WBD337 Audio Transcription
Bitcoin ETFs Unlock a Wall of Money with Steven McClurg & Jeff Kilburg
Interview date: Wednesday 21st April
Note: the following is a transcription of my interview with Steven McClurg & Jeff Kilburg. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this episode, I talk to Steven McClurg and Jeff Kilburg from Valkyrie. We discuss why Bitcoin ETFs are a game-changer, pent up institutional demand, and how soon they are coming.
“Think of 10,000 people sitting outside the amusement park trying to get in, that’s the institutional investment community…that’s the next leg higher, that’s $100K Bitcoin.”
— Jeff Kilburg
Interview Transcription
Peter McCormack: Steve, good to see you again, Jeff nice to meet you. ETFs, everyone's talking about ETFs, about wanting an ETF. It's a big question out there in the market and I know a lot of people are messaging me and they're like, "When are we going to get an ETF?" I know we have one in Canada and Brazil, but people care about, "When are we going to get one in the US?" There's a lot of interest in it.
Before we get into that, Steve, you've been on my other show Defiance, we talked about supply chains during the COVID crisis, it was a great show, it was good to talk to you back then and we hung out in Mexico last year, but it's good to see you again, man. Just introduce yourself to everyone, so they know who you are.
Steven McClurg: Yeah, absolutely, good to see you again Peter, hope to see you soon in person. My name's Steven McClurg the CIO of Valkyrie investments. We are really focused on getting an ETF for Bitcoin here in the US. I've spent a lot of my career building and launching and managing ETFs, some of them very difficult to do. Bitcoin isn't the hardest thing that I've tried to do in the ETF world, but that's what Valkyrie's doing along with a lot of other things, managing assets in the same space.
Peter McCormack: Jeff, nice to meet you, finally. Do you want to introduce yourself, let everyone know who you are?
Jeff Kilburg: Yeah, Peter, please to meet you and I'm coming right now from snowy Chicago. Hard to believe end of April here we are snowing, but we are excited. Steve McClurg; I've known Steven for over a decade going back to his Guggenheim days. We get excited at KKM Financial and as the founder and CEO, we really pride ourselves on being a boutique as a management firm.
We're headquartered here in Chicago, we're pretty deep into the ETF world, we utilise a lot of ETF model portfolios to provide investment solutions for our clients. We get really excited about one of our models and just a little tease here for Peter and for all of the viewers and listeners, that we're going to really get into our model that really identifies companies that directly or indirectly hold Bitcoin on their balance sheet.
We saw in that universe a couple of years ago, maybe a handful, maybe a dozen different companies had that type of exposure; now there's global adoption and with the enthusiasm in the cryptocurrency, we're seeing more and more names. We actually envision about 100 different companies being inside of that universe that directly or indirectly have Bitcoin on their balance sheet.
Peter McCormack: It's a big deal, man. Firstly, Jeff, I see a helmet behind you and a boar, and you're in Chicago, are you a Chicago Bears fan?
Jeff Kilburg: I am a Chicago Bears fan but the helmet you see over my shoulder is from the University of Notre Dame. A long, long time ago, Peter, I played for Coach Holtz in the 1990s.
Peter McCormack: Notre Dame, they've got the Irish connection, right?
Jeff Kilburg: That's right, funny and Irish, baby.
Peter McCormack: Yeah, I'm half-Irish. I don't know a lot about football, I know the Bears have sucked for quite a long time though, right?
Jeff Kilburg: Check, you're absolutely right on that and we're still at a loss, it's like a ship just going in circles on Lake Michigan, but nonetheless we're loyal here in Chicago and we're hoping for the best from the Bears next year.
Peter McCormack: Sorry, man, you want to come and talk about ETFs and here am I, a British guy, giving you shit about your team, but okay. Steve, you know the kind of show I put together. Just for those who don't know, let's explain what an ETF is and how they work.
Steven McClurg: Absolutely. First of all I do want to point out that if you want a real football team, it's Tottenham, right?
Peter McCormack: You'd better watch your mouth, man, honestly! I'll kick you off this show right now. Me and Jeff can do this on our own.
Steven McClurg: Really all an ETF is, it's an instrument that makes it really easy for people to buy various assets, whether it's a pool of companies that you want to hold like the S&P 500, whether it's gold or silver. It's hard to go buy gold and silver physically; you have to go down to some pawn shop-looking store down on the corner, where they're selling you gold at really high prices and buying it for really low prices and there's quite a spread there, but an EFT gives you the ability to buy and sell it much more easier than a lot of other things. You can also hold various other assets, but Bitcoin is one of those assets that gives a lot more people access through an ETF if it were available.
Peter McCormack: Okay, I've got a few questions though. We're really saying it's really the ability to invest in the asset rather than hold the asset, because if you have a Bitcoin ETF, you don't essentially hold Bitcoin. We'll come back to the Bitcoin one itself. So if there was a gold ETF, whoever runs the ETF, are they obliged to buy and hold gold reserves for the amount that people are buying; or are these just paper investments and they can take the risk?
Steven McClurg: They are actually obliged to hold the gold, so they're buying the gold and then they're actually holding it at a third-party custodian, meaning that if something happens to that manager, then you have direct access to the underlying asset, the gold itself. They do have an obligation to hold that, and it is double-checked, that's why it's important in a fund like an ETF that there's a manager and then there's a third-party custodian. The third-party custodians double-check to make sure that everything that they say that they're holding is actually theirs.
As a matter of fact, everybody's heard the news this last week of Bernie Madoff passing away in prison. Ten years ago, everybody knew who Bernie Madoff was and the really interesting thing about what he was doing was they were falsifying records and passing them out to people saying, "Here's how much money you have; here's how much you have in assets with us", and that's how they were able to get the scheme going, so to speak.
So all you had to do, if you were a client of Bernie Madoff's, was call the third-party custodian bank and verify that the assets matched and you would find out very quickly that they didn't; and that's the beauty of having a third-party custodian in a fund structure like an ETF.
Peter McCormack: Nobody checked in on Bernie?
Steven McClurg: Yeah, nobody checked in. I remember when I was a young analyst reviewing over all of the various investments that we had at the company that I worked at, you would get custodian statements in the mail every month and most people just get that stack of papers and toss it in the trash. I would actually go through and compare the custodian statements to the manager statements to make sure that they matched. I thought everybody did that, right, that's the way I was trained; but apparently none of the people that were putting money with Bernie Madoff, on behalf of their clients by the way, were actually doing that or they would have caught him.
Jeff Kilburg: Steven, Peter, I've got a funny story about those trade tickets real quickly. There's an asset manager here in Chicago, late 1990s, when Bernie Madoff was really just getting going. Typically, to Steven's point, when you do see those trade tickets, they come in pretty randomly, Peter. You get a whole host of trade tickets on what transpired in your account and it's really disorganised.
Madoff would send these trade tickets to this specific client here in Chicago and they were all squared, a nice little bow on it, just way too organised, way too neat. That set up a red flag. That specific or entity or person, I should say, in Chicago, I can't name them of course, they decided it was too neat, it was suspicious, and they exited. They were made fun of for about the next decade because Madoff went from $1 billion to $2 billion up to $65 billion, but sure enough his suspicion, his spidey senses were right that they were way too organised. So, if something doesn't look right or I should say here in Chicago, if it smells like a rat, looks a rat; it's a rat.
Peter McCormack: You're saying with an ETF, someone can actually check that they are holding?
Jeff Kilburg: That's the beauty of an ETF. This is really fascinating if you rewind 20 years ago, when BlackRock launched iShares, the ETF comes. So, think of an ETF, because this really is the intersection of traditional finance and we have new Bitcoin cryptocurrency finance intersecting here, but an ETF I like to think of it as a basket.
So, let's use the S&P 500, everyone's familiar with the S&P 500, that's an index that's created of 500 companies. So instead of individually buying those 500 names and properly weighting them because that's a market cap weighted index, which basically means the biggest companies have more of a weighting; that market cap weighted index, you would have to spend a lot of time to really allocate. If you were to buy an ETF SPY, that's a basket, that's the vehicle, it's one basket and all 500 names are in there; so with one click, you can buy SPY which gives you the exact same mirror or correlation, a congruent line, for the S&P 500.
What the ETF vehicle has really done, it's simplified the process, but you have full transparency in that ETF to see the underlying or to see in that basket and that's what really provides transparency for investors globally to understand. That's what's the beauty of the ETF: they're low cost, they're liquid, they trade, they're very tight bid offers; so it's just a superior vehicle. We get excited; you're seeing trillions and trillions of dollars of growth every year going to the ETF space and now obviously, we're focused on having that ETF vehicle, that ETF basket, provide that investment solution for Bitcoin demand globally.
Peter McCormack: If I go on, what are you buying; a share in an ETF? How does it work?
Jeff Kilburg: You can even buy fractional shares now. Steven, talk to us about fractional shares, it's really gotten interesting and tremendous for small investors as well as institutional investors.
Steven McClurg: The interesting thing about an ETF is when you buy a share of an ETF, you have ownership of the entire pool underlying. In other words, you have ownership of that, you have the right to take a distribution out of it. You can either trade your shares in and sell it to somebody else, or you can say, "I want to give you my shares and I want to take the thing that's underneath it, that represents my shares". You have the right and they have the obligation to give it to you.
Peter McCormack: Hold on a second, sorry. I'm getting we're going to have more questions than answers at this rate. If I go and buy a share of an ETF, say I buy 100 shares of the ETF, at the point I buy that, do they trigger themselves a purchase of all the underlying assets to cover that?
Jeff Kilburg: That's exactly, right.
Steven McClurg: Yes.
Peter McCormack: They instantly purchase and if I sell, they instantly sell?
Steven McClurg: That's correct.
Jeff Kilburg: Correct.
Peter McCormack: Don't trading fees not get in the way for them? How does that work? If lots of people are buying single shares surely that's going to be annoying.
Steven McClurg: What's certainly happening there is the ETF provider is working with several traders behind the scenes and because there's several people buying the ETFs on a single day, what you do is you create more units of it. Let's say that there is $10 million worth of demand for an ETF in a day; that means you create $10 million more of that ETF. They then go behind the scenes and process all of those trades; but yes, trading fees do work into that but you're buying it in bulk, therefore your trading fees typically get smaller than what you and I, if we're just buying $20,000 worth of Bitcoin or Apple stock, than what we would see.
Jeff Kilburg: Just to add onto that, Steven, you look at a typical ETF, there's an expense ratio; what it costs that end user. If I was to buy SPY, that cost 0.09 basis points. So think of a typical financial adviser, they charge their client let's say 1%, that's 100 basis points. To buy an ETF it'll fluctuate. They'll see really low-cost index ETFs, talking about 9 basis points, all the way to actively manage -- look at Cathie Wood at Ark, she charges 75 basis points.
So, it runs the gamut and I think it's really correlated to the management component, so if you see an actively-managed ETF, that's going to demand a higher fee because of the active manager and the secret sauce. You just have an index-based ETF, that's going to be a lower cost ETF.
Peter McCormack: Okay so essentially, they're not actually buying and selling instantly at every moment; they're just clearing at the end of the day the buys and sells?
Steven McClurg: That's exactly right, that's what the manager is doing. Now, you're trading it all day long, you don't see the sausage being made, but at the end of the day all the new creations or all the new redemptions is all cleared by the manager.
Jeff Kilburg: To be clear, you the client, you the investor, you're getting that exact price at that exact second. It's not like a mutual fund where you get the end-of-day pricing; you are getting that exact price. So if you see fluctuations, let's rewind a year ago when we saw 10% swings in the marketplace in the equity markets, when it's going up and down 10% contingent upon when you press click and buy that ETF, you're getting that exact pricing.
Peter McCormack: Okay but you're saying, Steve, I can also give back these shares and I can demand the underlying asset; so if it's shares, I get all the individual share certificates that make up the basket?
Steven McClurg: Typically what happens is, this is called a redemption process. If you say, "Hey, I want to get those back. I want to get everything underlying back", you can either get it through the cash value of what you're asking it back for, or what they call in-kind contributions, meaning the actual underlying.
Peter McCormack: So, I actually get the share certificates?
Steven McClurg: You absolutely can, yes.
Peter McCormack: Even if I was buying a fractional share of like the S&P 500 and I was spending like $25, I would get all the 500 individual fractional shares?
Steven McClurg: The way that it actually works is there are limits, and typical limits on ETFs are $2 million, $2.5 million, sometimes $5 million. So, if you have that much then, yes. If you have the S&P and you demand all the underlying back, then you'll get $2.5 million worth of all the S&P stocks. Now, because that function is in place, what it does is it keeps the ETF trading at a very close price range in value to all of the underlying shares.
Peter McCormack: Because if there isn't, there would be an Arb?
Steven McClurg: That's exactly right. Think about the Grayscale Bitcoin Trust for a moment. We saw this massive premium, and everybody thought that that was normal, "Oh it's just because of demand". Well, it's not because of demand, it's because grantor trust, which is the structure that Grayscale is in, doesn't have a mechanism to redeem your shares. It's like a casino, you can buy in, you can't really take the money out, they get all the money, you walk away empty.
Jeff Kilburg: Hotel California.
Steven McClurg: Even better. What's happening now with the Grayscale Trust is it's trading at a massive discount. Yesterday, I saw a discount of 12% meaning if you own it, then you own 12% less of what you think you own if you were to trade it, because there's no mechanism to Arb that. So that's what makes an ETF superior to that type of structure.
Peter McCormack: Fine, but with the Grayscale Trust, I imagine in a scenario whereby they get an ETF approval and they've talked about converting the GBTC into an ETF, at a 12% negative that would be a good buy; that would instantly get swallowed up.
Steven McClurg: I agree.
Peter McCormack: Are you therefore surprised that there is this negative on the GBTC?
Steven McClurg: I'm not surprised at all. I used to manage these vehicles called closed-end funds which are very similar to the Grayscale Trust. Closed-end funds trade at a natural 8% to 12% discount to the underlying just because of the illiquidity discount that you get. It's very difficult to arb, you don't have a redemption feature, so that's the natural discount. So, 12% for Grayscale, that's probably what it should be.
Peter McCormack: Okay, so going back to me as Pete, little poor trader from England; if I'm buying my fractional shares, I don't have the opportunity to transfer from the underlying asset, because there's a minimum value, but I can still buy an ETF, right? You've got to be a big spender to be able to redeem it for the underlying asset?
Steven McClurg: Yes, you can buy and then you can sell them, but because there are big spenders that are actively making that arb trade, when you're buying and selling, your discounted premium is very very small. We are talking a typical band under 50 basis points.
Peter McCormack: So, do you imagine when a Bitcoin ETF finally gets approved that it will be exactly the same scenario, that someone will be able to redeem it for the coins?
Steven McClurg: They absolutely could, within that certain range, if it's $2.5 million, $5 million.
Peter McCormack: That's really interesting. Let's talk about the Bitcoin ETFs, because there have been, what are we at, like 20 applications now?
Steven McClurg: Yeah, exactly. What is there, like eight, Jeff?
Jeff Kilburg: I've lost track of toes and fingers I'm counting on, but yeah, I think we are around nine.
Steven McClurg: Plus you have four in Canada.
Peter McCormack: What do you think the holdup is? Why do you think the SEC is not approving these?
Steven McClurg: What I really think happened was when the first round of applications went out three, four, five years ago, there was a lot of questions about Bitcoin at that time and then there was a big run up in the market and the big crash in the market, you know, crypto winter.
Peter McCormack: Freaked out the regulators.
Steven McClurg: Yeah, so there's a lot of hesitancy there and I think there were a lot of questions and comments on those Bitcoin applications that really dug the industry into a hole that's very difficult to get out of. We're now in the process of trying to answer a lot of those questions and comments and to prove that this is a legitimate digital currency. That's something that I've been working on for three years, but with Valkyrie it's something we've been working on for almost a year now.
Peter McCormack: So, with all these different applications, as you say, Jeff, there's nine, how much they can actually vary from one to the other in terms of what they are or what the structure is, the technicals to it?
Jeff Kilburg: I think there's so many nuances in the application, but you're right; fundamentally they're going to give you exposure, direct exposure to the fluctuations in the price of Bitcoin. I think with the staff the SEC has really looked at, and let's rewind when we saw a lot of those initial injections in 2017, the initial apprehension I believe, this is my opinion only; what I believe is that the staff, which there is a separate committee called Markets and Trading, they were trying to understand the depth of liquidity and that's dramatically different and so it's a maturity component, Pete.
We're seeing the maturity of Bitcoin, we're seeing the CME Group, where I became a member in the late 1990s, you're seeing futures in that market now approach 30,000 futures a day. If we go back to 2017 there weren't even at 3,000 futures; that's when they started the CBOE mini contracts. So, I think the fact that now the CME Group has the 5-coin future, and they also have the one-tenth micro, so if you want to trade futures or potentially hedge, if you're hollow and you want to hedge, you can now use these futures, so this is just a bigger picture of the maturity process.
So I think we're in a very different predicament in 2021. That maturing component, I think that is the overarching theme which will get us over the hurdle and approved; but which Bitcoin provider or issuer or application is going to win, that's the trillion-dollar question, but I do think cost, I do think expense is going to be a big difference. It's also the trading mechanism: will all be approaching the ETF the same; does that application potentially have the resume to be trading that ETF? There's a lot going into the formula here on who's going to be the winner, but I think it's an open market and we get excited.
Steve and I have been talking for years, we thought this was a 2022, potentially 2023 conversation, but the maturity and the price of Bitcoin and cryptocurrency being adopted globally, now we're seeing our brothers up north in Canada have these Bitcoin ETFs, so I think the time is now and I don't know if it's Q2 or Q3, but we get really excited not just about the enthusiasm but the maturity. I can't stress enough the maturity of the Bitcoin product from a futures product, as well as the global adoption, that's the difference maker and that's what's going to be the catalyst, I believe, to get the approval.
Peter McCormack: Okay, but wasn't one of the other big reasons the SEC was rejecting the ETFs was also worrying about manipulation in the market? Where do you think we're at with that?
Jeff Kilburg: I'll let Steven take that one, because he's pretty deep in the weeds on understanding that.
Steven McClurg: As we all know, any time that there is a lower market cap asset or an asset that's just very small, it's very easy to manipulate it. For instance, look at small cap publicly traded companies that are trading on the pink sheets, right, they're very easy to manipulate; and for that reason, the SEC only allows a certain percentage of those small cap companies into an ETF. It's plain and simple, if there's a big order that comes in, it can really move the market in one of those small equities. Now, larger equities like Microsoft or Apple, they're a lot harder to move and it takes a lot more money to move the price in that.
Now, everything's manipulable and people will certainly try to manipulate anything, even large cap equities, the entire market, LIBOR rates; there's a lot of things that can be manipulated. But the larger the Bitcoin gets, the harder it is for somebody to come in and drop $1 billion to move the market. It takes more and more money to move Bitcoin even a percentage point. It's still possible, but it's now at that size where it is very difficult to move it.
This weekend we saw some big price swings in Bitcoin of course and other crypto assets, but that's probably one of the biggest price swings we've seen in a really long time and on a comparative basis, it wasn't even that big. I mean, we went from like $60,000 to $55,000.
Peter McCormack: Dude, I love the price swings.
Steven McClurg: I love the swings, man.
Peter McCormack: Dude, I'm a psychopath, I see it drop $10,000 and I laugh, I fucking laugh now; I don't know about you, I laugh. I don't sit there and go, "Oh God, my net worth", I just laugh.
Steven McClurg: You have to, right? You've been around this industry long enough, it's just it's funny, right, in a lot of ways, but I happen to be up. I'm an old man now, wake up and go to the bathroom three times a night, so I'm looking at my phone and I'm like, "What just happened? I'm buying", so the middle of the night I'm going to my computer and buying more Bitcoin it's great, I can't help myself!
Peter McCormack: Buy the dip, man, buy the dip. Right, so listen, I think one's coming. From the people I've spoken to who are involved in this, and there's a few, most still feel like it's not this year; most feel like it is something for 2022. I know, Jeff, you mentioned maybe 2023, but most of the indications I get, it's probably not this year, probably 2022. Either way, there are nine in the market, there's a massive advantage to being the first. How the hell does the SEC even pick one in a fair way? Is it the case that if they approve one, they have to approve them all at the same time and the floodgates open or do you think they will just allow one?
Jeff Kilburg: I think the first criteria is they're looking to see how handsome their Chief Investment Officer is and the beard that Steven has certainly is an uptick; but Steve, what do you think; what's the leading criteria that the staff is looking at?
Steven McClurg: I've been through this several times. I remember filing an ETF back in my Guggenheim days and PIMCO had a similar one and BlackRock had a similar one and it was like, "Okay, who's the SEC going to choose?" Different things happen at different times. Sometimes they'll release the kraken all at once; sometimes it's based on who filed first and then sometimes it's based on structure, who had the best structure; who had the best arguments? All of these things are a factor.
I personally believe where the highest odds are, in this current amount of this applications you had VanEck, then you had us.
Peter McCormack: VanEck, yeah. Winklevoss.
Steven McClurg: Yeah, and then you had WisdomTree. I truly believe that the SEC will probably, and I'm not trying to predict or trying to put anything out there, but I think that us, VanEck and WisdomTree are probably the first batch, just based on timing.
Peter McCormack: I've been speaking to the guys over at VanEck, I've spoken to Gabor quite a bit. Is there something with VanEck in that they've run so many different types of ETFs anyway, or are you all like this? I know they've got a long track record in ETFs. Would it be like the SEC trusts them guys, they think that's a nice smooth safe one to start with? Also, would it be a case, because Bitcoin is still highly controversial, it's still one of those things that people look at as a bit weird and a bit odd, that they might just want to approve one and see how it goes?
Steven McClurg: I don't think they'll approve one to see how it goes. I think if they do, I think they might approve the first one and then a week later approve the second one that was on file, then a week later approve a third one that was on file. That's also a high probability scenario.
Peter McCormack: How big of a game changer is this really? I know this makes it easier for people to invest in Bitcoin who maybe can't go and buy the underlying asset or they're just a bit unsure about buying the underlying asset, they're just a bit unsure about technically buying Bitcoin, custodying it; I know it makes it a lot safer for them, there is that scenario.
But, are there other scenarios I wouldn't be aware of, like the fact that the ETF exists suddenly means that it suddenly appears on all these different trading platforms and trading websites, that suddenly there's so much more access because of that?
Steven McClurg: There's access and then there's a comfort model. Peter, you and I have been around for a long time.
Peter McCormack: Hold on a second, man, how old are you?
Jeff Kilburg: He's just brought you overboard, Pete.
Peter McCormack: Jesus, man, how old are you?
Steven McClurg: I'm 46, how old are you?
Peter McCormack: Dude, 42. You've been around a lot longer than me.
Steven McClurg: You've been around longer than me; you've been in Bitcoin longer than me.
Peter McCormack: Is that true?
Steven McClurg: I think so. When I came in you were already doing podcasts.
Peter McCormack: Maybe, maybe. All right, I forgive you if we're just talking about Bitcoin, I thought you meant life. Jesus, man, I'm already feeling old, I'm going grey!
Steven McClurg: Exactly!
Jeff Kilburg: Let me jump in real quick, Pete, because I think you're absolutely right, you and Steven talking about the retail, the apprehension, the ability, the access, but the one piece of the puzzle which I go back to: this intersection of traditional finance and cryptocurrency. The real component and no one's really talking about is that there are all these endowments, there are all these pensions, there are all these different companies that have policies and procedures. Inside of their policies and procedures, all that ability allows them to invest; there's no ability for them to invest into Bitcoin currently.
Peter McCormack: Right, they need ETFs for that.
Jeff Kilburg: If there's an ETF all of a sudden, they can invest in ETFs, now you're lighting up a whole new global vertical that can access Bitcoin which they couldn't before. So think about if you've got your favourite amusement park, you guys even have amusement parks over in England, we have a ton over here?
Peter McCormack: Yeah, we don't have like Six Flags, Eight Flags?
Jeff Kilburg: Okay, but I thought you said soccer stadiums?
Peter McCormack: We don't have that.
Jeff Kilburg: Okay. Well anyway, think of 10,000 people sitting outside the amusement park trying to get in. That's the institutional investment community, that's all the endowments, that's all these institutional investors who can buy an ETF, but they can't for whatever reason, because of their policy and procedures, can't buy Bitcoin. That's the next leg higher; that's $100K Bitcoin in my mind and that is subsequent to a Bitcoin being approved in the US, a Bitcoin ETF.
Peter McCormack: Right, okay. Jeff, how long have you been in the Bitcoin game now? What's your kind of thesis?
Jeff Kilburg: I've been in Bitcoin probably about five years. Steven pulled me a little bit deeper about two years ago, but I was over in Europe back in 2017, we did a little tour, talking crypto, specifically Bitcoin. I'm not a newbie, but I'm by no means anywhere near the experience that you guys are.
I get excited because I have a background, I started my career, I started trading the pits in the Chicago Board Trade which got bought by the Chicago Mercantile Exchange, so I traded treasury futures, interest rates, the deepest and most liquid futures contracts out there. So, I've taken my experience from the floor operation, turned it into an SEC registered investment firm and now all of a sudden, we're trying to bridge that. Yes, I took off my tie, Pete, because I know Steven would have given me crap if I was wearing a tie on here, I'm usually wearing a tie in CNBC.
But I get excited about this narrative of cryptocurrency and traditional financing and blending in between, so it's truly Main Street, Wall Street where I've been probably considered more Wall Street for the last couple of decades, but here I am trying to understand. I've been an early adopter in this traditional finance that you do need exposure to some extent to cryptocurrencies.
Peter McCormack: Crypto or Bitcoin?
Jeff Kilburg: Both.
Peter McCormack: No, Dude, it's Bitcoin only.
Jeff Kilburg: Bitcoin only?
Peter McCormack: Steve, you not told him this shit?
Jeff Kilburg: What about Dogecoin and Doge day itself?
Peter McCormack: Fucking Dogecoins. Are we going to get a Dogecoin ETF?
Steven McClurg: Over my dead body.
Peter McCormack: Wouldn't that be funny we got a Doge ETF first? Jeff, I've got to ask you something. You worked in the pits, like in those films where you see everyone yelling at each other and throwing tickets at each other?
Jeff Kilburg: Swearing, elbowing, yeah, I was in there for over a decade.
Peter McCormack: Is it just like that?
Jeff Kilburg: Yes, but probably a little nastier, so a very competitive environment. I used my football frame to really establish position in there and it's competitive, it's high energy, and it was a great spot to learn risk management. When I was able to take what I learned over a decade of having a floor operation in the pits, translate that into more of a family office off the floor trading, but it's great now because we were one of the earlier adopters.
Once everything started to go electronic, and this is probably confusing to some folks, but you couldn't trade ten-year notes, you couldn't trade 30-year bonds, you couldn't trade all this stuff electronically, there was only the pits. Everyone in the world, it doesn't matter what language you spoke, you spoke numbers. Those numbers would come into the pit, and I was one of the market makers that provided that liquidity.
Taking that in transition into the electronic trading world, it doesn't matter if you're trading crude oil, it doesn't matter if you're trading Bitcoin futures, it doesn't matter what you're trading. That was the bridge and I think that's what people are really growing upon, so you're seeing a lot of people who used to trade S&P 500 futures, who used to trade equities, stocks. Now, they're walking away from trading those products because the volatility that you talked about earlier, people get so excited, and they flock. It's like a moth to a light, specifically in Chicago, traders love volatility so that's where Bitcoin, I'm not going to say cryptocurrency again, I know you're going to mute my microphone, but that's where Bitcoin gets so exciting.
Peter McCormack: Jesus, you two! Jeff, sorry man, I've got to ask a bit more about the pit, because all the way back to Trading Places, the first time I saw it and every time I've seen it since, they still had it in the Big Short right, you still had the pit in the Big Short? I don't understand; do they still have the pit today?
Jeff Kilburg: They do, they do at the Chicago Mercantile Exchange, called the CME Group, in Chicago, the pit is still there; COVID has changed that dynamic.
Peter McCormack: What the hell's going on? I see it, are people literally just trading with each other? Is that all it is? Is it just like trading online, but two people together?
Jeff Kilburg: No, it's not. The eurodollar options, which is the largest pit in liquidity; there's more volume in the eurodollar options pit than there is in any other product in the world, even more so than the US Treasury market. That pit, you'll have 500 guys in there still. 500 guys, a lot of them wear headsets, but the big institutions, the big traders, instead of going to the screen, what we call electronic trading, we call it the screen; so, instead of going to the screen, where there could be some manipulation, there could be some spoofing; instead of having that ability, they want to call into the pit and get a bid and an ask, get a quote to potentially move $1 billion of notional and they can do it like that because there's 500 people competing.
That competition really tightens up, it's not loose. Sometimes on the screen, it can be moving around a little bit and manipulated. So I think the big banks, the big institutions, the big traders, the big hedge funds, they still want the pit in certain products to exist because it gives them a more fair level playing field. Does that make sense?
Peter McCormack: Yeah, that makes sense. Steve, have you worked in the pit?
Steven McClurg: Never. I was a boring bond trader sitting at a desk in Santa Monica.
Peter McCormack: You're so boring. Well you're at Santa Monica, you were probably out surfing!
Steven McClurg: Yeah, exactly!
Peter McCormack: Jeff, can I ever go and see a pit? If I come to Chicago, can you get me in the pit?
Jeff Kilburg: Yeah, man, get in here. I got you, we'll give you a nice little tour.
Peter McCormack: I want to get in the pit.
Jeff Kilburg: I'll have Steven pump in some orders.
Peter McCormack: Do I get one of those jackets?
Jeff Kilburg: I'll get you a jacket my man, you bet.
Peter McCormack: Fucking Hell, man, I'm so excited. I've been to Chicago so many times, I love that shit. I want to go; I want to go and see it.
Steven McClurg: We'll even one up that, Peter, real quick; we'll one up that.
Peter McCormack: All right.
Steven McClurg: When we launch an ETF and we ring the bell, we're inviting you to the bell ringing ceremony.
Jeff Kilburg: You'll be wearing a smart looking jacket.
Peter McCormack: Do I have to wear a smart looking jacket?
Jeff Kilburg: No, we'll get you a badge, we'll get you a trading jacket, an old school trading jacket. You tell me your colour, and we'll get that sucker made.
Peter McCormack: I'll have to borrow a suit jacket from my son.
Jeff Kilburg: What's your badge going to be? Mine was "KIL", that was my badge so every time there was a trade someone wrote KIL. What will your badge be? You got to think about that shit?
Peter McCormack: I'll go for BTFC.
Jeff Kilburg: All right, we'll get it made.
Peter McCormack: You figure that one out, I think Steven knows what that is. I want to see that.
Steven McClurg: I know what BTFC is.
Peter McCormack: Yeah, you know it, man! So, when an ETF gets launched, I know when a company with IPOs they get listed on the service stock exchange, might be NASDAQ or whatever. With an EFT, is it similar or is it just everywhere?
Steven McClurg: You launch on a different exchange. The three major exchanges right now are NASDAQ, New York Stock Exchange and then a CBOE even in the United States is probably the third. You choose the exchange that you list on, but they all trade with each other. What will end up happening, if you go to your Charles Schwab account or your TD Ameritrade account or whatever online brokerage you have, they'll see everything listed. To the normal person, nothing looks different; but to us, which exchange you list on does matter, different ones have different features that are important. As long as you're listed on one of those top three, you're pretty good.
Peter McCormack: Okay. So, there's not only Bitcoin ETFs coming, you've got another ETF you were telling me about, Steve, based on companies investing in Bitcoin; can we talk about that?
Steven McClurg: Yeah, so there is a filing for the Valkyrie innovation balance sheet fund, and I'm going to hand that over to Jeff to talk more about.
Jeff Kilburg: Sure, so we can't talk about the ETF, we can confirm that there certainly was a filing for the Valkyrie innovative balance sheet ETF with KKM, we are the investment adviser. But what I can talk about, Pete, is the model. The model portfolio that we developed at KKM, this Valkyrie innovative balance sheet model portfolio, that holds a basket of stocks, so we get excited about that basket of stocks.
Think of the correlation of these companies that have Bitcoin on their balance sheet, either directly or indirectly, but think of PayPals, think of MicroStrategys, think of Square, but also think about some of the new companies that you're hearing come in; it's Domino's Pizza, you heard Slim Jim during their earnings last week talk about owning Ether, so it's all these companies that are now coming to embrace the fact that they want to have Bitcoin on their balance sheet.
PayPal obviously set off the whole parade of companies getting into the game last October when they talked about allowing their 350 million users to transact in Bitcoin. I can talk all day about the model, but the model does a great job identifying that. Historically, the model portfolio has had about a 0.6 to 0.7 correlation to the price of Bitcoin. What the hell does that mean? That means that about 70% of the move is captured on the price of Bitcoin with these names because of it.
If you think of Tesla, obviously it was a big deal when Tesla came out and talked about their $1.5 billion, which is probably about $2 billion now, right Steve, maybe $2.5 billion worth of Bitcoin. When you have a model or a theme that can really hone in on companies that have direct or indirect balance sheet exposure, that gets exciting because that's again, Pete, that's a bridge for a lot of companies out there, a lot of endowments or even some retail investors who have apprehension or don't have the ability to invest in Bitcoin. This is a bridge. They can invest in single companies, exchange traded companies that have that exposure, so we get excited about this theme of our model portfolio which is the Valkyrie innovative balance sheet model.
Peter McCormack: This model sounds interesting, I think, for two reasons. Firstly, while we wait for the SEC to actually approve a Bitcoin ETF, this is what we would call kind of a Bitcoin ETF, I would say. I know some people who wanted exposure to Bitcoin were buying MicroStrategy shares and quite often, MicroStrategy was referred to as essentially an ETF, their shares were essentially an ETF.
There's a second thing that's quite interesting about this model. If you're someone like me who perhaps just say I wanted to diversify, I wanted to get a little bit outside of Bitcoin, I might want to invest in companies like Square, like Tesla because I think they share my world view, they share my outlook. I think there are two things going on there, have I captured that right?
Jeff Kilburg: You have hit the nail on the head, and that’s the biggest piece of diversification. This model portfolio, primarily we're honing in and identifying and we utilise Valkyrie as our research partner to really help us better understand, but there is a piece of this model portfolio that has a speculative component.
These are companies that we believe are going to incorporate Bitcoin either directly or indirectly in the balance sheet, so this is a little bit of a speculative prediction, if you will, because we just see this universe growing. We thought conservatively at the end of last year, "We'll see 50 or 60 different companies in 2021 really embrace Bitcoin either directly or indirectly on their balance sheet". That number now is going to be closer to 100 and may vault 100 by the end of the year as we're seeing the price of Bitcoin continue to move higher.
So yeah, you're absolutely right that this is a diversification. It's a parallel line; even if there is a Bitcoin ETF out there, this is another way to have some diversified exposure to the space and to the companies that are the first movers into Bitcoin on their balance sheet and maybe they're paying their employees in Bitcoin; that's going to be a big deal.
Peter McCormack: I guess also it's a lower risk investment than directly investing in, say, a Bitcoin EFT as well, because these companies will be generating revenue, they're cash generating businesses as well, so it's a slightly differently risk profile from just a strict Bitcoin ETF.
Jeff Kilburg: That's right.
Steven McClurg: A good example of that is, there was the announcement that Barclays will not allow any of their advisers to put any of their clients into Bitcoin or even MicroStrategy because it holds so much Bitcoin.
Peter McCormack: Or HSBC, I saw it the other day; HSBC, a guy showed me literally a tweet he tweeted out to HSBC and they said they won't allow him to buy Coinbase shares.
Steven McClurg: Yeah, that's right.
Peter McCormack: What the fuck?
Steven McClurg: Yeah. There's such a massive restriction from so many of these banks that won't allow their advisers to buy Bitcoin, what we see this as though is potentially a softball, where some of these people that are a little bit more on the fence might want their clients in that as opposed to something that's pure Bitcoin.
Peter McCormack: Fascinating. How do you choose the companies and how do you choose to weight the balance of the basket?
Jeff Kilburg: Pete, you just want the secret sauce of our model.
Peter McCormack: Yeah, of course I do, because I was going to launch my own, dude.
Jeff Kilburg: I can't give you too much, right, this is the secret sauce but --
Steven McClurg: Yeah, because you'll tell Gabor!
Peter McCormack: Yeah, I'll tell Gabor. Did I see they announce one or something similar?
Jeff Kilburg: Yeah, so they have an ETF that is focused on companies that are in the crypto space, or blockchain space, we only want Bitcoin on the balance sheets.
Peter McCormack: Because you're proper Chads.
Steven McClurg: That's right.
Jeff Kilburg: That's right, bloody love it.
Peter McCormack: Well, fuck their's then, I'm all about yours. Okay, so you're not going to give me the secret sauce.
Jeff Kilburg: I'll give you a hint. Half the portfolio of this model portfolio could be owned in five names with a maximum weighting of 10% of those names, so five names potentially could be at 10% there's half, so that's all I can give you of the secret sauce. You've got to come to Chicago for the rest.
Peter McCormack: Tesla, MicroStrategy, Square, PayPal, I'm just guessing myself, I'm not even looking at you.
Jeff Kilburg: We do those in separate managed accounts, so if you want to open up a separate managed account, my man.
Peter McCormack: Coinbase, I reckon that's the five; we'll see. You can let me know if I get that right.
Steven McClurg: We can neither confirm nor deny that those are the five.
Jeff Kilburg: If I wink once it's yes, if I wink twice it's a no, how about that.
Peter McCormack: Yeah, we'll take it, I'll take it. When do you think this one's going to launch?
Jeff Kilburg: Great question. We're waiting to hear back from the SEC, so that's probably all I can really say on that. We get excited about the model, but we'll just go zip on that.
Peter McCormack: Fair enough, we'll keep an eye out for that. Back to the traditional Bitcoin ETF, which everyone cares about, everyone wants. I'm aware of the two, I'm aware of the Canadian ETF and there's the Brazilian ETF. Are there any more or is that it; is that the two that are in the market?
Steven McClurg: To my knowledge, those are the only ones that are out there that are a pure Bitcoin ETF. There's a few that are variations of it in Europe.
Peter McCormack: ETNs.
Steven McClurg: Yeah, ETNs, but nothing like what we have in Brazil and Canada at the moment.
Peter McCormack: In terms of trading of the Canadian and the Brazilian ETFs, have they given you any indication of the pent-up demand that there is for these?
Steven McClurg: It has. Back in my traditional finance days, we operated a business, a large ETF business in the United States and a small business in Canada. Any time that you would launch an ETF that was a very similar brand-new type of ETF in the US and Canada, the US is 50 to 100 times the size of what you would get in Canada. It truly is a much larger market, a much deeper market, so if you're getting $1 billion in the door right away in an ETF in Canada when it launches, imagine what it would be in the United States. I think it's a $50 billion market, fairly easily.
Peter McCormack: $50 billion?
Steven McClurg: Yeah.
Jeff Kilburg: Just think about it, Pete, they have to have get off their horses in Canada, go down to their computers and click, so we don't get off horses here in the United States so it's a lot quicker and a lot more money.
Steven McClurg: Don't you guys own Canada by the way? Don't you guys over in the UK, you own them?
Peter McCormack: We don't own them, we still just rule over them with our Queen. Well listen, I didn't think you were still on horses in Chicago.
Jeff Kilburg: No, we are not.
Peter McCormack: It's not Texas, baby!
Jeff Kilburg: No, we're in Teslas!
Peter McCormack: You're in Teslas? I do like Chicago, I need to get back there, man.
Jeff Kilburg: Let's do it.
Peter McCormack: This all sounds amazing, it sounds like this really is the floodgates, this could be the next big leg up and I tell you what's quite interesting about it. Firstly, I don't want it to happen this year because I've got a bet with American HODL that Bitcoin's not going to hit $300,000. I don't know if you know that, Steve, we've got a half a Bitcoin bet.
He thinks Bitcoin's going to hit $300,000 this year and I think it isn't, so we've bet half a Bitcoin on it, right. So I definitely don't want these ETFs till next year, so if you can save them for around like 3 January, 4 January, that would suit me. But actually, one of the interesting aspects of this is like everybody's looking at Bitcoin -- it's very cyclical; if you look at the last few halvings, the cycles have always been the same: about a year to a year and a half of bull market and about two to two and a half years of bear market and we seem to be going through the same.
A lot of people thinking, "It might come to December and then we're done", we'll probably go through another bear market, but I also did an interview with Dan Held where we talked about, "No, we're in the supercycle potentially". If ETFs start dropping next year that will change the bear market scenario, right. That will probably or could upend the traditional cycle of Bitcoin.
Steven McClurg: I think it could. What we're experiencing right now is a massive deleveraging. Bitcoin hit that stride where a year ago it was at $4,000.
Peter McCormack: A deleveraging in Bitcoin or a deleveraging in the traditional markets?
Steven McClurg: Deleveraging in Bitcoin. What happened was Bitcoin shot up to $25,000 and on that momentum trade, a lot of people levered up the Bitcoin that they already had to get even more Bitcoin to buy into it or they went down to their local bank in England and got a loan to buy a car but put it in Bitcoin instead.
Peter McCormack: I would not advise anyone does that by the way. That sounds like a moron's idea.
Steven McClurg: It sounds terrible, it sounds terrible!
Peter McCormack: Who would do that?
Steven McClurg: But, there's a lot of leverage put into Bitcoin in various different ways that it really pushed it up to that $60,000 range. What we saw over the last week has been this deleveraging. Bitcoin's not going straight up anymore, and it's been hovering around that $60,000 range. People are starting to delever, we saw a massive delevering on Saturday, there was some false news came out, it caused the price to go down just enough to trigger a lot of stop losses for people that were levered up, which caused it to go down even further. Then it popped back up, and a lot of that deleveraging by the way was in Asia. Asia over the weekend and then delevering here in the United States yesterday.
Jeff Kilburg: You saw some of the enthusiasm Steven, some of the enthusiasm, the Coinbase direct listing. You definitely saw a price anticipation, a price move higher in the price of Bitcoin, so I think once that enthusiasm waned a bit, I think that also was a catalyst.
Steven McClurg: Yeah, that's correct.
Peter McCormack: Okay, so it sounds to me like deleveraging is kind of a healthy event.
Steven McClurg: Yes.
Peter McCormack: If the market heavily deleverages but we maintain something above $45,000, $50,000; that's a pretty good position to be in.
Steven McClurg: That's exactly right, because what's going to happen is once that deleveraging happens and Bitcoin retains its price, and it starts moving a little bit again, then naturally --
Peter McCormack: Everyone's going to leverage up again.
Steven McClurg: -- you will see the leverage go right back up, that's exactly right. People are going to go down to the local bank, they're going to get a car loan, they're going to put it on Bitcoin.
Peter McCormack: Get a car loan. In fairness, I did actually end up buying a car.
Steven McClurg: I know.
Peter McCormack: I actually ended up buying three cars which is funny, but anyway.
Steven McClurg: That's fantastic. What cars did you buy?
Jeff Kilburg: I want to come over and see it, Peter, it sounds like it's good.
Peter McCormack: Well, you know what I bought myself, I bought my dad a Jag and I bought my son his first car. Not the Audi R8 that I put online to trigger people as a joke, and they all lost their shit. I got my son his first car, but I'm still leveraged up because I didn't actually sell the Bitcoin to get them, I just bought them based on the -- but it is funny; that loan --
Jeff Kilburg: You can't tease us with two cars, what did you get yourself, that's what we want to hear. What was the third car?
Peter McCormack: I got myself an Aston Martin.
Steven McClurg: Nice.
Jeff Kilburg: You do look like James Bond, a little bit.
Peter McCormack: I do, don't I? I considered applying for the role. I just think I'm a bit too old for it now. The funny thing was I was leveraged in a way whereby I can't get triggered, right, because I just took a bank loan, I've got cash flow to cover it.
What I did, Jeff, you don't know about this, but basically when Bitcoin crashed to $17,500 on the run up, I was laying in bed and I just went onto my bank, Lloyds Bank, and I was like, "What's the most you'll lend me right now?" It was like £35,000, I just took the lot and I got like 2.55 Bitcoin, I was like, "I'll take that".
Obviously, I'm not leveraged on an exchange, I don't have a stop loss, my leverage is different so I can carry this, but it was an interesting experiment in understanding how to play with credit, because I've only ever played with credit in the past for buying things like houses and cars and shit like that. This was the first time I ever used credit to actually take advantage of a market situation, which was a real bit of education for me. Somebody who's not a trader, and somebody who's not played in the markets before, I was trying to understand a little bit of what Michael Saylor was doing and now I understand, if you understand certain market structures, you can play credit totally into your favour.
I get mocked, some people on Twitter are like, "You're an idiot, you're so broke you had to borrow money to buy Bitcoin", it's not that. It's actually I just used a situation to my advantage; it was all new to me.
Jeff Kilburg: That's good, that's awesome.
Steven McClurg: That's absolutely brilliant. By the way, when you were doing that, I sold my Tesla and bought Bitcoin with that. That's how much conviction I had.
Peter McCormack: You fucking legend. When this bull market ends, what are you going to replace because you're going to have to replace that Tesla?
Steven McClurg: I don't know, man. I've got this 1971 International Scout that I've been working on and restoring, so that's my car at the moment, but it can break down at any time, right. I haven't decided what I'm going to replace it with; I don't know if it's going to be another Tesla. I always said that if Elon Musk ever sells Teslas for Bitcoin, I would buy it, but I don't want to part with my Bitcoin, so it's a bit of a rough situation. It might be a Tesla, it might be something else; I haven't decided yet.
Peter McCormack: I tweeted, of course he's not going to reply and give a shit what I say, but in the 2017 bull run, I tweeted Elon Musk saying, "I will buy a Tesla off you if I can buy it with Bitcoin using the plane Wi-Fi at 35,000 feet", that's the transaction I want to do. I want to do it in the air at 35,000 feet, crossing the Atlantic; but he never replied, so I didn't do it.
Jeff Kilburg: Now, you have an Aston Martin.
Peter McCormack: Unlucky Elon, Aston Martin now, baby.
Steven McClurg: I have no access to Elon Musk either, it's great but I'm a big fan.
Peter McCormack: A big fan, hopefully he'll come on the podcast one day, hopefully. All right, cool, this has been super useful. Is there anything I've not asked you? Anything else, any other messages you want to tell, anything about these ETF things that you think people will need to understand?
Steven McClurg: If I could leave last parting words and I think this is really important, because a lot of people that have been around for a while, and I mean in the Bitcoin community, don't necessarily like an ETF because not your keys, not your Bitcoin; but my parting words is this: there's a whole spectrum of comfort that people have in technology. There are people that are way smarter than me that know how to set up their own wallets, buy their own Bitcoin, put them in the wallets, hold them forever and they own the keys, they own the wallet; that's great.
I've tried that, I realise that I suck at that. If I'm just holding just Bitcoin and I want to hold it somewhere I trust, it's going to be somewhere like Casa, right. Jameson's a trusted person, they help you manage your keys, it's a great place. That's the next level of comfort for people that aren't very technical.
Then for people that don't even understand that, this is a great instrument to hold your Bitcoin. Only 1% of the people are actually going to hold it in self-custody wallets; maybe 10% will hold it with somebody else, like a Casa; and then the other 80% or more, they're not going to do anything until there's an ETF. It's really the best instrument for a lot of people that aren't comfortable with technology.
Peter McCormack: Yeah, great. Jeff, any parting words you've got?
Jeff Kilburg: Yeah, just to put a couple of sprinkles on that ETF cupcake, it provides access, it has liquidity, and it has a layer of security which is regulated by the SEC, so that Exchange Traded Fund, which an ETF stands for, that security layer in there, I think it does make a difference. Even if you're not recognising it right now, I think embracing that; it's a positive, it's an uptick.
So, I'm getting excited about ETFs and you've seen them around for 20 years, but this global adoption for ETFs, not just for a Bitcoin ETF, but for all different kinds of ETFs, I think you're continue to see assets be attracted into that ETF vehicle.
Peter McCormack: Awesome and if people want to find out more about Valkyrie, where do they go?
Steven McClurg: Valkyrieinvest.com; our website just went up.
Peter McCormack: Right, I will stick that in the show notes. Jeff, great to meet you man. When I'm in Chicago, I'm going to come and find you and I'm going to come into the pit and see that shit going on.
Jeff Kilburg: I look forward to it. Awesome being on, thank you.
Peter McCormack: No worries, dude. Steve, I'm going to try and bug you to come to Mexico, I think you should come, I'm going to try and bug you.
Steven McClurg: Okay, I'll probably see you in Miami before that.
Peter McCormack: I'll see you in Miami.
Steven McClurg: You can twist my arm there.
Peter McCormack: Twist your arm, we'll grab a beer in Miami. Are you coming to Miami, Jeff?
Jeff Kilburg: I will be in Miami, they're only letting me in for 24 hours so I will be there, so I hope we cross paths and have a libation.
Peter McCormack: Let's do it, let's try and get a beer in. All right, guys, thanks for coming on, thanks for answering all my questions. Good luck with this, love what you're doing, all right, and peace out.
