be nice if you can just touch on how does it work and does it become fairly easy to buy a Bitcoin directly?

Som Seif: [00:11:57] You know, for the individual investor today now because of the ETFs, it's very easy.

Like I said, it's just as easy as trading your S & P 500 ETF or buying RBC shares. It's just as easy. So that's the beauty of it. And that's the innovation that we brought and that will open up. Increased awareness and demand for the assets. I think for execution as an individual or as a institution, it has, it's amazing that the expansion of volume and capability to expand trading in this space.

And so we've seen huge growth in the futures market. We don't trade in futures but for futures, for those who do. And then on top of that, we've seen significant number of brokers and dealers that ultimately now are linked to be able to execute direct in Bitcoin and an ether. So, you know, whereas again, a year or even a year ago, it was very hard.

You'd had a very specific number of specialists. Now you're seeing broad execution capabilities by some of the biggest brokerage firms in the world. And so that's a very powerful thing but you know, we execute all of our transactions through. You know, call it over the counter trends exchanges, around the world.

So these would be institutional grade over the counter exchanges, places like Coinbase and Gemini and places like that. And then we basically will execute those transactions and then we'll settle them in our custody account at you know, our custodian. You know, those are the key elements, but there's lots of different players, but you got to make sure.

You're dealing with institutional grade players. And the one thing that's really unique about digital assets is that they settle instantaneously. So unlike regular securities that they settle on a T plus one or two plus three basis you know, when you buy a stock or a bond in this case, they settled the minute that you buy it.

And. Second later you, you now own it. And so you better have the cash. So it's a very different execution model too. And of course, one of the novel things that we have to do is find a way to make sure that we were, in a liquid daily security that was settling on a T plus one. We actually moved our ETFs to settle on a T plus one basis.

That you are also executing a instantaneous settlement of a security. So these are really interesting and important things, but for most people that, um, isn't normal for, you individuals,

Joseph Lamanna: [00:14:04] How does Bitcoin and Ethereum fit into portfolios and what's a useful position, size or allocation to consider?

Yeah, no, it's a great question. We get that question a lot. And my answer for Bitcoin and ether are different actually. So first and foremost, I do believe that investors broadly should have access to digital assets and, within their portfolios. And, I think it's, long-term bets that you want to make in your portfolios because like other technology or innovations in your portfolio, you always want to have small sizing exposure.

So Bitcoin, I look at it as a, something that. Individuals should have somewhere between a half a percent to one and a half percent of the portfolio max in it. It's the average investor, this is the kind of thing that you want to have as a bet against lots of different variables.

It's got a very unique, long-term kind of upside on a supply and demand fundamentals, but also, w who knows what's going to happen with central bank action and all the inflation fears. I don't know how this is. It's too young to know how it's gonna react inflationary reaction, impacts.

But I do know that. Demand is going up. That's the one thing I know. So that's the first one on ether. I look at it as slightly different. I look at it as really how much would I size into a portfolio on a long-term bet like Amazon back in the early nineties or late nineties. And that's what I see.

It's it's a platform, it's a technology kind of utility and it has an unbelievable upside, but it has lots of variability. It's like a venture bet. So would I put one and a half or two and a half percent of my portfolio into that type of longterm play? Yeah, I probably would, but that's probably a similar what I would do in a single stock sizing in my portfolio.

So I probably cap it like that, having one or half or 2% of my portfolio in a single company, wouldn't bother me if it, lost money or whatever, be the same time. The upside of participation is a very powerful thing. So that's the way I look at it. And I think it's a really interesting thing.

And, but investors should treat them as two very different, even though they. Get coined together as a, pun intended, they're coined together as cryptocurrencies. They are in fact very much different. They are tokens. They are exposures to two very different concepts. They were based on the original blockchain technologies.

But what Bitcoin did was innovated. And what Ethereum did was 10 X it, and I think that they're very different. Long-term bets. One will be very much non-utility supply and demand based. One will be highly utility you know, demand function based on you know, applications and business opportunities.

Of the two Bitcoin and Ethereum, which one are you more excited about longterm?

Som Seif: [00:16:31] You know, I've got a pretty public bed on ether. You know, I've had a long exposure. I, when I first got involved in the space in 2017 you know, my Mo it was an ether that really blew my mind as to its opportunity. And I've been personally invested involved in it for a long time since and gone through the ups and downs of it.

And, participating in both the, the goods and the difficult moments in 2019 and 2020. And then of course what we've seen most recently, but I just think that, when I, what I really focus on is what's happening at the developer level at the core of the infrastructure.

And it's been amazing to watch and my kind of view of the future of what technology and what business will look like. It continues to expand because of what Ethereum is doing. So

Joseph Lamanna: [00:17:17] it's always a pleasure speaking with you. I'd like to take this time to thank you once again for making time for us.

Som Seif: [00:17:23] Stay well, thanks, Joseph. And it's a real pleasure to be here and happy to answer your questions anytime .