Crypto: Lack of segregation ‘can be a real challenge,’ strategist says

ProShares Global Investment Strategist Simeon Hyman joins Yahoo Finance Live to discuss the crypto markets crash and what led to the collapse of the FTX-Binance deal.

Video transcript

AKIKO FUJITA: Let's keep the conversation going with Simeon Hyman, ProShares global investment strategist. Simeon, let's pick up on that point that David made about the statement we got from Sam Bankman-Fried this morning, essentially saying, hopefully, things can find a way to recover. There's going to be a lot of steps between now and then. But I mean, where do we go from here?

SIMEON HYMAN: I think that sentiment is a reasonable one. And what this episode reminds us, this turmoil reminds us that that spot market for cryptocurrency, Bitcoin, exchanges, they're not quite mature enough. And what that turmoil is reminding us is that perhaps a better way to get Bitcoin-linked exposure is through the futures market that's regulated, transparent. You've got counterparty risk managed by the clearinghouse.

And of course, we at ProShares have BITO, which is our Bitcoin strategy ETF, and BITI, the short Bitcoin strategy ETF. When you put the ETF structure around those futures, you have a belt and suspenders approach that avoids a lot of these problems. And we've seen record volume this week, record volume that's short of only launch day, just telling us that there's still robust demand on both sides of the trade for Bitcoin.

AKIKO FUJITA: Yeah, can you talk about that a little more, Simeon, in terms of the kind of surge that you've seen?

SIMEON HYMAN: Yeah, I mean, in fact, I got to put my glasses on because I got to go read my screen. But we actually had as an example, we had 40 million shares trade on Tuesday in BITO. And that, again, is short only of the launch day. And the ETFs, even with this record surge in volume and turmoil in the underlying market, performed quite well and did exactly as they're supposed to do. They tracked their indices and delivered the investor outcomes that were indicated by the strategy.

AKIKO FUJITA: I mean, so much of this, this as in the crypto space, is based on trust in the system. Confidence certainly taking a big hit this week. I mean, the fact that you are seeing a surge, at least on the ETFs side, what does that tell you about how investors are thinking about this, the exposure to crypto and the underlying technology versus what's playing out directly with FTX and any of its affiliated companies?

SIMEON HYMAN: I think it tells us two important things. First, simply the fact that we've seen this volume on both BITO, folks who want to be long Bitcoin exposure, and BITI on the short side, tells us that there are people who want exposure to either side. Folks that see that perhaps this is a great buying opportunity, that the medium and longer term prognosis for Bitcoin and cryptocurrency, in the larger sense, is still there. And there will be hiccups along the way.

And of course, there are some folks who believe that there's still some downside left to go. And so the record volume for both of our ETFs, I think, is indicative of that. But again, I point to the other piece of this, which is that the episode also tells us about those key benefits of accessing this exposure through the futures market. Simply, the perhaps lack of segregation of assets in these exchanges can be a real challenge. And a lot of that is resolved through the futures and futures wrapped in a 1940 Security Act ETF.

AKIKO FUJITA: I mean, you say there's potential upside here. It's sort of tough to think about that right now when it feels like things are really starting to collapse with one of the largest exchanges now filing for bankruptcy. What's it going to take to bring that sentiment back up? Is it about regulation and investors feeling safe again that there are safeguards in place?

SIMEON HYMAN: So I think that may be part of it. A lot of the important underlying efficacy of defi-ing the blockchain will likely survive. But there are growing pains. And when those-- as those elements mature, that does have a reasonable likelihood of boosting the demand of defi and blockchain and cryptocurrency over time. And who knows if that's going to take weeks or months? So there definitely is a bull case over the longer term.

But again, the accessing that exposure on either side, depending on your perspective, through the futures can be a good way to maintain that exposure, while avoiding some of the growing pains that are in these exchanges and some of the other parts of the ecosystem right now.

AKIKO FUJITA: And finally, Simeon, you know, I wonder just on a personal level, somebody who has been monitoring this space very closely, how you've kind of processed the developments of the last few days. I mean, if you've got investors, especially retail investors out there, that are sort of-- they had put their money-- they're not able to withdraw it right now. I mean, how do you explain this to them? What happened? How did it get to this?

SIMEON HYMAN: Yeah, look, in any disruptive transformation, whether it's finance or anywhere else, there's going-- there are going to be risks and reward. So I think that's the message here. For the retail investor, you know, please don't permanently shy away from taking risks, but make sure that when you're investing in things that are disruptive on the riskier side of the equation, that you rightsize that for your risk tolerance and your capability to withstand the volatility that will likely ensue.

AKIKO FUJITA: OK, Simeon Hyman, it's good to talk to you on this Friday, ProShares Global Investment strategist. And a programming note here, be sure to tune into our crypto special on Monday. That is 11:00 AM Eastern. We'll be joined by Circle CEO Jeremy Allaire, Robinhood's head of crypto as well, to discuss the wild ride, to put it mildly, that has played out in this space.