Interview: Defidocode

Translation: Wu Says Blockchain

Defidocode's interview invited James Seyffart, an ETF research analyst at Bloomberg Intelligence, focusing on the rise of cryptocurrency ETFs, particularly innovative ETF products in the Bitcoin and Ethereum space, and how retail and institutional investors are responding to market panic and changes in capital flows. It pointed out that current capital flows are mainly into stock ETFs, while funds in the bond market are flowing out, indicating a structural rebalancing in the market. Additionally, it delved into how ETF products can serve as risk-adjusted tools and meet the needs of different investors, including the differences between long-term investors and short-term traders. James also discussed the performance differences of stocks from companies like MicroStrategy and Coinbase, suggesting that Bitcoin mining companies and gold mining companies share similarities in volatility, and emphasized that the intersection of AI and cryptocurrency could bring new opportunities to the market.

Opening Introduction of Guest: James Seyffart, ETF Research Analyst at Bloomberg

Alex Tapscott: Today we are very fortunate to have James Seyffart with us to tell us what is happening in the market, the changes in capital flows, how investors are reacting, and how retail investors are responding to these changes. James Seyffart is an ETF research analyst in Bloomberg's industry research department, recognized globally in 2024 for his expertise in cryptocurrency ETFs. However, James does not only focus on cryptocurrencies; he is also very knowledgeable about market dynamics and can provide us with insights on the broader market. If time permits, we can also discuss the capital flows of crypto asset ETFs and the discussions around new products in the next six to nine months, as well as changes in the U.S. regarding cryptocurrencies, particularly the relevant progress from the SEC. But first, let’s welcome James.

The ETF Door is Wide Open: The SEC's Stance on ETF Staking

Andrew Yang: So let's move on to the topic of cryptocurrencies. It feels like the last time we talked was before Trump was elected, and now the floodgates for cryptocurrency ETFs have completely opened. I can't even count how many new cryptocurrency ETFs have been launched; it's crazy. The range of asset classes covered includes everything from leveraged Bitcoin ETFs to ETFs for L1 projects that haven't officially launched yet, and even products like the "Memecoin ETF."

Alex Tapscott: It's like the door is wide open, and they can now experiment freely. It feels basically like "throwing spaghetti at the wall" to see which asset classes can succeed. But I noticed some applications for Solana spot ETFs have removed the staking feature. Is that correct? So I'm a bit curious, if even one ETF is allowed to stake assets, how open can the SEC be right now? So, what exactly happened? I'm just a bit curious and want to understand.

James Seyffart: I'll start with what Andrew said and then answer your question. Yes, indeed, the door for ETFs opened when Trump was elected. Everyone started applying for various ETFs, and now we have many upcoming dates when these ETFs might launch. In fact, we have already seen a 2x leveraged XRP ETF launched in the U.S., even though we don't even have a futures market. This is a complete change, right? So, the SEC has actually returned to their traditional way of handling these matters. Yes, it is indeed an open signal, but issues like staking or physical creation and redemption, I think they belong to the same category of thinking. I feel there are still many unresolved issues regarding these matters. For example, specific rule changes are indeed needed to allow these operations. So, for the Solana spot ETF, it basically needs to be listed similarly to Bitcoin or Ethereum spot ETFs, with Ethereum being a more appropriate example because it involves staking. So I think what you're saying here is that they will eventually approve spot products and then handle staking issues separately, and in the future, they will address any assets involving staking accordingly. That’s my view on this issue. So, I don't think this means "we will never allow this; we must remove the staking feature." I think it's more like, "let's launch the spot products first, and we'll deal with the staking language later." That's my basic assumption. But I agree with your view; I think in many cases, people are just casually applying, testing the SEC's parameters to see what they allow and what they don't.

But you will see that if there is an ETF that is very successful, like MicroStrategy's ETF or Nvidia's ETF, with billions or hundreds of billions inside, if as an issuer you can charge over 1% in fees, that would be fantastic. You know, I would rather throw 50 products at the wall if one can attract $10 billion in funds and I can charge over 1% in fees from it; that would be worth it. So, that’s the direction for future development. One question I look forward to seeing is how the SEC will handle physical creation and redemption, how they will deal with staking issues, and where they will ultimately draw the lines; that is the key.

The Advantages and Limitations of ETFs: Why Staking 100% of Assets May Be More Attractive Than ETFs?

Alex Tapscott: Regarding the topic of staking, I don't know if you saw the news yesterday about Janover being taken over by a group of former Kraken executives, including Marco Santori, who raised $42 million from several venture capital firms. Their proposal is basically to become the MicroStrategy for all other assets. I don't know if this news appeared in your Twitter feed. However, let me give you a brief overview of what this is about.

I think they currently believe they can stake 100% of the assets, and any staking returns can compound, which is better than an ETF. In their marketing materials, they explicitly state, "This is better than an ETF," which is interesting because I always thought MicroStrategy considered itself an operating company, having a financial strategy like Bitcoin through its balance sheet. And now they have made this argument clearer, possibly because the regulatory environment has changed. However, I wonder if they are launching this strategy in anticipation that ETFs may not allow staking or may not fully support staking for the time being. A corporate vehicle that can stake 100% and compound may actually be a better way to accumulate assets and could be a better way for investors to enter this space. I don't know what you think about this.

James Seyffart: I actually haven't seen that, but I have a few thoughts. First, you already have Ethereum ETF staking services in Canada, and we will follow suit in the U.S. The downside is, as you mentioned, you may not be able to stake 100% of the assets. There are now many service providers looking for ways to maximize the proportion of assets you can stake to increase yields. There are also some third-party companies, which should be considered service providers rather than software companies, that are trying to do this. I see some ETF issuers acquiring different staking service providers, trying to enter the staking space. I think this will become an important part of ETF competition, such as how much staking yield you can pass on. Do you choose not to charge fees and just take a percentage from the yields you earn? There are many ways to do this and make the market profitable. We have already seen similar situations in some European markets, where being able to capture 100% of staking yields is very advantageous for companies.

But the benefits of ETFs are not just about acquiring these assets and earning yields; the real benefit lies in the creation and redemption mechanism I mentioned earlier, just like high-yield municipal bond ETFs. The advantage is that ETFs will follow the trading situation of their underlying assets, right? For example, you will see MicroStrategy on certain days, even if Bitcoin drops, its stock price may rise, and vice versa. Its trading does not completely mirror the underlying assets held on its balance sheet, as you mentioned. Therefore, companies launching such products, like Real Estate Investment Trusts (REITs), while their trading is related to the real estate market, do not completely track the performance of the real estate market; they are influenced by other stock market risks and volatility. The creation and redemption process of ETFs always forces them to align with the market price of the underlying assets.

So, like this company, they will definitely have their advantages and may be able to leverage like MicroStrategy. But the real benefit of ETFs is that you can always exchange the underlying assets for ETF shares and vice versa; this swap mechanism ensures they always align with the underlying assets.

In the case of the product you mentioned, if a collapse occurs, the likelihood that the value of the underlying assets and its trading price are close is very low. Historically, we have many examples showing that it does not always work that way. So, I am sure there will be specific times and use cases where many people may prefer this method. But that does not mean this method will ultimately be better than how ETFs operate.

Premiums and Discounts in the Crypto Market: The Current State and Future Trends of Solana

Alex Tapscott: Speaking of premiums and discounts, I don't know if you've seen Grayscale's product lineup. For example, Gsolve, if you actually look at the chart of net asset value (NAV) versus unit price, it's insane. Yes, the chart is really crazy. At one point, its trading price was 6700% of NAV, so at that time, NAV was $14, and its trading price was around $90. I looked at it again yesterday. This chart looks like a crazy Bart Simpson hairstyle chart. But in fact, it is the P/NAV (price to net asset value ratio) that is guiding this trend, right? Now we are at a point that is roughly close to NAV, but still, in the ordinary ETF space, any fund trading at a 15% premium would be considered an extremely high premium, but it’s different in the cryptocurrency world. So this chart tells me that a Solana ETF is just a matter of time, not "if it will happen," and they are likely to arrive soon. Because remember last year, or about a year ago, GBTC was trading at a 50% discount, and then its discount gradually narrowed, eventually reaching about a 5% discount, 4% discount. That basically represents the time value between us and approval, and it ultimately got approved and then merged, right? So, what this chart tells me is that it’s like an impending trend; what do you think about this chart?

Andrew Yang: Sorry to interrupt. Isn't it also because the enthusiasm for Solana has declined over the past two or three months? Or is this difference entirely due to people shorting it and buying spot ETFs?

Alex Tapscott: No, I definitely think it's a combination of all three. I believe there are three factors. First, interest in Solana has certainly fluctuated; second, there was indeed a huge event last fall when a large private placement turned into freely tradable assets, allowing investors to exit at a premium. But for me, the most important factor is the fluctuations in the ETF's premium and discount. So, James, what do you think?

James Seyffart: I think, looking back at GBTC, the question is, how likely is it that this ETF will be approved? Even though Eric Balchunas and I were very optimistic in the months leading up to the approval and set the probability of approval very high, the market just didn't believe it. I know many very smart people who genuinely believe the SEC will not approve a Bitcoin ETF until a week before the approval, when we thought the probability of approval exceeded 80%. So that's the key point. This thing will eventually convert into an ETF, and the premium will disappear; that’s what’s most critical. Secondly, as Andrew mentioned, Solana has indeed lost a lot of attention in the past. Ultimately, the question is whether this product will become an ETF, and market participants have recognized this and started selling off due to its high premium.

Bitcoin and the "Mag 7" Tech Stocks: How Should the Market Interpret This?

Andrew Yang: I also want to ask a question. I know you mentioned in the podcast that you were clearly more focused on macro issues over the past week, but I’m a bit curious. There was a topic over the weekend about how Bitcoin has been performing steadily. We also mentioned gold, which has performed relatively well. I’m curious about the institutional market's view on Bitcoin in the context of this potential global trade restructuring. Logically, this situation should be favorable for Bitcoin. I just want to know if institutional investors agree with this view, or if they are just more focused on ensuring their survival in the coming weeks.

James Seyffart: Yes, in fact, I’ve been paying attention to this myself because I’m shocked by the actual decoupling of risk. Basically, at least over the past few years, Bitcoin has had a very high correlation with NASDAQ. That is to say, when risk assets fall, Bitcoin also falls; when risk assets rise, Bitcoin usually rises even more, regardless of the direction. However, in recent weeks, this situation has changed, especially last week when Bitcoin actually rose against the trend while all other assets, including gold, were falling. This phenomenon is very strange, and many people are analyzing why this is happening. Is it because GameStop is buying, or Saylor is buying? Who knows? It turns out that this is not the reason.

James Seyffart: However, that brief period when Bitcoin outperformed other assets faded on Sunday night as Bitcoin began to drop below $80,000. As of the recording, Bitcoin is still below $80,000. What I want to say is that although Bitcoin has dropped significantly, if you look at it since risk assets started to decline, Bitcoin's drop is roughly in line with NASDAQ, both down about 20%. As for the "Magnificent Seven" tech stocks, they have dropped about 26%, which was the case before today. Now they have all seen slight increases, but Bitcoin's trading generally still aligns with these assets. Even so, Bitcoin's volatility is much higher than these assets, but if someone had told me a month and a half ago what would happen in the next few days, I would have thought Bitcoin would drop to $60,000 or even lower. Relatively speaking, my view is that Bitcoin has held up quite well compared to its usual performance, after all, it typically trades like a leveraged risk asset, influenced by liquidity and other factors. On the other hand, clearly, Bitcoin has been dropping for a while, and almost all cryptocurrencies are the same, but its trading trend is contrary to all fundamental trends, right?

Since all of this started happening, I’ve attended several meetings, communicated with industry insiders, and talked with ETF issuers like you and many institutions looking to enter this space, and they are more optimistic about it than anyone I’ve seen before. Everyone is looking forward to many things happening. Basically, from the Biden administration, Gary Gensler, the SEC, to all the constraints, these resistances are gradually turning into favorable factors, or at least most of the resistance has disappeared, yet prices are still falling. So, this is a strange contradiction: risk assets are all falling, cryptocurrencies are also falling, but fundamentally, if you want to call it fundamentals or the changing backdrop, it should actually be favorable. You would expect the situation to improve.

One of my views is that Bitcoin has preemptively aligned with these changes since Trump was elected because everyone was particularly optimistic at that time. But when you talk to institutions, almost everyone is very optimistic about this situation. Frankly, a major issue facing many investment advisors, especially in the U.S. and globally, who are preparing to enter this space is: will advisors recommend these assets? Will they put these products into client accounts? In the past, they couldn’t do that, but now the shift in these platforms and large institutions is beginning to accelerate, allowing them to offer products like Bitcoin to clients. So, there are generally three different levels. The first situation is that clients cannot access these assets at all. The second situation is that if clients request to purchase or meet certain other criteria, they can buy for them. The last situation is that advisors can recommend these assets to specific clients, and many large institutions managing millions of dollars in assets are nearing the point where they can recommend these products to clients, if not in reality, at least at a scale of hundreds of billions of dollars.

Alex Tapscott: I think the trend you describe is also leading to Bitcoin occupying a larger dominant position among other crypto assets. Frankly, advisors can easily call their clients and recommend Bitcoin to them. They can say, "Look, this is digital gold, Larry Fink and many other smart people are recommending it; it is a store of value. It is non-correlated. As part of the portfolio, our model portfolio recommends it, so we think allocating Bitcoin is reasonable, right?" This actually doesn’t require much justification. In contrast, for assets like Ethereum or Solana, why hold these? Is it because they are platforms? Although there can be reasons to do so, I actually think they do have attractive investment cases, but it feels like there’s justification for both.

It is a platform that supports decentralized applications and peer-to-peer digital asset value transfer. What does that mean? I’m not quite sure. So I can’t help but feel that Bitcoin is currently one of the biggest beneficiaries of the policy shift, especially as regulatory resistance has turned into a driving force. Yes, although it has declined since Trump took office and has basically moved in line with the "Mag 7" over the past two months, Bitcoin has still risen since Trump took office. And this does not hold true for stock indices or most other crypto assets. Therefore, I feel that there is indeed a phenomenon of Bitcoin exceptionalism in the market, even though everything is relative—despite still declining, it has indeed dropped significantly, but if you are an ordinary retail investor, you would say, "Hey, this position has only dropped 25%-30%, not 50%."

For many, this may be a cold platform, but I think this could be a result of this transformation. Then, regarding the stage we are currently in, well, I feel that if we can smoothly navigate the current tariff trade dilemma, the second half of the year will be extremely bullish for cryptocurrencies, right? For example, Circle is preparing for an IPO, and there are a dozen other similar companies waiting in line. These companies will enter this queue.

Bitcoin's "Digital Gold" Status: How Do Institutional Investors View Its Future?

Alex Tapscott: These companies now perfectly meet the requirements. Many companies originally hoped to go public in the last cycle but missed the opportunity because the SEC under the Biden administration was not particularly supportive. Now they are all going public. We will see an expanding field of public issuers with audited finances and regular reporting, allowing investors to gain deeper insights into these companies, and more fund managers will hold these stocks, with more fund managers and advisors gaining exposure to Bitcoin through ETFs. We may see a wave of cryptocurrency ETF approvals, although this will be a "survival of the fittest" competitive game, with some succeeding and some not. But this means that these assets will see more capital inflows, especially since there is no longer the pressure from GBTC or ETHE like before. Last time we had to deal with a lot of redemptions, but now everything is net new creations. Therefore, I believe these trends are preparing for the second half of 2025, by which time everything will become very bullish, especially now that even the meme coin frenzy has subsided, so there is nothing negative or scary weighing on cryptocurrencies. We are like we are already prepared. But I think this is still a "tail wagging the dog" situation: in a world where risk assets are indiscriminately sold and investors are fearful, cryptocurrencies cannot succeed. I really can't see how both can develop in parallel. Perhaps Bitcoin will rise slightly due to decoupling, but I remain skeptical about this. I think we still need to get through the current moment if we want to see these realizations in the second half of the year.

James Seyffart: Yes, I’ll leave it at that. In fact, the situation is much worse than you described. As for Bitcoin, honestly, before the election, my view was that no matter what happened, Bitcoin would be fine. It doesn’t try to replace some of the things that the SEC has been pursuing like decentralized finance (DeFi), so it won’t be automatically classified as a security. Bitcoin is not a security, and even Ethereum has not been classified as a security by the Biden administration's SEC to some extent. I agree with your view; I think the promotion of Ethereum is far more complex than that of Bitcoin. If you ask me, I even said on our own podcast that I once thought Trump's victory would be more favorable for these other categories of assets, like Ethereum and Solana, because many of the things they are doing and trying to do are good. It’s just that under the pressure from regulatory bodies like the SEC, CFTC, and OCC, many things cannot proceed, and these agencies have been opposing these innovations.

Bitcoin serves as a digital store of value and a means of digital value transfer, and in this regard, it has already completed its role, facing relatively little opposition most of the time, right? However, as you mentioned, the advantage of Bitcoin lies in its much higher acceptance. The narrative around Bitcoin is very easy to understand: it is digital gold, a digital store of value. I see it as an option for digital value storage; although it hasn't fully realized this yet, it remains a risk asset. Is it possible for it to do so in the future? Some say no, but I believe that, without a doubt, the likelihood of this happening has increased from a price perspective. Whether it actually happens is another discussion, but there is no doubt that the market has made a decision, and the probability of it happening has risen. That’s my view. Therefore, I think all these factors, along with different platforms starting to accept and promote Bitcoin, will slow down the promotion of these other assets.

We were very bearish on the amount of assets that Ethereum ETFs could attract compared to the loyal supporters of cryptocurrencies and Ethereum. Compared to the maximalists of Bitcoin, they said Ethereum ETFs would get almost nothing, but we believe it will attract inflows at a discount relative to Bitcoin's market cap. In fact, we even underestimated this ratio because the launch of Ethereum ETFs in the U.S. faced net outflows due to the EPE pressure you mentioned earlier, until Trump was elected. Earlier this year, they shifted from $60 billion in outflows to $3.2 billion in inflows, but since then, some funds have flowed out again, especially at the end of January and early February. So, the promotion of Ethereum is indeed more challenging. If you listen to different opinions, they would say that investors holding "Magnificent Seven" stocks should have some exposure to Ethereum, Solana, or other altcoins that have submitted ETF applications; that would be the actual recommendation. But in reality, promoting this is much more complex than promoting Bitcoin, as you mentioned earlier, Bitcoin's dominance is gradually increasing.

The Performance Difference Between Bitcoin and Cryptocurrency Company Stocks: Why Do Coinbase and MicroStrategy Perform Better?

Andrew Yang: I'm also curious about your thoughts on another matter, which is the difference between Coinbase and some other cryptocurrency stocks compared to Bitcoin. Like Bitcoin and MicroStrategy, they have clearly outperformed some other cryptocurrency-related stocks and assets over the past three to six months. Their performance has far exceeded that of other cryptocurrency-related sectors, while those cryptocurrency-related stocks seem to have had little reaction. I wonder how you view this difference?

James Seyffart: I think this goes back to the issue of risk associated with other crypto assets that I mentioned earlier. MicroStrategy is considered an independent entity; it is a leveraged play on Bitcoin. Coinbase, on the other hand, is like an index fund for the cryptocurrency space, at least in some respects. But overall, Coinbase represents an investment in a broader crypto ecosystem, while MicroStrategy is entirely reliant on Bitcoin.

But another issue is that, although I say Bitcoin is a risk asset, the situation changes when you have a company doing many other things and trading on the stock market. It’s similar to a Real Estate Investment Trust (REIT), or other assets I mentioned earlier; the value of stocks does not always perfectly reflect the underlying value. The market is not completely efficient, and its value does not solely depend on the discounted future cash flows; rather, it fluctuates with the entire risk market. In this case, I think Coinbase has been affected by this, and its stock price has been dragged down; time will prove this. But in terms of optimism, the current level of optimism towards them is unprecedented. They have won case after case in court, but that doesn’t mean they will necessarily make more money if the entire cryptocurrency ecosystem continues to lose value.

Alex Tapscott: Yes, that's right. In fact, this is why I am most looking forward to the IPO boom, hoping it will happen because it will add more diversity to the investment landscape for cryptocurrency companies. Right now, the market mainly has Coinbase, which is both the largest exchange and the creator of Base; they have a range of assets and some cryptocurrencies on their books, but most importantly, they are a brokerage. Then there’s MicroStrategy, which, as you said, is a leveraged play on Bitcoin. Then there’s the entire mining sector. In fact, there are several issuers that are mining companies, but they are now more traded as AI data center stocks rather than as cryptocurrency companies, which is one reason they are not performing as well as Coinbase, Bitcoin, Ethereum, etc. Because the decline in cryptocurrencies, combined with the DeepSeek news, completely disrupted the entire investment logic, making it very challenging to invest in these companies because you don’t know which companies you can still invest in, right? Therefore, having more options in the market is very important to me, as it will help broaden the investor base because there will be more real companies to invest in. I believe this will contribute to the healthy development of the market.

James Seyffart: I completely agree with what you said. I would also like to add that mining companies, especially gold mining companies, particularly small gold mining companies, have similarities with Bitcoin mining companies. Although these Bitcoin mining companies are not small, if you look at their stock trading in the U.S. market, they are still relatively small companies. These companies operate similarly, depending on their fixed costs; if they can scale up, they can achieve greater profits. One of the most volatile products in the world is the triple-leveraged small gold mining company ETF. It contains many small mining companies. The reason you see extreme volatility in these companies is that their profits are highly dependent on fluctuations in gold prices. If their fixed costs are a certain percentage, when gold prices rise to a certain level, exceeding their costs, their variable costs will also rise, but they can still be profitable, and then as prices continue to rise, it becomes leveraged profits. The same situation applies to Bitcoin mining companies.

My personal view is that many of these companies are not the best in the world; they are entirely reliant on one factor. If your energy costs rise, for example, the risk becomes significant. Therefore, I think this is another reason many people understand this; when they see these companies, they find that these companies are highly capital-dependent and involve many other issues. So, I generally believe that they are starting to diversify and move towards a more general direction, like AI computing, rather than just Bitcoin, which is a good thing. I think the most successful companies will be a combination of both; for example, if they don’t use it for AI computing, they can use that energy for Bitcoin mining, and so on. But obviously, I’m not a mining analyst, but for those trying to understand why these companies are so volatile, they are essentially leveraged investments. Once Bitcoin prices exceed a certain point, and the company’s mining costs are established, for them, it’s like leveraged upside exposure.

Alex Tapscott: Exactly, I believe that AI and cryptocurrency are separate yet related technologies. There is some overlap between them. You need computing power to secure these blockchains, at least Bitcoin, and at the same time, you need computing power to handle all the AI-related work. So, it’s really interesting to see how they develop together.

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