Melanion became the first European fund to create a Bitcoin tracker. What challenges did you face in convincing regulators of such an ETF?
The way we were able to do that was by not persuading the regulator to change the regulations. What we did is we created a special index for companies in the bitcoin space. So it is not a bitcoin tracker, but a stock index made of bitcoin miners like bitcoin miners, equipment providers, exchanges, companies that have bitcoin on their balance sheet like MicroStrategy and crypto asset managers. We took all of these companies that are in the crypto space and built a stock index based on each company’s correlation with the price of bitcoin. There is a basket of 30 stocks that have historically been the most correlated with the price of bitcoin and this way one can avoid direct exposure to bitcoin. Instead, one gets indirect exposure because they work in this field and at the same time there is a compatible fund to meet all the current requirements. Even though it was just a basket of stocks because it’s bitcoin, there was some extra oversight from the regulator to make sure everything we did was right.
Do you think this is likely to be the model that other mutual funds could follow in the future?
If possible, it’s best to do it in a format that already exists because existing formats are much easier to work with. There is still a lot of political tension around cryptocurrencies. By going the traditional route, one only needs to manage perception. In my opinion, there is a lot of news coverage about the Bitcoin ETF. But I’m having a hard time finding how a pure Bitcoin ETF, where funds hold Bitcoin directly, can survive the long-term.
If Bitcoin goes to zero, it will disappear and if Bitcoin becomes what we all hope it will become, we will be able to have accounts in Bitcoin and everything in Bitcoin like the US dollar. There is no ETF in US dollars because it makes no sense.
I now believe that a shift from the investor’s point of view has to happen towards the Bitcoin ecosystem. Every month, a new Bitcoin miner is listed on the exchanges. So, there’s a great ecosystem out there and investors should start looking at these things. This is also why we prefer the equity route because we believe there are more exciting things being done in the Bitcoin ecosystem rather than the digital currency per se.
When regulators look at cryptocurrencies, they think of them as an atomic bomb that will essentially blow up their carefully manicured financial system. What should be the regulator’s approach to cryptocurrency?
If you remove all the noise, most regulators are not against cryptocurrency or bitcoin. Their main goal is to protect the investors who invest in them. Unfortunately, there was a lot of negative headlines where investors lost a lot of money, got scammed, robbed, hacked, etc. In my opinion, regulation would be positive. I was shocked that there was no “know your customer” in all of these products that are usually standard in the financial industry.
So, this is where the regulation will start and that will be a net positive because at the moment, mainstream adoption has been by retail investors and the big institutional investors haven’t stepped in. Regulations will allow cryptocurrencies to have a more solid foundation because you need to operate in a way that protects investors. Once you get the right regulation, it can unleash the full power of cryptocurrencies.
Bridgewater’s Ray Dalio argues that if Bitcoin becomes too successful, it could be killed by governments and regulators. Do you think bitcoin can be killed anymore?
At the moment, regulators see bitcoin as a digital asset. They see it as somewhat like gold, but when they begin to see it as money, they may be tempted to hinder it or limit its potential uses on their lands. This is the scenario I think Ray Dalio was thinking of. I generally think this is a very extreme scenario and I don’t see a developed country like the United States or even all of the G7 countries taking such a harsh and powerful step.
Most of the countries where this can happen are authoritarian countries and what we have seen so far is Bitcoin being adopted in the United States. The United States is where society is the strongest in terms of penetration but also in terms of means because you have very deep pockets to invest in every day. Therefore, even if they made such a decision, it would have bad economic effects that would offset any potential benefits of banning it. This is a very hypothetical scenario, and I don’t see it happening.
Since we hit an all-time high in April, we’ve seen a very deep selloff in bitcoin. Going forward, what is your view specifically on Bitcoin and how do you view this asset most likely in the next 12-18 months?
It is very difficult to give a price prediction on Bitcoin because it gives a price prediction on any asset trading in the financial market. What interests us most is the asymmetric return as it can basically go to zero but can also go up tenfold. This contrast is really unique and makes it really interesting. What we’ve seen so far is that due to the increase in adoption, the scenario of bitcoin going to zero just doesn’t exist anymore. The potential for disproportionate gains is now higher. And governments are printing money like never before. When I look at the price of Bitcoin going up, I see the price of fiat currency going down. It is very difficult to predict the price of bitcoin because it is more predictive of fiat currency.
ARK’s Cathy Wood says bitcoin could hit $500,000. I wanted to understand from you that if such a step is taken, what is the catalyst for it?
It’s the same factors that got Bitcoin to $50,000, which should continue to push it up to $500,000. The higher adoptions, the breadth of the community, and the number of wallets we’ve seen grow so rapidly in the past years should continue. I think these trends will continue because we now have a new class up front, and that is nation building. People have not yet realized the full potential of this type of adoption and El Salvador will be a use case for many countries that depend on remittances. This will make it difficult for Bitcoin skeptics to remain skeptical, and it will also be difficult for regulators to crack it. The benefits are very strong in terms of financial costs. The implications of this are much more than just the financial costs; It is to reduce poverty and achieve social equality. I don’t see how this can’t turn more countries and more skeptics to this technology.
The government of India has introduced a bill banning all private cryptocurrencies. The cryptocurrency industry here is urging the government not to view Bitcoin or other cryptocurrencies as a competition to fiat money but instead to treat it as a digital asset. Are you suggesting this is the approach the industry should take when it comes to dealing with regulators?
Recognizing it as a digital asset is a very important first step, because people talk a lot about all the bad things that cryptocurrency does but tend to forget that the worst asset in which we store our value today is gold. I say the worst because it has an enormous impact on our planet. The job of the gold industry is to drill huge holes in the ground to look for an extremely rare material and then extract it using mercury and destructive chemical products and then you have all those big companies trying to leave the mine in a semi-rehabilitated state. You also have a huge unregulated dirty gold industry and that’s on top of all the damage done by traditional miners. Bitcoin is definitely better than gold which has the same property, it does the same and avoids all these bad things that gold does. So for me, recognizing it as a digital asset is an obvious decision and almost an urgent one.
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