Wall Street’s ETF Crew Ready to Pounce in Era of Crypto ‘Degens’

(Bloomberg) -- With a crypto-friendly commander-in-chief returning to the White House, Wall Street is ready to unleash a new generation of speculative products across the $3.2 trillion industry to sate investor appetite — from institutional newbies to die-hard retail traders.

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A handful of cryptocurrency-linked exchange-traded funds that simply track Bitcoin have attracted billions in fresh demand since the election. Now, with the second presidency of digital-asset booster Donald Trump approaching, executives and lawyers involved with ETFs say they are ginning up strategies to cater to all tastes. They described products ranging from defensively-tilted ETFs for crypto-curious professional money managers, to full-blown speculative wagers for the “degen”-like crowd — a self-described group of degenerate gamblers.

The riskier crypto ETFs could focus on a broad variety of digital tokens, sometimes using leverage, options or quantitative strategies, industry investors and lawyers said. They expect new products to get a better reception from the US Securities and Exchange Commission under Trump than in recent times under President Joe Biden.

“The ETF industry is entering a ‘Wild West’ era under likely new SEC leadership, with new crypto-linked ETFs and increasingly complex leveraged and inverse products poised to lead the charge,” said Aisha Hunt, principal at law firm Kelley Hunt, whose work often focuses on ETFs.

Upstart financial firms are on a roll catering to a growing pack of institutional managers and the ever-diverse breed of day traders. The more sober-minded retail investors have flooded social-media channels this year to discuss the virtues of applying investment principles like cash-flow analysis to high-risk instruments, including crypto and leveraged tech exposures.

At the same time, braggadocious gamblers are in fighting spirits since Trump’s victory, flexing on social-media and touting ever more their life-changing coin wealth, sporting fast cars and luxury watches. All that suggests room for product growth across the digital-asset ecosystem with the giddiness sending Bitcoin’s price up over 40% since the election.

“We have a #Bitcoin President,” Michael Saylor, founder of Bitcoin-holding company Microstrategy Inc. wrote on X Nov. 6.

Gensler Goodbye

In online message boards, the term degen refers to traders who enjoy losing their shirts on the most exotic and ridiculous crypto trades, rather than those who add a little leverage or dare to buy tokens that aren’t Bitcoin. Anti-establishment crypto proponents have been emboldened by Trump’s win, after having to contend with Biden SEC Chair Gary Gensler, a skeptic of the industry who took a tough stance on enforcement.

Although Trump’s first presidency appeared squishy-at-best on crypto — with him calling Bitcoin “a scam,” among other things and his SEC chair at the time not doing much about policy — he has been an enthusiastic supporter between leaving office and getting reelected. It is not clear whom Trump will appoint to replace Gensler, but the choice is widely expected to align with the industry’s interests, especially given Trump’s choices for other roles.

That’s emboldened fund issuers to dream up ways to put increasingly more speculative crypto products into ETFs, like “altcoins,” shorthand for alternatives to Bitcoin. Several digital asset firms have already applied with the SEC to launch ETFs that would track crypto tokens including Solana, XRP and Litecoin. While they had just a fighting chance of winning approval under the Gensler-led SEC, their odds are better under the new administration.

Tokens like Aave, Uniswap and Maker are also primed for ETF products, said Chris Newhouse, director of research at digital-asset venture fund Cumberland Labs.

Still, using a traditional ETF issuer to access cryptocurrencies doesn’t exactly track with the anti-establishment principles of the original crypto visionaries. And, if the government takes a more hands-off approach to the nascent edges of decentralized finance, it may not be necessary to put crypto products into an ETF wrapper at all.

While more traditional investors may not ever veer into altcoin territory, there could be more ways they’ll invest in crypto-linked products under the new Trump administration.

“Bitcoin-Plus”

Sui Chung, who runs crypto index provider CF Benchmarks, said his schedule is beyond packed since Trump’s win. Everyone wants to know more about what he calls “Bitcoin-plus” products. They are based off of the world’s largest cryptocurrency, but generate different returns depending on the components.

“This is part of a trend of mainstream investors seeking to build on their straightforward vanilla exposure through the spot Bitcoin ETF, with additional products to tailor their exposure to the asset class,” he said.

The most popular ones include products that involve commodity futures pegged to crypto that earn yield, as well as those that offer downside protection through options.

While plans for these products have “always been on people’s road maps,” the change in administration has brought it to the fore, Chung said.

John Davi, chief investment officer of Astoria Portfolio Advisors, is considering adding Bitcoin exposure to the ETF model portfolios he runs, if the cryptocurrency pulls back from all time highs. He anticipates that soon product issuers could offer “smart-beta,” the rules-based investing method investors use to screen stocks based on traits like valuation, or how fast shares have risen, for crypto coins.

“Maybe you have an ETF that would actually give you exposure to other cryptocurrencies besides Bitcoin, and does some type of active management, trend-following approach,” Davi said.

Shiliang Tang, president of crypto principal trading firm Arbelos Markets, also expects tried-and-tested investing strategies to be wrapped into the cryptocurrency ETF package.

“They’re gonna run the Tradfi playbook,” he said, using a portmanteau for the term traditional finance. But, in his view, the underlying strategies will be anything but traditional: “Bitcoin-plus, dominance, leveraged ETFs, altcoin ETFs, basket ETFs” and more, he said.