Federico Brokate, 21Shares

So it was a great summer from that perspective. Basketball fan myself as well. And I have a lot of family and siblings here in the New York City area. So it keeps me busy for sure. That's great. I am a... I was never a soccer player. My daughter, who is seven, is like a soccer, freak. And now I'm finding that I'm spending like three hours a weekend at the soccer fields, which is fine. She loves it. But it is a great sport. It is. It is. I grew up playing myself. I'm from South America, Colombia. So it's a religion for us, really. Yeah. No, it's great. I'm getting more into it. I'm learning. So let's talk about 21 shares as a whole. you touched on it a little bit at a high level, but you do more than just, you

Know, your two ETFs that are here listed in the US and available. So you could talk about kind of the business as a whole and how you're serving clients holistically. Yeah, absolutely. So our business actually started around 2016, when our two founders, they're long term friends, and they had an interesting founding story, which was their moms actually had done a little bit of research on Bitcoin. And they kind of went to them and said, hey, you guys seem to know all about this. How can I add this into my investment portfolio? And back then, the easy answer was there was no way to do that unless you wanted to learn about wallets and keys and encryption. And so our founders set up on this mission of launching a digital asset ETP company to make

It easy and accessible for all types of investors to add digital assets to their portfolios. And so originally, we started the business in Zurich. Zurich at that point had clear regulations around what could be wrapped in an ETP. And so our founders moved there, they started launching some products, and quickly realized that there was a huge need in the market for these types of solutions that really bridged traditional assets and digital assets, if you will. And so since then, we've been expanding rapidly. Like I mentioned earlier, 50 global products, with the most recent being the US market that we entered through the Spot Bitcoin launch in January. And most recently, we actually launched our first 21 shares branded product here as well for our Ethereum Spot ETFs.

Yeah. So why don't we talk about kind of like a general digital asset landscape update? I think the last time we had someone on was probably in January talking about kind of the Bitcoin space. So how is advisor adoption going? How is the regulatory landscape? Like, in general, it seems like it's opening up a little bit, but how's it going? Look, the short answer to that question is, it's been a tremendous success, right? I think if we look at the top half of the digital asset league table, the top four products, ours included, are amongst the four fastest growing ETFs in the history of the ETF market, right? And so this level of success was definitely not expected, I think, by the entirety of the digital asset ecosystem, but has been a tremendous upside surprise and something

That we're really proud and excited about. When it comes to adoption by different types of clients, we tend to bucket them into three big buckets. First will be retail investors or individuals that trade on their own. The second would be wealth advisory world. So, financial advisors, home offices that are in charge of managing assets on behalf of other clients. And then the third big bucket is going to be institutional investors or asset owners or hedge funds that might have different use cases for these products as well. And so when I break it down into those three, we're seeing tremendous progress across all of them. retail investors have been rapidly adopting these products in the early innings, and we continue to see that.

I think we're particularly excited about that because they're really the fire that has gotten digital assets to become mainstream, if you will. So we're around 75% to 80% of all digital or Bitcoin ETF assets are held by retail today. And so when you think about that in comparison to the rest of capital markets, it's quite the inverse, right? I think somewhere around 80% of traditional assets are owned by institutions or by wealth advisors. And so retail has been a tremendous driver of demand, and we expect that going forward as well. Well, I think it's... Well, just real quick is I think Bitcoin... I've been in the industry for probably 20, 18 years now in the asset management industry. And so it's one of those...

Bitcoin's the only asset class I can ever remember that it wasn't the advisor bringing the idea, it was the client bringing the idea. And also the frustration of the client that's like, what do you mean you can't give me access to this? Yes, yes. And the ETFs are really unlocking that access, to your point. I talk to advisors all the time that are saying, hey, I actually don't know so much about Bitcoin or Ethereum myself, but my clients are asking for it in their portfolios. And so I need to educate myself and I need to educate the firm on how these can fit, which ones we should pick, and all the questions that go into ETF selection. Yeah. And this is more... I feel like going to...

A lot of advisors listen to the show, and I think the advisor landscape is... And you hit the nail on the head. It is all about education. And now that you have ease of access, trying to educate them on how to get access is now easy, right? You have your spot products, but it's the education on why that I think is really important and where you guys really have the heavy lifting to do. Absolutely. And when it comes to that heavy lifting, I think 21 years as a firm is one that really relies on our research capabilities and those educational tools, right? Over the last few years, we've been able to build up a research team that really, from my perspective, is second to none.

And we're able to share some of those resources with advisors and with all types of clients who want to educate themselves on the technology itself, on the portfolio fit, on the client suitability, right? And we can talk through all those different topics with advisors. Sure. So what do you think is... It's all going to come down to regulatory, but what do you think or what are the ideas that are being thrown around the Bitcoin ETF or Ethereum ETF space, right? And I liken it to the S&P where, okay, you can buy SPY, but I can also buy a defined outcome product on SPY. I can also buy leverage products. I can also buy inverse products. What is your industry talking about as a whole that they'd like to start seeing next and come

Down that pipeline? Yeah. You're talking about product innovation in our category, and that's something that we're extremely excited about. I typically look at Europe as a good benchmark for where the industry in the US could be headed towards on the road. And if I think about our European product suite, we have exactly what you just listed, right? We have levered products. We have inverse products. We have baskets that are indexed. We have multi-asset offerings as well, and all focused on the digital asset space. And so ultimately, to your point, it is a regulatory conversation in the US. But we've seen this story before in other markets where you start easing a little bit and you allow Bitcoin and Ethereum products, initially Ethereum without staking, then you

Kind of go to Ethereum with staking, and then you kind of enter some of the broader altcoin world as well. So just out of curiosity, because I don't follow the European markets at all, how are some of these levered or inverse? Is it mostly retail trading products? how heavily are they being utilized? How popular have they become? Or is still kind of that spot Bitcoin exposure king? Yeah. So look, it depends on markets. And Europe is a diverse continent for sure. But I would say it's really all types of clients. So from hedge funds all the way down to retail investors. And what we see is kind of differing demand for spot products.

In Europe, we have one of the largest Solana ETS in the market, which is a very popular product in that region. We also have a basket product, HODL, in Europe, which isn't available in the US today, but also is very attractive from a European client perspective. And so we're really seeing adoption across the board of all sorts of different types of strategies. On the inverse and the levered space, typically more of a retail oriented product. But still, we're seeing some institutions come in and participate as well. Interesting. So what's the overall temperature right now kind of across the Bitcoin community? It's quieted down. At least my Twitter's quieted down. Seems like Bitcoin has been a bit choppy over the last few months.

What is the community excited about to give it that next catalyst to kind of get the excitement ramped back up in the Bitcoin space? Yeah, that's a great question. And I think the ETF industry as a whole has perhaps been a little bit slower the last couple of summer months, right? This is something that we typically see every year. from let's call it July, August, that tend to be slower months for ETF flows. But what we're looking towards is really some of these longer term adoption metrics, right? Independent of the daily flows, we're actually starting to see the pickup quite significantly for Bitcoin ETFs. We're looking at, who's actually allowing these products on their platform.

So when it comes to wealth advisors, we recently saw news from Morgan Stanley allowing a couple of products to be, sold to some high net worth clients. And we're looking similarly for other types of wealth platforms to allow that as well. We're also looking at big institutions and asset owners in terms of who's adopting these products and who's actually starting to invest. Most recently, this pension fund for the state of Michigan actually started participating in our ARCB product, our spot Bitcoin product. And some of them are just dipping their toes in the water, right? These are small trades. But what we look towards is, is the activity there, is the adoption there, and are things headed in the right direction? So in your opinion, those bigger broker dealers, like, you mentioned Morgan

Stanley, but let's use Wells Fargo or whoever, right? What is the sticking point there? Is it compliance? What does it take for them to kind of get over the hurdle? Is it more education? Like, how can that move faster? Yeah, usually, when it comes to these large wealth platforms, they wait at least a year minimum to see how these products are performing and how they're operating in the market. They like to have the concrete proof points that they're behaving how they should, that, prices are reacting and the spreads are tight across the products and that from an operational perspective, they're set up correctly. That, at the same time, goes along with a lot of education and a lengthy due diligence process that they employ to make sure that they're providing their clients the best products

Available, right? And so we're coming up on that year mark, towards January of next year. And what we're looking for is an increase in terms of opening of the gates, if you will, from these wealth platforms for these products. So before we kind of touch on your spot products, operationally, how has it been? Meaning, it appears to me that you've checked all those boxes in terms of spread, in terms of adherence to NAV, like, how's it gone? Because I think everybody was a wait and see. And it seems like it's gone pretty perfectly. It's gone. knock on wood, right? But it's gone very, very well.

These products are performing well, ours and our competitors included. And I think what we're excited about is being able to point to a robust industry that has, not just our products with strong operational controls and oversights, but for everyone else in the market as well. And really, the more confidence that we can instill in digital assets as an ecosystem, I think the better for some of these more institutionalized advisors and investors. That said, there was a concrete proof point in August when we saw some of the market volatility and pullback around some of the negative numbers that were coming out of the U.S. and some of the concerns around the Japan, the yen carry trade. And these products responded perfectly. And so we're at 21.

She was really excited about being able to point to some of these concrete moments in markets and how our products respond. So you've got two spot ETFs available. One is your spot Bitcoin product that is ARKB, and you also have Ethereum, which is C-E-T-H. First, can you talk about the ETF structure for a second? how trading in custody is all facilitated in these products? It's slightly different than maybe a traditional equity ETF. Can you just talk about from a structure perspective, how these products achieve all the things you just mentioned that they achieve? Yeah, I think it all starts with institutional greater custody, right?

We have top-of-the-line custodians for our products. And actually, I love that you bring this up because our operational setup is one of the key differentiators for our products versus others. We are the only issuer in market today that offers a multi-custodial model. And so what that means in layman terms is we work with multiple custodians for each one of our products. Our ARKB product comes with Coinbase, comes with Anchorage, and comes with BitGo as the three custodians. Same goes for our C-E-E-T product. And the benefit to advisors and to all clients really here is that we're eliminating the single point of failure, right? And so now by having multiple custodians that can support our product, we can spread around assets and it can be a little bit more of a robust operational setup for our products.

The other thing that we do that is a big differentiator on the operational side is that we make sure that we provide our clients with full transparency into what our products are holding. We are in a partnership with Chainlink and through their proof of reserve system, any one of our investors can actually go straight onto the blockchain through the Chainlink website and verify the exact Bitcoin held by each one of our tickers across all of our custodians. Same goes for Ethereum. And so this level of transparency really helps give confidence to our investors that the products are operating how they should and that they're holding the assets that they say they are. And a lot of this comes from our experience in Europe and in our experience managing digital

Asset ETPs more broadly. We've been through multiple market cycles, right? Since 2017, 18, we've seen bull markets, we've seen bear markets, and we've managed multiple types of strategies and we've been able to successfully navigate these different types of landscapes. That's great. So maybe you can get a little bit more in the weeds there just out of my curiosity because I haven't done the research. So I'm used to the traditional create and redeem process in a traditional ETF. So is it different in the Bitcoin space? And then on top of that, you mentioned multiple custodians. What is the decision making on where it gets custodied or is it all split evenly?

Can you just go a little bit deeper there? Yeah. So to be completely transparent with you, these products operate very similar to a gold ETF, right? These are 33-act products. And so to your point, they are slightly different from a traditional US equity product. But in the same way that you would trade an IVV or another product that tracks an S&P 500 ETF or index, we have market makers, we have APs, we have transfer agents that are all on the back end making sure that these products are operating correctly. And there's an elaborate system of checks and balances here that are going to help make sure that there are no errors, if you will, from an operational perspective. On the custody side, we started, like everybody else, with Coinbase as a primary custodian for

These products. Since then, we've onboarded Anchorage and Bitco, as I mentioned earlier. And some of these assets will begin to move over to our new custody partners. But really, it's all focused on how we can make sure that we're guaranteeing that these products are operationally sound. And so you will start to see some of these assets move from Coinbase over to Anchorage and Bitco, but at different rates, I would say. Got it. So let's talk about your Ethereum product, CETH or C-E-T-H. What do you think is the reason that these Ethereum products have not taken off as much as kind of the Bitcoin products? I know Bitcoin is so much more popular, so much more widely utilized, but there's a lot of potential with Ethereum.

And it's just the delta between the AUM in your Bitcoin products, not just yours, but everybody's, and the Ethereum product is pretty wide. So what's holding up adoption there? Yeah. comparing it to Bitcoin is a crime almost for Ethereum because it's hard to stack up to that level of success. But really, I think there's a combination of things impacting Ethereum flows. And they have been disappointing just given the success we saw on Bitcoin, but some of them are related to Ethereum and some of them are actually, I think, a bit more macro. But the first thing I would say is in the US market, there's just a lower brand awareness for Ethereum versus Bitcoin. Bitcoin is the flag bearer for the digital asset industry in the US.

There's no doubt about that. And it has a simpler narrative, right? People seem to identify the fact that it operates as digital gold wealth versus Ethereum is much more of a growth equity play that can take different shapes and forms depending on who you're speaking to. The second thing I would point to here from an Ethereum perspective is the lack of staking, right? For those who may not know, staking is one of the key value propositions of Ethereum. And it provides this additional source of yield in exchange for helping validate transactions. It's basically passive income. And so when I think about who would be an early adopter for this product, it would really be that crypto native or that crypto adjacent crowd that was looking to provide this or had

This exposure to their portfolio. But perhaps because of the lack of staking, they stayed on the sidelines so far. And the third thing that I mentioned a little bit earlier was some of this macro point where if I look at QQQ, for example, as a proxy for growth equities, especially in the US, prices have largely moved sideways over the last few months, right? And I typically view Ethereum as more of a growth equity story. And so when I'm looking at performance there, I'll compare it to other US equity products. And really, it's moved quite similarly since it launched. So I think these couple of things that are near-term headwinds, they'll dissipate. And ultimately, the long-term potential, I absolutely agree, is very strong and it remains

There for Ethereum. Most of the most prominent blockchain use cases, including stable coins or real-world assets or DeFi, all live on Ethereum today. So I think in order to help flows, you guys waived all fees up until a certain date, and or a certain dollar amount. Are you the only ones that have done that? Has anybody else done that? No, multiple issues in the market have done so. And everyone has a slightly different way of doing it. But the idea being that if those early adopters are able to come in early to the product, they will have some sort of fee benefit to doing so. But ultimately, as long-term investors, I myself consider myself to be one.

We look at the TER price and kind of gauge it that way. Got it. So you kind of answered my next question, which is what happens? What do we need to see happen to kind of increase Ethereum flows? And so let's just pivot to your Bitcoin product, ARKB, massive adoption. Congratulations. Thank you. Can you talk about what needed to happen in the early days to get market share? Because it was, everybody had their eyeballs on it, and it was definitely a race. So what are you guys doing over 21 shares now? What did you do kind of in that January? I know you weren't there, but I'm sure you had your eyes on the space. What needed to happen to get that adoption going?

Yeah. Look, I think we had to be very active in the market from the early days. And we had to make sure that we were using our voice to kind of educate clients before even the product launched on some of the key benefits and how it could fit into their portfolio. What we counted on was a strong track record in Europe that we were able to kind of leverage here in the US market and especially some clients that are cross-regional, right? We were able to position our US product early on with them. But also just being very, very active with the retail crowd. I think this was a part of the market that was very quick to enter these products and was a huge driver of demand and flows, especially in the first few, obviously the first quarter

Really of trading. And so we were fortunate to count with a strong client base from both the institutional side and from the retail side from the early days. Now there's a lot of great, successful Bitcoin products in the market today. But I think what we were able to do differently was really lean into that research capability that we've developed over the last few years and some of those educational content series that we have to help educate retail investors too. No, no, that's great. there's still a lot of competition. Is there still a bit of a fee war in the space occurring or is that kind of slowed down? I think it's slowed down. the most recent fee-related news that we saw was the launch of Grayscale Minis,

The Bitcoin and their Ethereum product at 15 bps. But we really haven't seen the TERs be a big driver of decision-making by investors so far. And the delta between one product and the other at this point is somewhat small. And so we're able to kind of tell clients the total cost of ownership story, where we're able to leverage our operational excellence to drive actual total costs for the client down, even relative to some of the bigger players. And so that's what's been able to set us apart. And that operational expertise and experience is really valuable for the end client. So here's the million-dollar question, right? You're sitting down with an advisor. How are you, from your perspective, how are you kind of putting out the benefit of adding crypto ETFs to an already diversified model portfolio?

Kind of the whole story of, why is it beneficial? Where should I put it? How much should I have? I know that is going to be totally dependent, but I know that there's some guardrails there. What's the story you're telling to start to get wider adoption in that space? Yeah, I think there's a couple of things. First is explaining to the advisor why they should care inherently about Bitcoin in the first place, right? And I think once you make the case for the need for an asset like Bitcoin, the second part of the conversation becomes much easier, which is, okay, if I add Bitcoin to my portfolio, the first thing they'll think about is the increase in volatility. But what does it do to my, you know,

What does it do to my risk-adjusted returns on a full-year basis, right? And so what we're able to demonstrate through data is, adding a certain percentage, depending on the portfolio, of Bitcoin holdings to their existing assets can actually improve their return profile on a risk-adjusted basis over the long term. And so it's making this case with concrete numbers and demonstrating, where you did the math has really been super helpful. But really, like I mentioned earlier, it's a two-pronged approach of like, look, this is the case for Bitcoin more broadly. But then when it comes to your clients and their assets, this is how it actually improves their outcomes. So before we wrap up, why don't you take a minute to explain that first point?

What is the benefit of Bitcoin more broadly? What is that story that you're telling to advisors? Like, how can it benefit their clients? Well, I think the first thing to point to, right, is that Bitcoin is an uncorrelated asset versus traditional assets, right? And I think it has its own individual set of risk and return drivers that might not actually apply to some of the traditional asset classes. And so, there's been a lot of talk recently in the market about, is Bitcoin risk on? Is it risk off? Is it neutral? Is it different? I think it's just that matrix or that framework for assessing Bitcoin. It doesn't really work. If I think about a comparison versus tech stocks, it's quite misleading.

We see, correlations versus a QQQ, for example, are actually negative in some cases or in some periods of time. And so what we promote Bitcoin as is a hedge against, inflation, against monetary debasement, against geopolitical risk. And so showing how, again, Bitcoin is a risky asset, but combining the use case plus the performance adjusted or risk adjusted performance numbers, that's where you really hit the sweet spot. Well, Federico, I really appreciate your time. I love talking about this kind of stuff. Before I let you go, where can people learn more about 21Shares, all the things you do and your two products? 21Shares.com.

We have fantastic research up there completely for free. We also produce newsletters that keep you up to date on what is going on in the Digital Asset community. So please feel free to look us up on our website and sign up for our newsletters. Well, again, thank you so much for being with me. Thank you, Brad. Thank you.

Thank you.