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Will Prediction Markets Come to ETFs? · Trillions

0:05
Speaker 1: Wokan A trillions.
0:06
Speaker 2: I'm Joel Weber and I'm Eric Belchunas.
0:12
Speaker 1: Eric, I know you're really excited about this episode, and
0:16
Speaker 1: I had a prediction that was related to that. We're
0:19
Speaker 1: going to talk about prediction markets, which had become I
0:23
Speaker 1: think one of the most fascinating areas in all of
0:27
Speaker 1: kind of we'll call it finance, even though I think
0:29
Speaker 1: it's slightly adjacent to that, but people have gotten really
0:31
Speaker 1: into prediction markets, and that meant that the ETF industry
0:35
Speaker 1: has also taken note, and there's been some filings that
0:38
Speaker 1: I'm really interested in discussing on today's episode. What caught
0:42
Speaker 1: your attention?
0:43
Speaker 2: Yeah, about maybe a month ago somewhere, and there I
0:47
Speaker 2: was sitting I remember exactly where I was. I was
0:50
Speaker 2: at my kids au basketball game. We're just about to
0:54
Speaker 2: keep score. I wasn't the coach. I was the scorekeeper
0:57
Speaker 2: for this one. But anyway, I saw the filing. I
0:59
Speaker 2: think James might have texted it to me and he said,
1:02
Speaker 2: look at this. And it was Friday. A lot of
1:04
Speaker 2: the best filings come in at Friday on Friday at
1:07
Speaker 2: like four pm. Anyway, I'm looking at it, and it's
1:11
Speaker 2: prediction market ETFs. There was a filing from round Hill
1:15
Speaker 2: and then Bitwise followed and then there was a third
1:18
Speaker 2: issue or so there's three issuers who filed for prediction
1:20
Speaker 2: market ETFs. A that's interesting, and be the ones they
1:24
Speaker 2: chose were Democratic president wins twenty twenty eight election, Republican
1:29
Speaker 2: president wins twenty twenty eight election, and then there's some
1:32
Speaker 2: Democrat Republican Senate ones in there, so it was political.
1:35
Speaker 2: Now that's just a tip of the iceberg of what
1:37
Speaker 2: prediction markets could do. But as instantly as an ETF analysts,
1:41
Speaker 2: I'm like, oh my god, they're going after this. I
1:44
Speaker 2: just didn't anticipate it. There was nothing in my brain
1:46
Speaker 2: that was expecting prediction market ETFs. And I'm pretty aware,
1:51
Speaker 2: you know, I'm total nerd in this space. So it
1:53
Speaker 2: was interesting to be caught by surprise. And then you know,
1:56
Speaker 2: we looked in how will these work? And again that's
1:59
Speaker 2: why it's fun to be an ETF analyst. It's never
2:01
Speaker 2: a dull moment. I mean, every time, every time it
2:04
Speaker 2: gets a little like calm out there, something else throws
2:07
Speaker 2: you into this new world. And this could be really
2:09
Speaker 2: interesting because if these go through, there's you know, the
2:13
Speaker 2: sky's the limit. You know, we could see a whole
2:16
Speaker 2: gigantic category created for basically easy ways to click a
2:20
Speaker 2: button and bet on prediction markets for a variety of things.
2:24
Speaker 2: So I thought it was worth discussing, you know, while
2:27
Speaker 2: they're in registration, just so people could sort of, you know,
2:31
Speaker 2: get these teed up and look out for them if
2:33
Speaker 2: they launch.
2:34
Speaker 1: So if being the big operative, we're there and to
2:36
Speaker 1: discuss all of this with us. Matt Hogan, who's the
2:40
Speaker 1: chief investment officer of bit Wise Asset Management. Usually he
2:43
Speaker 1: comes on to talk about crypto, so I'm excited about
2:47
Speaker 1: talking with him about something off today, this time on
2:52
Speaker 1: trillions prediction markets. Matt, Welcome back to trillions.
2:58
Speaker 3: Oh thanks for having me. I'm excited to be here.
3:00
Speaker 1: Okay, So I didn't know that you wanted to do
3:02
Speaker 1: things other than crypto. I thought you had gone full crypto,
3:05
Speaker 1: and once you go full crypto, you can't do anything else.
3:09
Speaker 1: But I guess there's room for a little bit more.
3:11
Speaker 2: Wait, hold on, did you go full crypto? Because whenever
3:14
Speaker 2: we had him on and he said he was fifty
3:15
Speaker 2: five percent crypto, he.
3:17
Speaker 1: Was full crypto. But yeah, okay, I think you're full now, Matt, Yeah,
3:21
Speaker 1: what's that breakdown? Now?
3:22
Speaker 3: Come on, guys, I dragged ETFs into crypto along with
3:25
Speaker 3: a lot of my friends, so I merged the two worlds. Yeah,
3:29
Speaker 3: full crypto, full financial innovation. Look, prediction markets are a
3:33
Speaker 3: close analog to crypto. They sort of got their early
3:38
Speaker 3: traction in the crypto market with Auger and then polymarket,
3:42
Speaker 3: and now we see more regulated traditional onshore venues like Kalshi.
3:46
Speaker 3: So these were close cousins. I think if you've been
3:48
Speaker 3: involved in crypto for the last five years, you've been
3:51
Speaker 3: paying very close attention to prediction markets, So to me,
3:54
Speaker 3: it's a natural extension.
3:56
Speaker 1: Okay, so I'm really curious about how this is actually
4:00
Speaker 1: going to work, Like, how do you imagine calci or
4:04
Speaker 1: polling market style bet being packaged into an ETF. What
4:10
Speaker 1: are the mechanics of that?
4:11
Speaker 3: Yeah? Sure, I mean first I should say that I
4:13
Speaker 3: can't speak about the filings beyond what's in the actual filing,
4:17
Speaker 3: of course, because they're alive filing and registration. I'm going
4:20
Speaker 3: to speak generally about the process as opposed to specifically
4:23
Speaker 3: about the prediction shares filing. But look, you know, if
4:27
Speaker 3: you think about the ETF industry writ large you guys
4:30
Speaker 3: have been covering. It takes interesting financial applications and packages
4:34
Speaker 3: them into an easy wrapper that people can access. We've
4:38
Speaker 3: seen that from stocks, to bonds, to hedge fund like strategies,
4:41
Speaker 3: et cetera. This is a natural extension of that. So
4:45
Speaker 3: if you think of the underlying exposure, what's going on
4:49
Speaker 3: in prediction markets. There are prediction markets on a wide
4:54
Speaker 3: variety of things, from the silly to the geopolitical to
4:58
Speaker 3: the political. Have something like a Democrat or a Republican
5:03
Speaker 3: wins the election in twenty twenty eight, people in the
5:06
Speaker 3: underlying prediction markets can bet on that outcome. Let's say
5:09
Speaker 3: it's trading fifty five forty five Democratic. They could bet
5:14
Speaker 3: on the Democrat winning fifty five percent. If he wins,
5:17
Speaker 3: it goes to a dollar. If he loses, it goes
5:18
Speaker 3: to zero. The ETFs, per the filings, can use swaps
5:25
Speaker 3: or direct exposure to gain exposure to that kind of outcome.
5:28
Speaker 3: So it's actually it's relatively simple, which is that this
5:31
Speaker 3: exists in a regulated market, and the ETFs are capturing
5:36
Speaker 3: that or proposing to capture that, because of course they
5:38
Speaker 3: aren't launched. They may not launch theirself to be approved,
5:42
Speaker 3: proposing to capture that in an ETF rapper.
5:45
Speaker 2: Okay, so Matt, Basically, if you're looking at let's say
5:49
Speaker 2: to CTF launched, and you were at the fifty five
5:50
Speaker 2: to forty five the Republican one, I forget what you said,
5:54
Speaker 2: but let's say that was the fifty five to one,
5:56
Speaker 2: you would buy the ETF and it would match the
6:00
Speaker 2: percent currently on polymarket or whichever interface you were using.
6:06
Speaker 2: So effectively, all this is doing is just making it
6:10
Speaker 2: a little more convenient for people who do like to
6:12
Speaker 2: use ETFs versus getting your own poly market account, which
6:16
Speaker 2: again isn't that dissimilar from crypto, where you're literally just
6:20
Speaker 2: having this thing put into your environment where.
6:24
Speaker 1: You like it.
6:25
Speaker 2: That's all that's happening. There's no other variable here. You
6:28
Speaker 2: basically will click by at fifty five and that number
6:32
Speaker 2: will move based on how poly Market moves up to
6:35
Speaker 2: the election.
6:36
Speaker 3: I mean, that is what you see in the filings.
6:38
Speaker 3: That is how it's defined. Of course, the exact exposure,
6:40
Speaker 3: as I mentioned, could be either swaps based or direct
6:44
Speaker 3: contract based. The proposals contemplate both, but the general idea
6:49
Speaker 3: is exactly that. I think the analog to crypto and
6:53
Speaker 3: bitcoin is very similar. When the bitcoin ETF's launched, there's
6:56
Speaker 3: this hue and cry you heard it about why do
6:59
Speaker 3: we need a bitcoin ef You can buy it on coinbase,
7:02
Speaker 3: you can buy it through self custody. It turned out
7:05
Speaker 3: that people like the protections and ease of the ETF format.
7:09
Speaker 3: This is exactly that. It's absolutely true that individuals can
7:12
Speaker 3: open a Calshie account or a poly market account and
7:16
Speaker 3: trade tailor swift song views if they want to, but
7:20
Speaker 3: not everyone wants to open those accounts, capitalize them. They
7:23
Speaker 3: don't fit into their plans, et cetera. So if these
7:26
Speaker 3: were allowed and permitted, it would allow it to happen
7:29
Speaker 3: in a traditional ETF repper.
7:31
Speaker 1: So how have regulators responded to your interest so far?
7:35
Speaker 3: Well, we're engaged in the process with regulators. I'll just
7:38
Speaker 3: say that there is there is interest. But you know,
7:41
Speaker 3: one thing I've said before when we filed originally for
7:44
Speaker 3: crypto ETFs is that bitwise doesn't exist to pay lawyers
7:49
Speaker 3: and file projects that we don't believe will launch. So
7:52
Speaker 3: if we didn't think there was a pathway to launch,
7:55
Speaker 3: we wouldn't have taken this filing. All that said, I
7:58
Speaker 3: said that when we first filed our bitcoin et which
8:00
Speaker 3: I think was twenty nineteen, So you should take because
8:03
Speaker 3: words with a long term view and not a guarantee
8:07
Speaker 3: of any short term activity.
8:09
Speaker 1: Is there a prediction on when your filing will actually
8:13
Speaker 1: get through?
8:14
Speaker 3: Yet?
8:14
Speaker 1: Can we get.
8:15
Speaker 2: Prediction markets on when the prediction ETFs will launch?
8:18
Speaker 3: I've actually pretty shocked that there isn't. Well, as far
8:20
Speaker 3: as I know, there's not one. But maybe after people
8:23
Speaker 3: listen to.
8:24
Speaker 2: Should I should get it going?
8:26
Speaker 3: You should get it going.
8:28
Speaker 2: I mean after seeing what went down with the bitcoin
8:32
Speaker 2: ETFs and the crypto ETFs and how well they've done.
8:36
Speaker 2: And again, the ETFs have proved over and over you
8:39
Speaker 2: could stuff almost anything in there. These issuers know what
8:41
Speaker 2: they're doing. I don't see them taking that long to launch.
8:45
Speaker 2: There could be something I'm not seeing here, but it's
8:49
Speaker 2: seems like you would just be able to use those
8:53
Speaker 2: other examples as things that worked fine in a similar fashion,
8:58
Speaker 2: And that's all ETFs have ever done. They've just made
9:01
Speaker 2: something you can probably do on your own easier.
9:04
Speaker 3: Yeah, I think that's right. If you think back of
9:06
Speaker 3: the history of ETFs, they've almost always worked extraordinarily well
9:11
Speaker 3: accept in situations where the underlying was really complex, like
9:15
Speaker 3: inverse vix, or where they were underlying liquidity issues like
9:21
Speaker 3: putting private shares into an ETF have. Those have enabled challenges.
9:25
Speaker 3: But if you have a liquid underlying that's accessible and
9:30
Speaker 3: that could be clearly explained to people, that has an
9:32
Speaker 3: extremely strong track record in ETF land over the last
9:36
Speaker 3: thirty years.
9:45
Speaker 1: So if I'm a regulator, what's going to make me nervous? Like?
9:48
Speaker 1: What did you have to anticipate as you were thinking
9:50
Speaker 1: about this, about what the anxieties are going to be?
9:54
Speaker 3: Yeah, certainly, I think they're probably two that come immediately
9:57
Speaker 3: to mind, and these would apply to any sort of
10:01
Speaker 3: filing that you're doing. One is the underlying liquidity. Right,
10:05
Speaker 3: the underlying liquidity on some of these contracts can range
10:08
Speaker 3: from very good to very poor, and so you have
10:11
Speaker 3: to think about how liquid the underlying is. That's certainly
10:14
Speaker 3: something that went into our calculus when evaluating this space.
10:18
Speaker 3: And then the second is that prediction markets are a
10:20
Speaker 3: vast canvas and we've seen reactions for and against different
10:26
Speaker 3: parts of the prediction market sector. Right, there's this big
10:29
Speaker 3: debate our prediction markets investing or gambling, and I think
10:33
Speaker 3: it's like not a great debate, because if you take
10:35
Speaker 3: a prediction market on a sports game, like the outcome
10:40
Speaker 3: of the NCAAA final, that looks a lot like traditional
10:45
Speaker 3: sports betting. If you take a prediction market on FED
10:47
Speaker 3: fund futures and the outlook for interest rates, that looks
10:50
Speaker 3: like a lot like traditional investment categories. And so I
10:55
Speaker 3: think the other thing that we think a lot about
10:57
Speaker 3: is what is appropriate in a setting and then what
11:01
Speaker 3: is maybe less appropriate. And I think that's that's something
11:06
Speaker 3: that I think you'll see et officialers think carefully about
11:10
Speaker 3: as they look to pursue this.
11:12
Speaker 2: You guys have these look I agree, and I actually
11:15
Speaker 2: before on the train ride up, these political ones Joel
11:18
Speaker 2: are the most popular. So my guess is there's a
11:21
Speaker 2: lot of liquidity for giant political races, and that's why
11:25
Speaker 2: you started here.
11:26
Speaker 1: But I'm actually sports is by far the more popular
11:31
Speaker 1: place where the money goes. It's like something like Matt,
11:34
Speaker 1: you'll probably know better, something like ninety percent is all
11:36
Speaker 1: in sports. It's basically become a proxy for sports books,
11:40
Speaker 1: which is why states have been filing lawsuits against prediction markets.
11:46
Speaker 1: So I'm curious, like you, I mean, starting in a
11:49
Speaker 1: place like politics and elections purposely avoids that discussion, and
11:54
Speaker 1: I'm curious why go politics to start?
11:57
Speaker 3: Well, look bit wise exist to help people gaining interesting
12:00
Speaker 3: exposure to important areas of the market. I think politics
12:02
Speaker 3: is obviously extremely important for the outlook of the market.
12:05
Speaker 3: I mean, living in crypto, the outcome of elections has
12:08
Speaker 3: a huge impact on my business, and there is no
12:10
Speaker 3: way to explicitly hedge that impact or lean into that impact.
12:15
Speaker 3: So if you think about it from an investment lens,
12:18
Speaker 3: the presidential election will impact huge numbers of investments. Whether
12:23
Speaker 3: Michigan beats Yukon or not will not impact a huge
12:27
Speaker 3: number of investments. So I think it's as simple sort
12:29
Speaker 3: of real politic as that.
12:31
Speaker 1: But isn't the sports thing inevitable, Like we're going to
12:34
Speaker 1: have Super Bowl bets and ETFs at some point if
12:37
Speaker 1: we go down this path.
12:39
Speaker 3: Oh, I don't know. I'm not sure that that's true,
12:41
Speaker 3: you know, as you mentioned, and there's a lot of
12:43
Speaker 3: state based litigation about that. I think that introduces some
12:47
Speaker 3: regulatory risk and maybe some existential risk into the development
12:50
Speaker 3: of products focused on that, while those is still adjudicated.
12:53
Speaker 3: So I'm not sure that you have to assume we
12:56
Speaker 3: go to infinity, if we go to one, I would
12:59
Speaker 3: even say that oddly about prediction markets. I think there's
13:01
Speaker 3: a possibility in the future that prediction markets narrow in
13:05
Speaker 3: from their current enormous scope and refine what is appropriate,
13:09
Speaker 3: at least on the regulated onshore markets. I don't think, yeah,
13:13
Speaker 3: I don't think that that is fully scoped at this point,
13:15
Speaker 3: and people are sort of feeling out the edges.
13:17
Speaker 2: It does seem like the ETF industry will definitely play
13:22
Speaker 2: with this a little bit. I expect that if these launch,
13:26
Speaker 2: we will see a little silly season, but generally speaking,
13:31
Speaker 2: when it comes like I'm I'm thinking of like will
13:35
Speaker 2: Aliens come back? Will Jesus come back? Will the Eagles
13:39
Speaker 2: win the Super Bowl? I want a two x version
13:40
Speaker 2: of that. I could see this happening, But those ideas
13:47
Speaker 2: are very similar to crypto. The further you get from
13:50
Speaker 2: further away you get from these big liquid areas, they're
13:53
Speaker 2: not going to be huge successes in the ETF either.
13:56
Speaker 2: So I think sticking to politics it is probably makes
13:58
Speaker 2: sense for me point of view too, which is there's
14:01
Speaker 2: probably a lot of people who are interested in that,
14:04
Speaker 2: and you know, there's always been this thing like oh, hey,
14:07
Speaker 2: I think Trump's gonna win, let me go along the market.
14:10
Speaker 2: Or some people were like he's going to crash the market,
14:13
Speaker 2: and that's actually two way bet there, like people don't
14:16
Speaker 2: even know. This cleans that up a little because then
14:18
Speaker 2: you don't have to actually do like three D math, like, well,
14:22
Speaker 2: if the Republicans win, the rates will do this, and
14:25
Speaker 2: people will think this and this will go up and down.
14:27
Speaker 2: This is just straight up this will pay off if
14:30
Speaker 2: they win, which it cuts through having to do that
14:33
Speaker 2: three D math, which people have to do with the
14:35
Speaker 2: political stuff a lot. I think.
14:38
Speaker 3: I think that's enormously true, and I would actually extend
14:40
Speaker 3: that beyond things. If you look at something like interest
14:43
Speaker 3: rates and you look at the Fed fund futures market,
14:45
Speaker 3: that involves a high degree of math to figure out
14:48
Speaker 3: what they're expressing, Whereas what people want to decide is
14:51
Speaker 3: will interest rates go up or down at the next meeting.
14:55
Speaker 3: I would even say that that extends to some degree
14:57
Speaker 3: to like options and and equity price outcomes. You know,
15:02
Speaker 3: what people want to allocate to is will bitcoin cross
15:05
Speaker 3: one hundred thousand dollars. They don't want to talk about
15:08
Speaker 3: various Greeks on how that's expressed in the options market,
15:11
Speaker 3: at least not everyone wants to. So you know, again,
15:14
Speaker 3: if you think of one pathway that ETFs have followed
15:19
Speaker 3: has been taking institutional exposures and making them accessible and
15:23
Speaker 3: easy to understand for everyone. I think prediction markets are
15:26
Speaker 3: in that vein when it comes to politics, economic indicators,
15:30
Speaker 3: market indicators, and I think that's really good for investors
15:35
Speaker 3: and actually really good for the world as well.
15:38
Speaker 1: Just to stick with the regulatory theme for a second,
15:42
Speaker 1: one of the things that I find interesting about prediction
15:44
Speaker 1: markets is that we've talked about the states and how
15:47
Speaker 1: they're suing the companies and trying to change what you
15:52
Speaker 1: may or may not be able to bet on. The
15:54
Speaker 1: CFTC has really been the most vocal on a federal
15:59
Speaker 1: level proponent of the markets. So I'm curious. We've seen
16:02
Speaker 1: what happens between SEC and CFTC on occasion. Do you
16:07
Speaker 1: have any inklings of how that dynamic plays out yet?
16:11
Speaker 3: Look, I think it's it's you know what celig has said.
16:14
Speaker 3: The chair of the CFTC is pretty clear that he've
16:17
Speaker 3: used these as swap contracts that ought to be regulated
16:19
Speaker 3: by the CFTC, which means a lot of things which
16:22
Speaker 3: are worth noting. It means things like market surveillance, it
16:26
Speaker 3: means things like rules against insider trading, et cetera, et cetera.
16:30
Speaker 3: I think that is obviously the dominant paradigm. ETFs have
16:34
Speaker 3: interacted with commodity swaps and options for years, right, So
16:38
Speaker 3: ETFs hold things that are primarily regulated by the CFTC.
16:42
Speaker 3: That's been going on at least since the gold ETFs, right,
16:46
Speaker 3: certainly you know before that. So this is just an
16:48
Speaker 3: extension of that. Now, of course, the SEC has its
16:51
Speaker 3: own review process for these contracts, but the underlying I
16:55
Speaker 3: think there's a I think there is a broad consensus
16:58
Speaker 3: that those are you know, swap that belong under a
17:02
Speaker 3: CFTC guidance.
17:04
Speaker 1: And just to stick with the mechanics of how this
17:06
Speaker 1: might work. So there's this, let's call it a binary
17:10
Speaker 1: that on a presidential outcome. What does that look like
17:15
Speaker 1: after it resolves? From an ETF perspective, Is there any
17:18
Speaker 1: version or comparison that we've ever seen in the marketplace
17:22
Speaker 1: of basically a you know, ETF resolving itself in sunsetting
17:26
Speaker 1: like that seems like a new chapter.
17:30
Speaker 3: Yeah, Actually, so there are two versions. There's one that
17:32
Speaker 3: you're referring to, which I would say there is a
17:35
Speaker 3: great example, which are the bullet shaars. The bulletshairs were
17:38
Speaker 3: bond ETFs that targeted specific years, so like I'll only
17:41
Speaker 3: hold treasuries that mature in twenty twenty nine, and then
17:45
Speaker 3: at the end of twenty twenty nine you would get
17:47
Speaker 3: your one hundred dollars par back. You've collected interest along
17:49
Speaker 3: the way, and then the it liquidates and off you go.
17:53
Speaker 3: And the reason that was a successful franchise is because
17:56
Speaker 3: people have specific needs at specific years. They want to
17:59
Speaker 3: get their money back, and traditional bond ETFs don't do that,
18:03
Speaker 3: and then people would often move from the twenty twenty
18:07
Speaker 3: nine to the twenty thirty or the twenty thirty one,
18:09
Speaker 3: et cetera, using them like a bond ladder. So I
18:12
Speaker 3: think that is the best example of sunsetting ETFs that
18:15
Speaker 3: we have, and it was enormously successful. Obviously, it introduces
18:19
Speaker 3: some capital and tax considerations that are worth thinking about,
18:23
Speaker 3: but we do have a clear example of that. The
18:25
Speaker 3: other thing you see in the filings, again not talking
18:28
Speaker 3: about ours, but just the filings broadly, is a concept
18:31
Speaker 3: of rolling these into future where you would use stock
18:36
Speaker 3: reverse splits to sort of recalibrate it to the next election.
18:41
Speaker 3: I think it remains to be seen. You know, what
18:44
Speaker 3: is the best approach, what investors want, how those will
18:47
Speaker 3: work from a mechanical perspective, But if you dig into
18:49
Speaker 3: the filings you'll see both ideas.
18:51
Speaker 1: I'm curious, Matt, because you're referring to filings other than
18:54
Speaker 1: just your own. Is there anything else you saw in
18:56
Speaker 1: the filings that made you go, Oh, that's that's different
18:59
Speaker 1: and that tickles my brain in a way that I
19:01
Speaker 1: hadn't expected.
19:02
Speaker 3: Yeah, I think I think that is the That is
19:05
Speaker 3: the primary thing that I've seen. From a difference perspective,
19:09
Speaker 3: I think a lot of the details have to have
19:11
Speaker 3: yet to come out and yet to materialize. I think
19:13
Speaker 3: if you're thinking around where are the interesting structural questions,
19:18
Speaker 3: that's the primary one, and then how you gain exposure
19:21
Speaker 3: is the secondary one. But that's more sort of nuts
19:24
Speaker 3: and bolts. And if you think about product development perspective,
19:28
Speaker 3: it's the question we talked about earlier, is are there
19:30
Speaker 3: more where else could get this go? Where is appropriate?
19:34
Speaker 3: What is helpful for investors versus harmful for investors? What
19:37
Speaker 3: is easy to understand versus not easy to understand, and
19:41
Speaker 3: I think those are the two avenues of exploration you'll
19:43
Speaker 3: see at least first as we go down. As Eric mentioned,
19:48
Speaker 3: you know, the ETF innovation machine throws everything against the wall.
19:52
Speaker 3: So I won't foreclose what other people will do in
19:54
Speaker 3: the future. I have no idea if we'll see leveraged
19:57
Speaker 3: prediction markets or something like. Who knows.
20:00
Speaker 2: And I'm telling you right now, these things go through.
20:04
Speaker 2: You know, Matt Tuttle, just the name one. He's on
20:06
Speaker 2: a loan. We're going to see some funky stuff and
20:09
Speaker 2: I'm here for it. I don't mind that. I've always
20:12
Speaker 2: looked at the exotic and even silly part of ETFs
20:17
Speaker 2: are just you can't have perfect innovation where everything's serious
20:21
Speaker 2: and perfect and always works. It's just the way capitalism works.
20:25
Speaker 2: And one of these goofy ones may take off, and
20:28
Speaker 2: that's fine. This is a free market. That said, like earlier,
20:32
Speaker 2: the goofy er and crazier you get the less of
20:34
Speaker 2: the market. There will be the same thing's happening with
20:36
Speaker 2: the crypto. As you get further away from bitcoin, the
20:39
Speaker 2: assets are going to go down and down, and the
20:41
Speaker 2: interest will go down. It's not like the ETF will
20:43
Speaker 2: all of a sudden drum up new dynamics that the
20:46
Speaker 2: underlying market doesn't have. So I do think though there's
20:50
Speaker 2: there are some ones that could appeal to direct retail
20:54
Speaker 2: that are just silly, goofy and you know a little
20:57
Speaker 2: on the de gen side, and then they might leverage them.
21:00
Speaker 1: We'll see.
21:00
Speaker 2: But you know, there are two x dock ETFs out
21:04
Speaker 2: there right now that have such incredible volatility that you know,
21:08
Speaker 2: there's plenty of ways to gamble. So it's not that
21:12
Speaker 2: big of a deal. But the it'll be seem like
21:15
Speaker 2: a big deal for a while. It always, it always does.
21:18
Speaker 2: I've just been doing this so long. You know, at
21:21
Speaker 2: some point nothing shocking, you know, like.
21:24
Speaker 1: This is when he like becomes the old man on
21:25
Speaker 1: the rocking chair.
21:28
Speaker 2: Well, actually, I feel pretty young at heart because there
21:31
Speaker 2: are some other analysts I won't name them who kind
21:34
Speaker 2: of crap on a lot of the new stuff. We
21:37
Speaker 2: had a theme that we started writing about last year
21:39
Speaker 2: called no industry for old analysts.
21:43
Speaker 3: That's it. I think that's right. But that's been going
21:46
Speaker 3: on in ETF land forever. I mean, people didn't think
21:48
Speaker 3: we should do bonds in ETFs. To me, the dividing
21:53
Speaker 3: line is is it easy to understand or is it
21:55
Speaker 3: hard to understand? The exotic ETFs that I dislike are
21:59
Speaker 3: the ones that are difficult for people to understand, like
22:02
Speaker 3: highly leverage, daily resetting ETFs that are subject to path dependency.
22:07
Speaker 3: One of the great things about prediction markets is that
22:10
Speaker 3: they are easy to understand. Right, the Democrat will win
22:14
Speaker 3: or the Republican will win. And if you can design
22:17
Speaker 3: an ETF that expresses that, well, then I think the
22:22
Speaker 3: probability that people who allocate to it know what they're
22:25
Speaker 3: doing is very high, right, And that's the job of
22:28
Speaker 3: the ETF issuers to increase that fidelity between what people
22:31
Speaker 3: expect and what they get. And so that's what I
22:34
Speaker 3: think people will try to do with these.
22:35
Speaker 1: So, Matt, what comes next? What do you what's the
22:37
Speaker 1: next step that you're waiting for?
22:38
Speaker 3: Well, what do you want to what do you want
22:40
Speaker 3: to see in a prediction market ETF? Joel, do you
22:42
Speaker 3: tell me? Man?
22:44
Speaker 1: I don't know if I'm allowed to comment on that specifically,
22:48
Speaker 1: but I mean more of.
22:50
Speaker 2: Like, it's got to do something, It has to do
22:53
Speaker 2: something with Beyonce.
22:54
Speaker 1: Oh No, I think the thing that I find interesting.
23:00
Speaker 2: We'll Beyonce Win the Grammy like that that's the stuff
23:02
Speaker 2: he wants to bet on.
23:04
Speaker 1: But I already can do that, right, And I think
23:06
Speaker 1: what is interesting about this conversation. You know, it's like
23:10
Speaker 1: what you can do on Kyle she or Polly Market
23:12
Speaker 1: currently versus the stuff that you can potentially tie into
23:17
Speaker 1: your brokerage account, right, And clearly Matt's thinking the same way.
23:21
Speaker 1: So so Matt, you know, I think I could almost
23:25
Speaker 1: you could just look at what's currently available and start
23:28
Speaker 1: to go, Okay, well if you really think about how
23:31
Speaker 1: investing could fit in this wrapper or like, there's a
23:34
Speaker 1: lot of things that are currently there that would suddenly
23:36
Speaker 1: like be available in your Schwab account y or robin
23:39
Speaker 1: Hood account or whatever else. So so I meant the
23:43
Speaker 1: question more as you know, you're engaged in the SEC
23:46
Speaker 1: could have a long time ahead of you. What's mechanically
23:50
Speaker 1: for you? What's the horizon look like here? What's the
23:53
Speaker 1: how much dancing do you have to do?
23:55
Speaker 3: Yeah? That makes that now I understand. I was going
23:57
Speaker 3: to say, I'm not going to tell you what I'm
23:59
Speaker 3: filing for because I'm sure Will ryand and others are listening.
24:04
Speaker 3: So what happens from here. So typically in an ETF filing,
24:07
Speaker 3: there's you know, there's a series of comments and questions.
24:10
Speaker 3: The SEC will look at your initial filing and come
24:12
Speaker 3: back to you with a list of questions and you'll
24:14
Speaker 3: answer those, and you'll go back and forth over things
24:17
Speaker 3: like disclosures and the underlying functioning. As an outsider, the
24:22
Speaker 3: clue on whether you're getting close or not is how
24:25
Speaker 3: detailed the filings are. Filings start very abstract, and once
24:29
Speaker 3: they fill in all those details, that is the signal
24:32
Speaker 3: that you're typically approaching launch, although nothing's guaranteed until it launches,
24:36
Speaker 3: so that will be the process behind the scenes. What
24:38
Speaker 3: a company like bitwise will work on in these situations
24:41
Speaker 3: is ensuring that the liquidity is there, ensuring that the
24:44
Speaker 3: trading partnerships are there, ensuring that swap counterparties are lined up,
24:48
Speaker 3: ensuring that you know the initial audit and things of
24:51
Speaker 3: the filing is done, and then on something like this,
24:54
Speaker 3: ensuring that you know how you're going to communicate about it,
24:56
Speaker 3: that you can do so in an appropriate manner. A
25:00
Speaker 3: it's a pretty big task. So there's the SEC dance.
25:04
Speaker 3: There is the sort of execution of the product if
25:08
Speaker 3: it launches, dance, and then there's the messaging dance, all
25:11
Speaker 3: of which has to happen well in advance of any
25:15
Speaker 3: potential launch because it has to go through regulatory compliance approvals.
25:19
Speaker 3: So that's the process taking place a bit wise, and
25:22
Speaker 3: it's a yeah, it's a lot of work.
25:31
Speaker 2: Ben Johnson, our mutual friend from morning Star. When these
25:35
Speaker 2: came out, he wrote this, He goes casino. Gamble has
25:39
Speaker 2: just filed for its first ever gamble shares ETFs. Gamble
25:42
Speaker 2: shares when baby swift ETF, gamble shares what will bitcoin
25:46
Speaker 2: do in the next five minutes ETF, and gamble shares
25:50
Speaker 2: who wins the next powerball ETF. So he's having a
25:53
Speaker 2: little fun for that with that. That's where I think
25:56
Speaker 2: a lot of people's minds initially went, We'll see I
26:00
Speaker 2: hear you, though. I think being able to bet on
26:03
Speaker 2: politics without having to overly think it makes a lot
26:06
Speaker 2: of sense. I want to just ask one of the
26:07
Speaker 2: questions for you about polymarket. It's somewhat related. It's adjacent
26:11
Speaker 2: to this. Polymarket runs on the blockchain, correct, Can you
26:15
Speaker 2: go into that a little bit? I found that people
26:17
Speaker 2: don't know that, and even I don't know it completely.
26:20
Speaker 2: But how does that work?
26:22
Speaker 3: Sure? Yeah, Polygon is a crypto based prediction market. It's
26:27
Speaker 3: not the first, but it is by far the largest.
26:29
Speaker 3: So the underlying contracts are resolved using oracles as opposed
26:35
Speaker 3: to external data feeds run by an individual. So, in
26:38
Speaker 3: other words, while a traditional market may look to Bloomberg
26:42
Speaker 3: data directly to resolve a contract, polymarket will engage with
26:48
Speaker 3: a data oracle that will aggregate sources to resolve it,
26:51
Speaker 3: sort of independent of internal oversight, and then the underlying
26:56
Speaker 3: contracts are maintained and stored on a tradition from a blockchain.
27:01
Speaker 3: The beauty of it is it's not that different. Actually,
27:04
Speaker 3: it speaks a lot to where crypto is going. If
27:06
Speaker 3: you think about it from a user perspective, polymarket calshi.
27:10
Speaker 3: Your user experience is actually remarkably similar. Right, you invest,
27:15
Speaker 3: you get the outcome, it's a dollar or it's zero,
27:18
Speaker 3: and you don't care what's happening behind the scenes. Right,
27:21
Speaker 3: do you really care how exactly they're resolving these contracts
27:25
Speaker 3: or how exactly they're storing You don't. The real difference
27:30
Speaker 3: is in the community they access in sort of the
27:34
Speaker 3: global versus country based regime. And I think you're going
27:38
Speaker 3: to see that. It's sort of a roadmap to where
27:40
Speaker 3: I think things like tokenization will look like in the future,
27:43
Speaker 3: where you won't even really notice how it works.
27:46
Speaker 2: And by the way, Joel's been asking me about his
27:49
Speaker 2: bitcoin investment. You know, he's again saving up for his
27:55
Speaker 2: cyber truck and he wants to know when's it going
27:58
Speaker 2: to hit one hundred and twenty five thousand dollars.
27:59
Speaker 3: Again check the Polly market man.
28:03
Speaker 1: Yeah, I love I love that Eric can just read
28:08
Speaker 1: my mind and articulate all the things that are ticking
28:10
Speaker 1: around my brain.
28:13
Speaker 2: Everything I just said is kind of the opposite of
28:15
Speaker 2: how of Joel.
28:18
Speaker 1: He doesn't. Yeah, I do, but nottt just done. On crypto.
28:23
Speaker 1: I mean, it has been a bumpy last few months,
28:27
Speaker 1: and you know, just to change gears out of prediction
28:29
Speaker 1: markets and and talk about where crypto and and and
28:33
Speaker 1: bitcoin seemed to be going, Like where do you feel
28:36
Speaker 1: we are in the life cycle of uh, you know,
28:40
Speaker 1: post ETF launch, huge initial enthusiasm now a lot of
28:43
Speaker 1: retail investors bought in at a moment that you know
28:46
Speaker 1: we're well below.
28:47
Speaker 3: Yeah, that's absolutely right. Specific to bitcoin, I think we're
28:51
Speaker 3: in a classic crypto winner. It's a four year cycle.
28:54
Speaker 3: I think it will recover towards the end of the
28:57
Speaker 3: year as we get past tax season, particularly if we
29:00
Speaker 3: get passage of the Clarity Act, and particularly if the
29:03
Speaker 3: bitcoin community takes action on the rising concerns about quantum computing.
29:08
Speaker 3: I do think that that is a weight holding the
29:11
Speaker 3: market back from what would otherwise be a recovery into
29:14
Speaker 3: the spring of the four year cycle. So I think
29:19
Speaker 3: will it rally towards the end of the year is
29:22
Speaker 3: dependent on whether the Clarity Act passes and whether the
29:25
Speaker 3: bitcoin development community takes robust action on quantum concerns. If
29:30
Speaker 3: both of those happen, I think it will be a
29:32
Speaker 3: great end of the year. If neither of those happen,
29:34
Speaker 3: I think it will be challenging. So that's a contingent
29:37
Speaker 3: answer on the rest of crypto. Look, I think stable
29:43
Speaker 3: coins and tokenization are effectively a runaway train, and I
29:47
Speaker 3: think that's going to drag up the rest of crypto again,
29:50
Speaker 3: particularly if we get the Clarity Act passed through Congress.
29:53
Speaker 3: I do think that that is an important fork in
29:56
Speaker 3: the road, because if it doesn't pass, I think you'll
29:59
Speaker 3: see Wall Street pull back a little bit from tokenization efforts.
30:02
Speaker 3: On concerns on what would happen in a new administration.
30:05
Speaker 3: If it does pass. I think they'll lean in, and
30:08
Speaker 3: so that is supportive for Ethereum, Solana and DeFi apps
30:13
Speaker 3: in particular, but generally speaking, we're just in a traditional winter.
30:17
Speaker 3: We've had these before. Bitwise is seen three of these now.
30:21
Speaker 3: We started in twenty seventeen, and you know, even with
30:25
Speaker 3: the pullback, bitcoins up, you know quite a bit since
30:28
Speaker 3: since bitwise started, So I think it'll be okay.
30:32
Speaker 1: It sounds like you maybe want to make a prediction
30:34
Speaker 1: about the Clarity Act.
30:37
Speaker 3: Actually, the funny thing is the prediction markets on the
30:40
Speaker 3: Clarity Act. I think put the odds it's something like sixty.
30:42
Speaker 3: I'm slightly more barrassed than that. So if I were,
30:45
Speaker 3: if I were taking the bet on that, I would
30:47
Speaker 3: take the under unfortunately, but wouldn't it be nice if
30:50
Speaker 3: I could hedge that in a familiar ETF wrapper.
30:55
Speaker 2: It is really crazy how you can do. You can
30:59
Speaker 2: get on some of these things pretty easily. The ETF
31:02
Speaker 2: just is that much easier. It's just it's amazing to me.
31:07
Speaker 2: It's not that hard to do prediction markets or crypto
31:10
Speaker 2: on your own. I just want to put that out there.
31:12
Speaker 2: I just think it's it's that's again why I got
31:14
Speaker 2: into the industry. It is unbelievable.
31:17
Speaker 3: It is, it is remarkable, and it expands the set
31:20
Speaker 3: of people who use it dramatically. We saw that in
31:23
Speaker 3: bitcoin ETFs. Now you have every macro hedge fund trading bitcoin. Look,
31:28
Speaker 3: I think prediction markets are one of the most important
31:31
Speaker 3: new financial ideas that I've seen, maybe since crypto uh
31:36
Speaker 3: and and I think I think if we can impacte
31:39
Speaker 3: them in an e t F, you'll see extensive use
31:42
Speaker 3: of them in various portfolio settings.
31:44
Speaker 1: We'll leave it there, Matt, thanks so much for joining
31:46
Speaker 1: us on Trillions.
31:46
Speaker 3: Thanks Matt, thanks for having me.
31:53
Speaker 1: Thanks for listening to Trillions until next time. You can
31:55
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts,
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Speaker 1: Spot five, or wherever else you'd like to listen. We'd
32:02
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32:04
Speaker 1: I'm at Joel Weber Show, He's at Eric Faulcinus. Trillions
32:08
Speaker 1: is produced by Magnus Henrikson