Dialogue ETF Research Analyst: The Rise of Crypto ETFs, Staking, Solana, and the Listing Wave

Interview: Defidocode

Compiled by: 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 respond to market panic and changes in capital flows. It pointed out that current capital flows are primarily moving into stock ETFs, while funds are flowing out of the bond market, 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 between stocks of companies like MicroStrategy and Coinbase, noting 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 and has gained global recognition in 2024 for his expertise in the cryptocurrency ETF space. However, James does not solely 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: Let’s switch 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 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 what sticks, trying to apply for every possible asset class and experiment to see which one will 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 curious 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 start launching. 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 like the Bitcoin or Ethereum spot ETFs, with Ethereum being a more suitable 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, addressing any assets involving staking in the future. That's my view on this issue. So, I don't think this means "we will never allow this; staking must be removed"; I think it's more like, "let's launch the spot products first, and we will address the staking language later." That's my basic assumption. But I agree with your point; I think in many cases, people are just casually applying, testing the SEC's parameters to see what they actually allow and what they don't.

But you'll see that if there is an ETF that is very successful, like MicroStrategy's ETF or Nvidia's ETF, which has billions or hundreds of billions in it, 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; that would be worth it. So that's the direction for the future. One question I'm looking forward to seeing is how the SEC handles physical creation and redemption, how they deal with staking issues, and where they will ultimately draw the lines; that's 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 saw the news yesterday that Janover was taken over by a group of former Kraken executives, including Marco Santori, who raised $42 million from several venture capital firms. Their proposal is essentially to become the MicroStrategy of all other assets. I don't know if this news appeared in your Twitter feed. Anyway, let me give you a brief overview of what happened.

I think they basically 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 that had a financial strategy like Bitcoin through its balance sheet. And now they have made this argument clearer, possibly because the regulatory environment has changed. But I'm wondering if they are launching this strategy in anticipation that ETFs might not allow staking or might not fully support staking for a while. A corporate vehicle that can stake 100% and compound might 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 that.

James Seyffart: I actually haven't seen that, but I have a few thoughts. First, you already have staking services for Ethereum ETFs 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 many service providers looking for ways to maximize the percentage of assets you can stake to enhance 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've seen some ETF issuers acquiring different staking service providers, trying to enter the staking space. I think this will become an important part of the competition among ETFs, 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 go beyond just 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 of their underlying assets, right? For example, you will see MicroStrategy's stock price rise on certain days even when Bitcoin is down, and vice versa. Its trading does not completely mirror the underlying assets 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, for this company, they will definitely have their advantages, possibly leveraging 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 of the underlying asset's value being close to its trading price is very low. Historically, we have many examples showing that it doesn't always work that way. So, I am sure there will be specific times and use cases where many people might prefer this approach. But that doesn't mean this approach 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, regarding Grayscale's product line, I don't know if you've checked their website. 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. 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 where we are roughly close to NAV, but still, in the regular 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 will likely come soon. Because remember last year, or about a year ago, GBTC was trading at a 50% discount, and then its discount gradually narrowed down to about a 5% discount, 4% discount. That basically reflects the time value between us and approval, and it eventually got approved and merged, right? So this chart tells me that this is like an upcoming trend; what do you think of this chart?

Andrew Yang: Sorry to interrupt. Isn't this also because the enthusiasm for Solana has waned 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 factors. I think there are three factors. First, Solana's interest 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 premiums and discounts of ETFs. So, James, what do you think?

James Seyffart: I think, looking back at GBTC, the question is, how likely is this ETF to be approved? Even though Eric Balchunas and I were very optimistic a few months before approval and set the probability of approval very high, the market just didn't believe it. I know many very smart people who genuinely believed the SEC would not approve a Bitcoin ETF until a week before approval, when we thought the probability of approval exceeded 80%. So that’s the key. This thing will eventually convert into an ETF, and the premium will disappear; that’s what’s crucial. 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; market participants have identified this and started selling off due to its high premium.

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

Andrew Yang: I also want to ask a question; I know you mentioned before the podcast that you have obviously been more focused on macro-level issues over the past week, but I'm curious about a topic over the weekend regarding how Bitcoin's performance has been stable. 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 share this view, or are they just more focused on ensuring their survival in the coming weeks?

James Seyffart: Yes, in fact, I have been paying attention to this because I am 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 down. This phenomenon is very strange, and many people are analyzing why this is happening. Is it because of GameStop buying, or is it Saylor buying? Who knows? It turns out that this was not the reason.

James Seyffart: However, that brief period of Bitcoin outperforming 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 while Bitcoin has fallen significantly, if you look at it since risk assets started to decline, Bitcoin's drop is about in line with NASDAQ, both down about 20%. As for the "Magnificent Seven" tech stocks, they have dropped about 26%, and that was the situation before today. Now they have all seen slight increases, but Bitcoin's trading usually 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 down 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 have attended several meetings, communicated with industry insiders, and talked to ETF issuers like you, as well as many institutions looking to enter this space, and they are more optimistic about all of this than anyone I have 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 resistances are disappearing, yet the 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 anticipated these changes since Trump was elected because everyone was particularly optimistic at that time. But when you talk to institutions, almost everyone is very much looking forward to this situation. Honestly, a major issue facing many investment advisors preparing to enter this space, especially in the U.S. and globally, is whether advisors will recommend these assets. Will they place these products in client accounts? In the past, they couldn't do that, but now the shift in these platforms and large institutions is starting to accelerate, allowing them to offer products like Bitcoin to clients. So, there are typically 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 the 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 uncorrelated. As part of the portfolio, our model portfolio recommends it, so we think allocating Bitcoin makes sense, right?" This actually doesn't require much justification. In contrast, for assets like Ethereum or Solana, why hold them? 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 both sides have their reasons.

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 fallen since Trump took office and has moved in sync with the "Mag 7" over the past two months, Bitcoin has still risen since Trump took office. And this does not hold for stock indices or for most other crypto assets. Therefore, I feel that there is indeed a phenomenon of Bitcoin exceptionalism in the market; although everything is relative—despite still falling significantly, 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, in terms of 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 issuer investments, with audited finances and regular reporting, allowing investors to gain deeper insights into these companies, more fund managers will hold these stocks, and more fund managers and advisors will gain 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, and 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 mania for meme coins 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 case of "the tail wagging the dog": 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 that; however, 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 will 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 happens, Bitcoin will be fine. It does not try to replace some things that the SEC has been targeting like decentralized finance (DeFi), so it will not 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 Ethereum's promotion is far more complex than Bitcoin's. 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. However, under the pressure from regulatory bodies like the SEC, CFTC, OCC, and others, many things cannot proceed, and these agencies have been opposing these innovations.

Bitcoin, on the other hand, is about digital value storage and digital value transfer, and it has long completed this, and most of the time it has not faced much opposition, right? But as you said, the benefit of Bitcoin is that its acceptance is far higher. The narrative of Bitcoin is very easy to understand: it is digital gold, a store of digital value. I see it as an option for digital value storage; although it has not fully realized this, it is still a risk asset. Is it possible for it in the future? Some say no, but I believe that, without a doubt, the likelihood of it 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 likelihood of it happening has increased. That’s my view. So, 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 thought it would attract inflows at a discount 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, which only changed after Trump was elected. Earlier this year, they went 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, promoting Ethereum is indeed more challenging. If you listen to different people's views, 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 is the actual promotion. But in reality, promoting this is much more complicated than promoting Bitcoin, as you mentioned earlier, Bitcoin's dominance is gradually increasing.

Performance Differences Between Bitcoin and Crypto 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 far exceeds that of other cryptocurrency-related areas, while those cryptocurrency-related stocks seem to have little reaction. I want to know how you view this difference.

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

But another issue is that even though I say Bitcoin is a risk asset, when you have a company doing many other things and trading in the stock market, the situation is different. It's like 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; its value does not come from the discounting of future cash flows, but it fluctuates up and down 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 level of optimism for them is unprecedented now. They have won case after case in court, but that does not mean that if the entire cryptocurrency ecosystem continues to lose value, they will necessarily make more money.

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 field of cryptocurrency companies. Because 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 balance sheet, but most importantly, they are a brokerage. Then there’s MicroStrategy, as you said, which is a leveraged play on Bitcoin. Then there’s the entire mining sector. In fact, there are also a few issuers that are mining companies, but they are now more traded as AI data center stocks rather than as cryptocurrency companies, which is also one reason why they are not performing as well as Coinbase, Bitcoin, Ethereum, etc. Because the decline in cryptocurrencies, combined with the DeepSeek news, completely broke the entire investment logic, making investing in these companies very challenging 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; this will help broaden the investor base because there will be more real companies to invest in. I think 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 small gold mining companies, share 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 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 profit. 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 dependent on one factor. If your energy costs rise, for example, the risk is significant. Therefore, I think this is another reason why 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 think 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 believe the most successful companies will be a combination of both; for example, if they do not use their energy for AI computing, they can use it for Bitcoin mining, and so on. But obviously, I am not a mining analyst, but for those trying to understand why these companies are so volatile, they are basically leveraged investments. Once Bitcoin prices exceed a certain point, and the company's mining costs are determined, for them, it is like leveraged upside exposure.

Alex Tapscott: That's right; I believe 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 also need computing power to handle all the AI-related work. So, it’s really interesting to see how they develop together.