After significant delays, spot bitcoin exchange-traded funds (ETFs) have finally arrived. BlackRock’s IBIT is currently the fifth largest ETF by inflows this year, with competing funds not far behind. It remains to be seen if this growth can match the optimistic forecasts made by firms like Standard Chartered Bank and Fidelity for year-end ETF valuations, but it is clear that bitcoin ETFs are now a permanent fixture. The question now is how Wall Street will approach this new method of gaining exposure to bitcoin, and if regular investors will want to get involved.“We believe bitcoin could become one of the most discussed topics on Wall Street in the next decade,” said Mike Willis, CEO and founder of ONEFUND. “You’re at the beginning of the ‘bitcoin era’ on Wall Street.” While hesitant to provide a price prediction, Willis believes that bitcoin could easily reach the market cap of gold.This is an interesting forecast considering ONEFUND’s strategy in introducing its own set of bitcoin ETFs. The independent index fund operation, best known for its $106 million INDEX ETF that mirrors the S&P 500, intends to launch a number of “Cyber Hornet” funds that hold both bitcoin and traditional equities in order to appeal to risk-averse retail investors.Most wealth managers will not advise their clients to allocate more than 1%-3% to crypto, according to Willis. However, even this small recommendation could expose financial advisers to legal risks. “Hardcore bitcoiners might be used to it, but 90% of Wall Street and traditional investors are not accustomed to being down 40% in a given month.”“If I’m down 40% for clients they’re calling me, if I’m down 50% they’re gone, if I’m down 60% or 70% it’s a potential fiduciary liability — a potential lawsuit. Advisers are aware of that,” explained Willis, who co-founded ONEFUND in 2015 after working at UBS, Paine Webber and Smith Barney.The ETF closest to launch, which has been approved by the SEC under the ticker ZZZ, will allocate 75% of its capital to the S&P and 25% to bitcoin futures (with the option to also hold spot bitcoin, Willis stated). The aim is to help mitigate bitcoin’s potential downside risk and notable volatility by investing in “the most widely held index strategy on Wall Street.”Willis predicts that a number of hybrid funds will be launched with strategies that protect the downside volatility of bitcoin, potentially using U.S. Treasuries and/or other less risky asset classes. This will also serve as a way for funds to differentiate themselves, given the crowded competition after 11 spot bitcoin ETFs were approved on the same day.Like many others, Willis anticipates a race to the bottom in terms of management fees — since it’s one of the few ways firms can undercut their competition. Other tactics include promotions, such as Bitwise slashing fees to zero for the first six months or until the fund reaches a certain asset threshold. However, these marketing efforts are only effective for a limited time.A different way for firms to compete is how they handle the underlying bitcoin they purchase with investors’ money — either leveraging it to earn yield for the company or holding it in cold storage. Willis mentioned that some funds may rehypothecate (or loan out) the bitcoins in order to earn a return, which can bring in “hundreds of basis points.”For its part, ONEFUND has no intention of competing on fees and believes it will be able to charge higher rates because it will guarantee in its prospectus that the bitcoins won’t move from cold storage (the firm is in discussions with Caitlin Long’s Custodia Bank for custody services). However, there are other, somewhat intangible ways that firms can distinguish themselves.One firm staying firm on high fees is Grayscale, which is charging 1.5% on its popular GBTC product. Since transitioning to an ETF this year, GBTC has seen notable withdrawals, although Willis expressed surprise that the fund hasn’t experienced more. “It’s loyalty. It’s laziness. And the other side is bitcoiners don’t want to go to BlackRock or Fidelity — they want to keep it in the community,” he added. ONEFUND hopes to tap into that same sense of bitcoiner camaraderie, a sort of non-institutional institution. This is part of the reason why it chose the Cyber Hornet branding, a phrase most closely associated with uber-bitcoiner Michael Saylor, who is not affiliated with the product.The firm, which made headlines when it allowed its INDEX fund shareholders to vote by proxy, has also secured a number of “kickass” tickers for its ETFs, which will all have different allocations between bitcoin and the S&P500. Triple-letter tickers, like “the Qs,” standing for Nasdaq’s QQQ, are valuable real estate, according to Willis, mentioning the “triple Z” ticker on his firm’s flagship bitcoin ETF.A number of recently launched ETFs carry meme-worthy names, including Valkyrie’s BRRR (referring to the pandemic era “money printer go BRR” meme) and VanEck’s HODL (referencing how bitcoiners buy, hold and rarely sell).“We think the branding is going to stand for doing things the ‘right way,’ the non-institutional choice that represents the community,” Willis said. “We’re not owned by BlackRock, we’re not owned by the big institutions.”Still, to some extent, Willis’ strategy revolves around Wall Street entering the picture. Although it may not be the most conventional way to get people using bitcoin, it is the simplest and safest route to mass onboarding into the bitcoin economy via ETFs, possibly fulfilling Cory Klippsten’s vision of creating “10 million bitcoiners,” Willis stated. The first turn of the supposed flywheel occurred last year, when BlackRock announced its plan to launch a bitcoin ETF, which in a way encouraged other Wall Street firms to also get involved. Now that ETFs are actually live, more and more capital will flow into bitcoin over the next decade — beginning with model portfolios, retirement accounts, pension plans, and ultimately leading to it becoming a “mainstream asset class,” according to Willis.”Bitcoin has been thriving for 15 years, but on Wall Street it has been non-existent,” he remarked. “This changes everything.”
