Original text: Bankless
Compiled by: Yuliya, PANews
In the view of Samara Cohen, the captain of the ETF and index investment sector at the global asset management giant BlackRock, the financial market is undergoing a critical transformation period. In this in-depth dialogue hosted by Bankless, Samara, who manages $6.6 trillion in assets, shared her unique insights on digital asset ETFs, the modernization process of the market, and the integration of blockchain technology and traditional finance. PANews has compiled the text of this interview.
Samara: The Driver of Market Modernization
Before joining the ETF industry, Samara had focused on fixed income and derivatives business at a large investment bank. She describes herself as a "driver of market modernization", committed to enhancing market resilience, improving transparency, and expanding investor participation. At BlackRock, she works closely with Robbie Mitnik, the head of the digital assets division, to explore the potential of cryptocurrencies and digital assets.
Samara believes that ETFs themselves are a disruptive technology, with the same goal as blockchain technology: to drive market modernization and achieve innovation and transformation in the financial market. She points out that technological innovation has always been the cornerstone of market modernization, and this rule has never changed in the past thousands of years.
Integration of Blockchain and Traditional Markets
Samara states that we are currently in the stage of integrating blockchain assets and traditional financial markets. She points out that the launch of the US Bitcoin ETP (exchange-traded product, not an ETF, this subtle definitional difference is important) marks an important milestone, and this is just the beginning.
The significance of these Bitcoin ETPs lies in that they have built a bridge between the crypto world and the traditional finance (TradFi) world. Surprisingly, this bridge has had a positive impact on the participants of both worlds:
- Traditional investors can access Bitcoin through familiar investment tools
- Digital native investors also find that ETPs can meet their needs
Data shows that many investors have first encountered this product category through Bitcoin ETPs, and then expanded to other ETPs. This integration currently only involves a few crypto assets and relies on traditional financial infrastructure. Samara believes that the ideal development direction is to create bridges, drawing on the best practices of all parties, rather than completely overturning the existing system.
Technological Evolution and Market Transformation
Samara uses the transition from dial-up to broadband internet as an analogy for the current development of crypto assets:
1. Current stage ("dial-up" stage):
- Bitcoin ETFs, Ethereum ETFs, etc. are "simulated versions" of crypto assets
- It's like forcibly fitting crypto technology into the traditional finance framework
2. Future vision ("broadband era"):
- The business of traditional financial institutions (such as BlackRock, Nasdaq) may shift to the blockchain
- There may be dedicated financial institution blockchains
But Samara raises a key question: Is this completely decentralized vision really the most suitable for the current market and investors? She analyzes the problem from the perspective of the need for balance:
- Acknowledging the advantages of crypto technology in transparency and auditability
- Questioning the necessity of complete decentralization
- Pointing out the historical value of intermediaries: allowing people to focus on their own professional fields
- Suggesting using crypto technology to improve trust mechanisms, rather than completely replacing intermediaries
Development of the Options Market
BlackRock's iShares Bitcoin ETF and Ethereum ETP are dominant in terms of options trading volume. BlackRock has established an options ecosystem by collaborating with institutions like Nasdaq, with the Bitcoin ETF options launching a day earlier than similar products.
The iShares platform covers multiple asset classes and national markets, and has established extensive connections with the trading ecosystem. In the Bitcoin market, the following characteristics are the focus of market attention:
- High volatility
- Relatively high volatility of volatility (volatility of volatility)
- Positive skewness (volatility tends to rise when prices rise)
The development of the options market has brought new trading mechanisms to crypto currency ETFs. Although there are many sources of price information in the crypto currency market, by introducing volatility tools into exchanges and listed trading, the market has achieved:
- Standardization of capital investment methods
- Measurability of volatility trends
- Real-time monitoring of trading conditions
Data shows that the ETF market has experienced significant growth in the past 20 years, a considerable portion of which was institutional investors initially entering the market through ETF options. The options market provides investors with an additional way to participate in the market, allowing them to adjust their risk exposure according to their own needs.
The development of the options market has diversified the ways of market participation, specifically reflected in:
- Standardization of trading methods
- Improvement of price discovery mechanisms
- Increase in risk management tools
- Improvement of market liquidity
"Price is the Best Marketing"
There is a famous saying in the Bitcoin community: "Price is the best marketing". However, from BlackRock's perspective, education is the best marketing for Bitcoin. This education mainly focuses on risk management, how to use risk to achieve portfolio diversification, and research on the interaction between portfolios.
Although Bitcoin reached a new high at the end of the year, investors still need to be aware that although Bitcoin's price volatility has decreased in recent years, it is still a high-risk, high-volatility asset compared to other assets in investors' portfolios. It is precisely this volatility feature that gives Bitcoin unique value as a portfolio diversification tool. If it didn't have these volatility characteristics, Bitcoin might not have the current investment rationale.
For institutions like BlackRock, which are mainly oriented towards long-term investors, conveying these fundamental factors to investors is more important than focusing on Bitcoin's price trends. This also reveals a common misconception in the crypto currency world: many people believe that the success of ETFs is directly related to the rise in the price of the underlying assets. However, this is completely different from the actual criteria for measuring the success of ETF products.
Criteria for Measuring ETF Success
As a traditional finance (TradFi) expert, Samara points out some misunderstandings between the crypto currency community and the traditional finance field, especially regarding the performance evaluation of Bitcoin ETFs and Ethereum ETFs. Samara specifically points out that many people believe that the Ethereum ETF is less successful than the Bitcoin ETF, but from the professional standards of the ETF industry, the launch of the Ethereum ETF is actually quite successful. She emphasizes that the primary criterion for judging the success of an ETF is whether it can achieve its intended goals.
Criteria for Measuring ETF Success:
1. Tracking Accuracy
- Must accurately track the underlying index
- The importance of Bitcoin ETFs lies in solving the problems faced by previous investors
- Providing new choices other than self-custody and exchange holding
- Avoiding the position limit issues of futures ETFs
2. Market Quality
- Requires a complete ecosystem support
- Including trading volume, liquidity, exchange access
- Creation and redemption mechanism of Authorized Participants (APs)
- Both Bitcoin and Ethereum ETFs have demonstrated good market quality
Analysis of Flow Differences:
- ETFs themselves do not directly drive capital inflows
- Investor sentiment and investment philosophy are the key
- The investment philosophy for Bitcoin was more specific and clear in 2020 than Ethereum
- This explains the difference in capital inflows between the two
Actual Performance:
- Bitcoin ETF broke historical records
- Ethereum ETF still ranks in the top 20% of ETF launches in the US this year
- Both are considered successful products
Key Findings:
- The marketing story of Bitcoin is simpler and more direct (21 million limited supply, digital gold)
- Product success depends not only on technical performance, but also on clear narratives and identity positioning
ETF Trends
On the development of the Ethereum ETF:
- The SEC surprisingly approved the Ethereum ETF in May 2023
- The industry faced uncertainty around the launch timing from June to July
- Preparation is needed for the investment portfolio, trading operations, and education strategy
Current market trend analysis:
1. Investor Characteristics
- Ranging from small investors to sophisticated investors
- Self-directed investors are the main driving force
- Investors generally understand the difference between Bitcoin and Ethereum
2. Advantages of the Bitcoin Investment Thesis
- Aligned with the current geopolitical tensions
- Addressing concerns about the US dollar deficit
- As a diversification tool for traditional investment portfolios
- Particularly valuable in the context of the 2022 stock and bond market crash
3. Challenges Facing Ethereum
- For US investors already holding tech stocks
- Ethereum is more of an "amplifier" than a "diversifier" for existing investments
- High correlation with large tech stocks
Market Education Progress:
- Investors' understanding of the two assets is constantly deepening
- Bitcoin is currently more aligned with portfolio allocation needs
- Market education is still ongoing
ETF Protocol Upgrades
Regarding potential protocol upgrades for the Ethereum and Bitcoin blockchains, BlackRock's stance and views as an ETF issuer are worth noting. When participating in industry discussions, BlackRock's views are mainly based on the following principles:
- Focus on how the ecosystem can best serve the needs of the company and its clients
- Tend to support open architecture and interoperability
- Consider the practical needs of institutional-scale operations
Due to BlackRock's large operational scale, operating in a closed ecosystem often faces many limitations. This is why the company has clearly shifted towards supporting public blockchains rather than permissioned chains in recent years regarding tokenization. This shift reflects the institution's emphasis on openness and scalability.
In terms of specific positions, BlackRock is more inclined to focus on:
- The scalability of the system
- The participation conditions of counterparties
- The overall openness of the ecosystem, rather than taking a stance on a specific crypto platform
ETF Development Outlook
Regarding the prospects for ETF development by 2025, BlackRock has proposed several key observations and expectations.
- First, they hope to see continued deepening of research on the role of Bitcoin in portfolio construction. The focus of the discussion should shift from "whether to invest in Bitcoin" to "how to use Bitcoin reasonably in the portfolio".
- The second important development is the launch of Bitcoin ETP options. This innovation has already shown its importance as of November 2023. In general, the options ecosystem helps create a more balanced trading dynamic, with buy-side activity during market declines and sell-side activity during rallies. However, innovation often comes with complexity. While many institutions are eager to launch and market options-based strategies, not all strategies are easily understood by investors. Therefore, strengthening investor education will become increasingly important.
Other ETF Plans
Regarding BlackRock's future plans for digital asset ETFs, the company has taken a relatively cautious and pragmatic approach. The main points of analysis are as follows:
Discrepancy between Market Perception and Reality:
- There is a common misconception in the market that launching an ETF will necessarily lead to an increase in the underlying asset price
- The success of the Bitcoin ETF has to some extent reinforced this perception
- The performance of the Ethereum ETF shows that this correlation is not necessarily the case
The Actual Impact of ETFs on Assets:
- Provides a more convenient investment channel
- Brings a certain degree of legitimacy recognition
- Reduces regulatory risks
- May attract new pools of capital
BlackRock's Investment Decision Principles:
- Based on clear investment rationale
- Focus on cash flow valuation of underlying assets
- Emphasis on risk measurement
- Consider client portfolio needs
Observations on Capital Inflows:
- Bitcoin ETFs have accumulated about $36 billion in net inflows
- Secondary market trading volume is 9 times that of the primary market
- Institutional investors participate through multiple channels, with ETFs being just one
BlackRock's Current Digital Asset Strategy Priorities:
- Operation and development of Bitcoin and Ethereum ETFs
- Tokenization projects, especially the tokenization of government bonds
- Stablecoin-related businesses
Looking Ahead:
- The company is currently mainly focused on Bitcoin and Ethereum ETFs
- The digital asset strategy covers three pillars: cryptocurrencies, stablecoins, and tokenization
- New product development will continue to be driven by client demand
Impact of the New Government
The new government, which is taking office soon, is more inclined towards a free market and pro-market policy. An important change for the crypto industry is that SEC Chairman Gary Gensler will be leaving. This change not only affects crypto-native companies, but also mainstream financial institutions like BlackRock, who are closely watching the developments. It is worth noting that the influence of the SEC extends beyond the US market and actually permeates the global financial market.
Historically, the US market has outperformed other global markets in balancing support for innovation and investor protection, and this balance has contributed to the US market's current dominance. The current regulatory environment has been largely shaped by market changes in 2020-2021. During that period, the participation of retail investors increased significantly, thanks to the introduction of commission-free trading platforms, increased acceptance of technology during the pandemic, and government stimulus payments. Subsequently, many individual traders transitioned to index and ETP investments, further driving market transformation.
Future Outlook
BlackRock is optimistic about the future and expects the market to return to a balanced development path. Although there has been a lack of transparency in the regulation of crypto ETFs, this situation is expected to improve. They anticipate a more supportive regulatory environment for innovation, while emphasizing that appropriate regulation is crucial for maintaining investor confidence.
For the specific outlook for 2025, BlackRock is focused on three core areas:
- Establishing clear definitions, clarifying the attributes of various digital assets
- Delineating jurisdictions, determining the specific responsibilities of regulatory authorities
- Establishing a mechanism for public-private sector collaboration
Regarding the existing FIT 21 Act and Stablecoin Act, BlackRock believes these are positive developments, but they need to be better integrated with the traditional financial (TradFi) system to avoid creating a completely independent crypto ecosystem, which could lead to duplicative regulatory systems that hinder the participation of existing financial institutions.
BlackRock observes that while 2023 has been challenging, with strong discontent in the industry towards the regulatory environment, now is the time to refocus on the core mission: creating a more transparent and inclusive financial system.
The industry is entering a potential "golden age", mainly due to three key factors:
- Lower-cost blockchain space
- More convenient development environment
- Clearer regulatory outlook
