Interview: Defidocode

Translation: Wu Shuo Blockchain

Defidocode invited James Seyffart, an ETF research analyst at Bloomberg Intelligence, to discuss the rise of cryptocurrency ETFs, particularly innovative ETF products in Bitcoin and Ethereum, and how retail investors and institutions are responding to market panic and shifts in capital flows. It also pointed out that current capital flows are mainly into stock ETFs, while bond markets are experiencing outflows, indicating a structural reallocation in the market. Additionally, it explored how ETF products 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 between companies like MicroStrategy and Coinbase, noting that Bitcoin mining companies and gold mining companies have similar volatility and emphasizing that the intersection of AI and cryptocurrency could bring new opportunities to the market.

Introduction of the guest: James Seyffart, ETF Research Analyst at Bloomberg

Alex Tapscott: Today we are very fortunate to have James Safeart 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 Safeart is an ETF research analyst at Bloomberg's industry research department, who gained global recognition in 2024 for his expertise in the cryptocurrency ETF sector. However, James is not only focused on cryptocurrency; he is also very familiar with market dynamics and can provide insights into the broader market. If time permits, we can also discuss the capital flows of crypto asset ETFs, as well as discussions on new products in the next six to nine months and developments in cryptocurrency in the US, especially the progress of the SEC. However, first, let's welcome James.

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

Andrew Yang: So we move on to the topic of cryptocurrency. It felt like the last time we talked was before Trump was elected, and now the flood of cryptocurrency ETFs has completely opened up, and I can't count how many new cryptocurrency ETFs have been launched, it's really crazy. From the range of asset classes covered, including leveraged Bitcoin ETFs, ETFs for L1 projects that haven't been officially launched yet, and even products like "Memecoin ETF".

Alex Tapscott: It's like the door is fully open, and they can now experiment freely. This makes me feel like "throwing spaghetti against the wall", trying to apply for all possible asset classes, conducting experiments, and seeing which ones will succeed. But I noticed some applications for Solana spot ETFs, where they 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? So what's actually going on? I'm just a bit curious and want to know about it.

James Seyffart: I'll start with what Andrew said, then answer your question. Yes, indeed, when Trump was elected, the door for ETFs was already opened. Everyone started applying for various ETFs, and now we have many dates coming up, and these ETFs may start launching. In fact, we have already seen a 2x leveraged XRP ETF launched in the United States, even though we don't even have a futures market. This is a complete change, right? So, the SEC has returned to their traditional way of handling such matters. Yes, it's a signal of openness, but issues like staking or physical creation and redemption fall into the same category of thinking. I think there are still many things to be resolved. For example, specific rule changes are needed to allow these operations. So, for the Solana spot ETF, it's basically listed in the same way as Bitcoin or Ethereum spot ETFs, with Ethereum being a more appropriate example, as it involves staking. So, I think what you're saying is that they will eventually approve the spot product and then handle the staking issue separately, making corresponding adjustments for any assets involving staking in the future. This is my view on this issue. I don't think it means "we will never allow this, and we must remove the staking function," I think it's more like "we'll launch the spot product first, and we'll deal with the staking language later." This is my basic assumption. But I agree with your view, I think in many cases, people are just applying randomly, testing the SEC's parameters, and seeing what they actually allow and what they don't allow.

But you will see that if an ETF is very successful, like MicroStrategy's ETF or Nvidia's ETF, with billions or hundreds of billions of dollars, if as an issuer you can charge more than 1% in fees, that would be great. You know, I'd rather throw 50 products against the wall, if one can attract $10 billion in funds and I can charge more than 1% in fees, it's worth it. So, this is the direction of the future. One of the questions I'm looking forward to seeing is how the SEC handles physical creation and redemption, how they handle staking issues, and where they ultimately draw the boundaries. That is the key.

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've seen the news about Janover being taken over by a group of former Kraken executives, including Marco Santori, who raised $42 million from several venture capital firms. Basically, their proposal is to become the MicroStrategy of all other assets. I don't know if this news appeared on your Twitter feed. Anyway, I'll briefly explain what's going on.

I think they are basically believing that they can stake 100% of the assets, and any staking earnings can compound, which is better than ETFs. In their marketing materials, they clearly state "this is better than ETFs," which is interesting, because I have always thought that MicroStrategy always positions itself as an operating company, owning a fiscal strategy similar to Bitcoin through its balance sheet. Now they are making this argument more clearly, which may be because the regulatory environment is different now. However, I'm wondering whether they launched this strategy in anticipation of ETFs possibly not allowing staking or temporarily not fully supporting staking? A corporate vehicle that can stake 100% and compound, might actually be a better way to aggregate assets, and a better way for investors to enter this field. I don't know what your opinion is on this.

James Seyffart: I actually haven't seen this, but I have a few thoughts. First, you already have Ethereum ETF staking services in Canada, and we will follow in the US. The downside is, as you said, it may not be possible to stake 100% of the assets. There are many service providers looking for ways to maximize the proportion of assets you can stake, thereby increasing returns. Some third-party companies, which should be service providers rather than software companies, are trying to do this kind of thing. I have seen 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 a fee, but instead take a percentage from the returns you get? There are many ways to do this and make the market profitable. We have seen similar situations in European markets, where it is very advantageous for companies to obtain 100% of the staking yields.

But the benefit of ETFs is not just acquiring these assets and earning returns. The real benefit, as I mentioned earlier, is the creation and redemption mechanism, like high-yield municipal bond ETFs. The benefit is that the ETF follows the trading of its underlying assets, right? For example, you will see that MicroStrategy sometimes rises even when Bitcoin falls, and vice versa. Its trading does not completely mirror the underlying assets on its balance sheet, as you mentioned. Therefore, the companies that launch such products, like real estate investment trusts (REITs), although related to the real estate market, do not completely track the performance of the real estate market. They are affected by other stock market risks and fluctuations. And the creation and redemption process of ETFs always forces it to align with the market price of the underlying assets.

So, this company definitely has its advantages, maybe able to use 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 exchange mechanism ensures that they remain consistent with the underlying assets.

As you said, if this product crashes, the likelihood of the underlying assets' value and its trading price being close is very small. Historically, we have many examples showing that it doesn't always happen. So, I am sure there will be specific times and usage scenarios where many people will be willing to choose this way. But it doesn't mean that this way will ultimately be better than the way ETFs operate.

Premiums and Discounts in the Crypto Market: The Current Situation and Future Prospects of Solana

Alex Tapscott: Speaking of premiums and discounts, I don't know if you've seen their website, Grayscale's product series. For example, Gsolve, if you look at the chart of net asset value (NAV) and unit price, it's crazy. 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. Yesterday I checked again. This chart looks like a crazy Bart Simpson hairdo. But actually, it's the P/NAV (price-to-net asset value ratio) that's driving this trend, right? Now we are at a point where it's roughly close to NAV, but still, in the regular ETF world, any fund trading at a 15% premium is considered a very high premium, but in the cryptocurrency world, it's different. So this chart tells me that the Solana ETF is just a matter of time, not "whether it will happen," and they are likely to come soon. Because remember last year, or about a year ago, GBTC was trading at a 50% discount, and then the discount gradually narrowed down, eventually reaching about a 5% discount, 4% discount. That basically was the time value between us and approval, and it eventually got approved, then merged, right? So this chart tells me that it's a coming trend, what do you think of this chart?

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

Alex Tapscott: No, I think it's definitely a combination of three factors. First, the interest in Solana definitely fluctuates; second, there was a huge event last autumn when a large private placement became tradable, and investors were able to exit at a premium. But for me, the most important factor is the changes in the premium and discount of ETFs. So, James, what do you think?

James Seyffart: I think, looking back at GBTC, the question is, how big is the chance that this ETF will be approved? Although Eric Balchunas and I were very optimistic a few months before the approval, setting the probability of approval very high, the market just didn't believe it. I know many very smart people who genuinely believed that the SEC would not approve the Bitcoin ETF until the week before the approval, when we thought the probability of approval exceeded 80%. So, the key point is that this thing will eventually be converted into an ETF, and the premium will disappear, which is the most important thing. Secondly, as Andrew said, Solana has indeed lost a lot of attention in the past. Ultimately, the question is, this product will eventually become an ETF, and market participants have identified this, and because of its high premium, they have started selling.

Bitcoin and the "Mag 7" Tech Stocks Move in Sync, How Should the Market Interpret This?

Andrew Yang: I also want to ask you another question, I know you mentioned it in the podcast, you've obviously been focusing on macroeconomic issues this week, but I'm curious, during the weekend, there was a topic about how Bitcoin performed so steadily. We also mentioned gold, which has also performed relatively well. I'm curious, in this context of potential global trade restructuring, what is the institutional market's view on Bitcoin? Logically, this situation should be beneficial for Bitcoin. I just wonder if institutional investors also agree with this view, or are they just focusing on ensuring their survival in the next few weeks?

James Seyffart: Yes, in fact, I myself have been paying attention to it, because I was shocked by the actual disconnection of risk. Basically, at least over the past few years, the correlation between Bitcoin and NASDAQ has been very high. That is, when risk assets fall, Bitcoin also falls; when risk assets rise, Bitcoin usually rises more, regardless of the direction. However, this has changed in recent weeks, especially last week, when Bitcoin actually rose despite all other assets, including gold, falling. This phenomenon is very strange, and many people are analyzing why this happened. Was it because GameStop was buying, or Saylor was buying, who knows? It turned out that it wasn't the reason.

James Seyffart: However, that brief period when Bitcoin outperformed other assets disappeared by Sunday evening, and Bitcoin began to fall below $80,000. At the time of recording, Bitcoin is still below $80,000. What I'm saying is that although Bitcoin fell very hard, if you look at the drop since risk assets began to fall, Bitcoin has dropped by about 20%, similar to NASDAQ. As for the "Magnificent Seven," they have dropped by about 26%, and this was the case before today. Now they have seen slight increases, but Bitcoin's trading is still consistent with these assets. Although, Bitcoin's volatility is much higher than these assets, 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 performed quite well compared to usual, considering it usually trades like a leveraged risk asset, influenced by liquidity factors. On the other hand, obviously, Bitcoin has been falling for a while, as have almost all cryptocurrencies, but its trading movement is opposite to all fundamental trends, right?

Since everything started happening, I have attended several meetings, exchanged with industry professionals, and communicated with ETF issuers and many institutions wanting to enter this field. They are more optimistic about this than anyone I have seen before. Everyone is expecting a lot to happen. Basically, from the Biden administration, Gary Gensler, the SEC, to all the constraints, these obstacles have gradually turned into favorable factors, or at least most of the obstacles have disappeared, yet prices are still falling. So, this is a strange contradiction: risk assets are all falling, and so is cryptocurrency, but fundamentally, if you call it fundamentals or changing background, it should actually be favorable. You would expect the situation to improve.

My view is that Bitcoin anticipated these changes after Trump's election, because everyone was especially optimistic then. But when you talk to institutions, almost everyone is very excited about this situation. Honestly, many investment advisors preparing to enter this field, especially in the US and globally, face a major issue: will advisors recommend these assets? Will they put these products into client accounts? They couldn't do this before, but now these platforms and these large institutions are accelerating their transformation, allowing them to offer Bitcoin and other products to clients. So, there are typically three different levels. The first case is that clients can't access these assets under any circumstances. The second case is that if clients request to purchase or meet other certain criteria, they can be purchased for them. Finally, advisors can recommend these assets to specific clients, many large institutions managing millions of dollars in assets are approaching the point where they can recommend these products to clients, if not in reality, at least in the scale of hundreds of billions of dollars.

Alex Tapscott: I think the trend you described is also leading Bitcoin to have a larger dominant position among other cryptocurrencies. Frankly, advisors can easily call their clients and recommend Bitcoin. They can say, look, this is digital gold, Larry Fink and many other smart people recommend it, it's a store of value. It's uncorrelated. As part of the portfolio, our model portfolio recommends it, so we think allocating to Bitcoin is reasonable, right? This doesn't really require much reasoning. In contrast, why hold Ethereum or Solana? Because they are platforms. Although there are reasons to do so, I actually think they do have attractive investment cases, but it feels like both sides have their merits.

It's a platform that supports decentralized applications and peer-to-peer transfer of digital asset value. What does that mean? I'm not sure. So I can't help but feel that Bitcoin is one of the biggest beneficiaries of the policy changes, especially after the resistance from regulation has turned into a push. Yes, although it has fallen since Trump took office, and in the past two months, it has basically moved in line with the "Mag 7", but since Trump took office, Bitcoin has still risen. This does not apply to stock indices, nor to other major cryptocurrencies. Therefore, I think there is indeed some Bitcoin exceptionalism in the market, although everything is relative—despite still falling, it has fallen quite severely, but if you are a retail investor, you might say, "Hey, the decline in this position is only 25%-30%, not 50%."

For many people, this may be a cold platform, but I think this may be a result of this change. Then, regarding our current stage, I think if we can smoothly overcome the current tariff trade dilemma, the second half of 2025 will be extremely bullish for cryptocurrencies, right? For example, Circle is preparing for an IPO, and there are dozens of 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 are now perfectly meeting the requirements, many companies that wanted to go public in the previous cycle 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 public offering investor field, with audited financials and regular reporting, investors can gain insight into these companies, more fund managers will hold these stocks, more fund managers and advisors will gain exposure to Bitcoin through ETFs. We may see a wave of approvals for cryptocurrency ETFs, although this will be a "survival of the fittest" competitive game, some will succeed, some will not. But this means more capital inflows into these assets, especially because there is no longer the pressure from GBTC or ETHE as before. Last time we had to deal with a lot of redemptions, and now everything is net new creation. Therefore, I think these trends are preparing for the second half of 2025, and by then everything will be very bullish, especially now that the meme coin frenzy has subsided, so there is nothing negative or terrible weighing on cryptocurrencies. We are like having prepared ourselves. But I think this is still a "tail wags dog" situation: in a world where risk assets are sold indiscriminately and investors are fearful, cryptocurrencies cannot succeed. I really don't see how these two can coexist. Perhaps Bitcoin will slightly rise due to decoupling, and I remain skeptical about this, but I think we still need to go through the current moment if we want to see these things realized in the second half of the year.

James Seyffart: Yes, that's it. Actually, the situation is much worse than what you said. As for what you said about Bitcoin, honestly, before the election, my view was that no matter what happens, Bitcoin will be fine. It doesn't try to replace the things that the SEC has been chasing, unlike decentralized finance (DeFi), so it won't be automatically classified as a security. Bitcoin is not a security, and even Ethereum, to some extent, hasn't been classified as a security by the SEC under the Biden administration. I agree with your view, I think the promotion of Ethereum is much more complex than Bitcoin. If you ask me, even in our own podcast, I have said before that I thought Trump's victory would be more beneficial for other categories of assets, such as Ethereum and Solana, because they are doing a lot of things and trying to do things that are good. However, under the pressure of regulatory agencies like the SEC, CFTC, and OCC, many things cannot be done, and these agencies have been opposing these innovations.

Bitcoin, on the other hand, is digital value storage and digital value transfer, which it has already completed, and for most of the time, it hasn't faced much opposition, right? But, as you said, the advantage of Bitcoin is its much higher acceptance. The narrative of Bitcoin is very easy to understand. That is, digital gold, digital value storage. I see it as an option for digital value storage, although it hasn't fully materialized yet, but it's still a risk asset. Is it possible in the future? Some say no, but I think, without a doubt, the possibility has increased from a price perspective. Whether it actually happens is another discussion topic, but there's no doubt that the market has made a decision, and the possibility has increased. This is my view. So, I think all these factors and different platforms starting to accept and promote Bitcoin will make the promotion of these other assets slower.

We were very bearish about the amount of assets that Ethereum ETFs could attract, compared to those who are loyal to cryptocurrencies and supporters of Ethereum. Compared to Bitcoin maximalists, they said that Ethereum ETFs would get almost nothing, but we thought they would get capital inflows at a discount to Bitcoin's market cap. In fact, we even underestimated this ratio, because the launch of Ethereum ETFs in the US, due to the EPE pressure you mentioned earlier, ETF shares experienced net outflows until Trump's election. Earlier this year, they went from $6 billion in outflows to $3.2 billion in inflows, but since then, some funds have flowed out, especially in January and February. So, promoting Ethereum is indeed more challenging. If you listen to different people's opinions, they say that investors holding "Magnificent Seven" stocks should have some exposure to Ethereum, Solana, or other altcoins that have submitted ETF applications, that's the actual promotion. But in reality, promoting this is more complicated than promoting Bitcoin, as you said earlier, and Bitcoin's dominance is gradually increasing.

Performance Differences Between Bitcoin and Cryptocurrency Company Stocks: Why Does Coinbase and MicroStrategy Perform Better?

Andrew Yang: I'm also very curious about your view on another thing, which is the difference between Coinbase and other cryptocurrency stocks and Bitcoin. Like Bitcoin and MicroStrategy, their performance over the past three to six months has been significantly better than other cryptocurrency-related stocks and assets. Their performance far exceeds other areas of cryptocurrency-related fields, and those cryptocurrency-related stocks seem to have not reacted much. I wonder how you view this difference?

James Seyffart: I think this goes back to the risk issues I mentioned earlier regarding other cryptocurrency assets. MicroStrategy is an independent entity, it's a leveraged Bitcoin play. And Coinbase is like an index fund in the cryptocurrency world, at least in some ways I think so. But overall, Coinbase is a broader investment in the cryptocurrency ecosystem, while MicroStrategy is completely dependent on Bitcoin.

But another issue is that even though I say Bitcoin is a risk asset, when you own a company that does a lot of other things and it's traded on the stock market, the situation is different. This is like a real estate investment trust (REIT), or other assets I mentioned earlier. The value of the stock is not always perfectly reflecting the underlying value. The market isn't completely efficient, its value isn't because of discounted future cash flows, but 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, there has never been such a level of optimism for them. They have won one court case after another, but this doesn't mean that if the entire cryptocurrency ecosystem continues to lose value, they will necessarily make more money.

Alex Tapscott: Yes, that's right. Actually, that's why I'm looking forward to the IPO boom, hoping it will happen, because it will add more diversity to the investment field of cryptocurrency companies. Now, the market mainly has Coinbase, the largest exchange and the creator of Base, they have a series of assets, and they also have some cryptocurrencies on their balance sheet, but the most important thing is a brokerage firm. Then there's MicroStrategy, as you said, it's a leveraged Bitcoin play. 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 cryptocurrency stocks, which is one of the reasons they are performing worse than Coinbase, Bitcoin, and Ethereum. Because the decline in cryptocurrencies combined with DeepSeek news completely broke the entire investment logic, making it very challenging to invest in these companies, because you don't know which companies to invest in, right? Therefore, having more options is very important to me, which will help broaden the investor base, because there will be more real companies to invest in. I think this will help the market develop healthily.

James Seyffart: I completely agree with what you said. I also want to add that mining companies, especially gold mining companies, especially small gold mining companies, are similar to Bitcoin mining companies. Although these Bitcoin mining companies are not small companies, if you look at their stock trading in the US market, they are relatively small companies. Their operations are similar, depending on their fixed costs, if they can scale up, they can achieve greater profits. One of the most unstable products is a triple-leveraged small gold mining ETF. It includes many small mining companies. You see the high volatility of these companies because 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 also increase, but they can still profit, and as the price continues to rise, this becomes leveraged profit. Bitcoin mining companies are the same situation.

In my view, many of these companies are not the best businesses, they completely depend on one factor. If your energy costs rise, etc., the risk is huge. 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 usually think that they start to diversify, moving 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 the combination of both, like if they are not used for AI computing, you can use these energy resources for Bitcoin mining, and so on. But obviously, I'm not a mining analyst, but for those trying to figure out why these companies are so volatile, they are basically leveraged investments. Once the Bitcoin price exceeds a certain point, and the company's mining cost is determined, for them, this is like leveraged upward exposure.

Alex Tapscott: Yes, I think AI and cryptocurrency are separate but related technologies. They have some intersections. You need computing power to secure these blockchains, at least Bitcoin, and you also need computing power to process all AI-related work. So, watching how they develop together is really interesting.