Potential downside impact of the ProShares Bitcoin Strategy ETF

Kapil Rathi, CrossTower Co-Founder and CEO, joins Yahoo Finance Live to discuss the cryptocurrency space amid the launch of ProShares’ Bitcoin ETF.

Video transcript

- Bitcoin has gone stratospheric after the launch of the first US Bitcoin futures exchange. But what does it mean for the broader crypto market and gaining regulatory support? Here to discuss that is Kapil Rathi, co-founder and CEO of CrossTower, a leading crypto exchange ranked in the top five globally. Thank you so much for being here. So tell me, this Bitcoin ETF-- is this futures exchange a good thing for the industry? And how do you see it moving forward?

KAPIL RATHI: Yes. It is actually quite symbolic for SEC to approve an ETF based on Bitcoin futures. I think over the past two, three weeks or months, we're seeing while China is looking to ban cryptocurrencies, and the fact that the United States is now embracing cryptocurrencies and digital assets as a new investment product. I think, overall, it's symbolically really positive for the industry.

And we're seeing the price moves in Bitcoin and ETH is demonstrating that the market is taking it in a very healthy way.

- Well certainly the ETF is off to the races right out of the gate here, Kapil. And I know that having this Bitcoin ETF gives regular retail investors another option-- the option they've so been yearning for in order to get some exposure to that space. But what are some of the possible pitfalls, red flags, things retail investors may not be aware of with this particular ETF?

KAPIL RATHI: So yeah, I think there are definitely a lot of positives. But the details are important. This particular product, to be clear for our retail investors, it does not necessarily track Bitcoin prices one-to-one. It does not buy Bitcoin in the ETF itself. It is essentially buying the front month futures that are traded on CME. So there is an inherent cost built into this product. When the ETF issuer and the market makers are buying those futures, they are paying an additional cost.

According to our estimate, this product could trail the growth in-- or any Bitcoin product by at least 10% to 15%. And especially if the Bitcoin takes a nosedive, this product could actually have much more downside impact as opposed to buying Bitcoin directly. On the other hand, positive is you can now buy this in your 401(k), you can buy it through your pension funds, IRAs, through your TD Ameritrade account.

So overall, I think it's really healthy for the market. But the devil is in the details.

- And how does it affect your exchange and other exchanges, like Robinhood or Coinbase? Can't people just sort of do away with that? That they can just invest in the futures and not have to deal with spot at all.

KAPIL RATHI: Yeah, no, I think that's a good point. Most of the savvy investors will continue buying Bitcoin on exchanges like us and Coinbases of the world. This brings additional liquidity. Today, brokers like TD Ameritrade, E*TRADE, Charles Schwab are not really offering our products. I think this will sort of add additional distribution for crypto as an asset class. But I think from an overall industry perspective, I always say we are in early inning. There's a lot more growth coming. This is symbolic.

I can see the ETH futures coming next. But I think as an industry, or as regulators, since we are embracing this, this is positive for all of us.

- I mean, to bounce off that idea of us being in the early innings, I mean, this industry is still in its infancy. So what do you see next for the crypto space? You talk about regulation. Is that going to pull back some of the growth we're seeing? Will that deter some investors from wanting to get involved?

KAPIL RATHI: I think we are only starting. Traditionally, a new asset class, you start with institutions, and then retail comes in. In this asset class, retail came first, and now we are seeing institutions, which is where CrossTower specializes. We are seeing a lot more hedge funds, traditional macro sort of quant funds, asset managers, pension funds, now getting access to this market.

They are able to trade ETFs. Now you can easily short. You can buy options. So the institutional wave is going to kick off with this. I think in terms of products, Bitcoin is one investment opportunity out there. The industry, the technology has a lot to offer-- stablecoin, central bank digital currencies, DeFi protocols. The innovation wave is just kicking in.

- And what do Gary Gensler and other regulators need to see before there is a spot Bitcoin ETF? And where do you see Bitcoin going by the end of this year, let's say, for example?

KAPIL RATHI: SEC Chairman Gary Gensler, in the beginning, was sort of sending some mixed signals whether he is in favor of cryptocurrencies or not. But the fact that SEC has approved this, it seems like they are now opening up to have more asset classes. I think are their mantra has been, as long as there is an underlying regulated market, they will keep bringing these type of products-- or approving these type of products.

So I think this has kind of calmed down the nerves. We saw Bitcoin went down from all-time high of 64,000 to 30,000 last six months, and now we are back. Oh, I think from a SEC and regulatory perspective, I see more products getting approved now. US was sort of falling behind-- Canada has ETF, Europe has ETF. With this ETF, US is catching up, overall, in the industry.