Kill your neighbour.
Look, let’s just say that if you are a wealth manager or any provider of investment products and you still don’t have a bitcoin exposure, by this time, you look very stupid.
You could, like, go and buy some and then offer them to clients, but please understand that as someone from the old finance, you won’t do it. The standard line that you would use is that you are waiting until the bitcoin is available in the form of a clean regulated product.
“Hello,” says the banker.
Boy, there are few things that are as bad as wrapping bitcoin into traditional finance clothes:
In the U.S., hahaha, it is really bad because I suppose they have the largest capital markets and so the regulators have to be extra careful of things they approve? Anyway, last month they gave green light to a bitcoin futures exchange traded fund (ETF). And, I mean, let just appreciate how bastardized that product is: from the registration statement of ProShares Bitcoin Strategy ETF, when you buy the ETF, it will put 70% of that money into money market instruments, so U.S. Treasuries (yes, the infinite demand for the U.S. debt) or other safe things like senior corporate debt; it will put (only?) 30% of that money as collateral with U.S. registered (safe) commodity futures exchange to buy cash settled bitcoin futures. OK, sorry but there is more ... those remaining (only) 30% in the ETF that are supposed to buy bitcoin futures really just pay an arbitrageur.
So, there is someone who buys a physical bitcoin and put money as collateral with the U.S. registered commodity futures exchange to be able to sell a cash settled bitcoin future. That someone is the other side of the ETF. If bitcoin goes up, the speculator has to increase his/her collateral at the exchange, but his physical bitcoin goes up. If bitcoin goes down, he/she gets some money from the exchange, but loses some value because his/her physical bitcoin falls. Of course, by its very definition, the arbitrageur does it because it pays. This is why the bitcoin futures ETF is more expensive than just the normal boring bitcoin. If you buy a bitcoin futures ETF, you don’t pay bitcoin, absolutely not. You pay someone who is happy to bet that bitcoin will go down. And they are only happy because they are fully hedged by holding actual bitcoin, except its a lot of work so they want something back = arbitrage.
In Europe, it is less bad (but still very bad) because the ETF can hold an actual bitcoin. Say, there are a few Russian bankers in London. They understand that the world wants a bitcoin product in the clothes of old finance, they know their way around capital markets quite well. They file a document with all regulators in Europe (essentially everywhere where they would like to sell their bitcoin ETF) to be able to issue large bond that is collateralized by bitcoin. Then they call their friends in prime brokers, smaller private banks and offer them to be authorized participants. In an ETF, an authorized participant is the entity that has the right to maintain the value of the ETF equal to the value of what the ETF represents. So, here, when the banks see that the price of the ETF on an exchange rises above the value of the bitcoin that the ETF holds (or sorry that the already issued bond has stored at a custodian as collateral), they quickly buy some real bitcoin and give it to the issuer to get more of the ETF to then sell it on the market at the higher inflated price = arbitrage*.
OK, you could just say this:
This is finance at its very best, moving money between things in a complex obscure way, letting many middlemen earn some, while creating a risk of major failure because at some point everyone sort of stops understanding the giant mess that comes to be.
Those wealth managers / investment product providers that we have mentioned at the beginning have warmly embraced the bitcoin ETFs because they have the regulatory check mark, probably little knowing what those products are when you slice open them, and most likely completely lacking the vigor to find out how they could do the same thing simpler and obtain a similar regulatory check mark.
It is more comfortable to buy new things in the form you already know from brands and people you already know. And, I don’t know, could this be why the world runs on relationships?
I am also here and here. My writing is just a humble redux of Matt Levine’s column.
*Oh wait, that is not all, sorry. The Russian bankers also reduce the bond collateralization (the pool of bitcoin that backs the bond) by 2% every year.
