Why Morgan Stanley Launched the Cheapest Bitcoin ETF on the Market

Transcript

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Morgan Stanley became the first major US bank to issue its own spot Bitcoin ETF, which launched um and it and that was MSBT, which launched on Wednesday. So, what what made this interesting to me is that this is coming amidst this broader market slump. And oh my gosh, I am so sorry, James. I completely forgot to introduce you. >> [laughter] >> It's okay. Today's guest is James Seyffart, ETF analyst at Bloomberg Intelligence. Welcome James. Thanks for having me back, Laura. It's so nice to have you back. Um I know you had to stop moderating Bits 'N' Bips. Uh we miss you, but yeah, it's lovely to have you back on the show.

So, as I started saying, Morgan Stanley being the first major US bank to issue its own spot Bitcoin ETF, which was MSBT, which launched on Wednesday. What made this interesting is that this is coming amidst this broader market slump. So, tell me, how did MSBT perform and how do you think the market timing affected its launch? Um I mean, it performed really well. Uh it traded over 34 million on day one, which isn't like blockbuster, we've never seen this before, but it's top, I don't know, percentile, couple percentile of ETF launches over the last year or two.

Um so, there's still interest out there for Bitcoin spot ETF launches, though I think the Morgan Stanley name and what is behind it, which we'll get into, is a huge driver of that, obviously. Um today, obviously, we're in the second day of trading. It's probably going to trade over 20 million, 25 million, would be my guess. We're at 12 and 1/2, just a little beyond halfway through the day now. Um so, yeah, it's gone pretty well. It took in $30 million on day one. Um this is not something where I would guess this to be like, "Oh my god, money's going to pour in immediately." I think this is going to be much more of a slow burn type of thing. If people are going to move assets or interested in Bitcoin, they've had plenty of opportunities, even Morgan Stanley advisors. They're okay to buy IBIT and

some other ETFs. I think BITB from Bitwise, but don't quote me on that. Um so, the advisors that they really wanted could have gotten exposure. The the benefit here is it's 14 basis points, which is the cheapest ETF on the market right now. But and when you get to things like spot Bitcoin ETFs or spot anything ETFs, and all it does is hold the underlying asset, like you the nuance becomes around branding and fees. And now this is the lowest cost provider. I will say VanEck, their full Bitcoin ETF is a fee waiver, so it's zero fees right now. So, they're undercutting Grayscale's BTC by one bip, and they undercut IBIT by 11 bips here. So, long-term buy and hold oriented investors are probably going to be very interested in this product cuz 11 bips uh

it can add up over a long enough time frame. So, yeah, it seems like the fees will really drive a lot of this, but you did mention something about the Morgan Stanley brand. Like, tell me, you know, generally how you think it will fare in competition with other Bitcoin ETFs? Like, you know, who will it appeal to versus the other ones or, you know, who's going to buy it or how, you know, will will it sell itself? Yeah. Um I think it has to be more geared towards long-term buy and hold types of investors. Like, that's the people that are going to buy this. Right now, IBIT is far and away the largest.

It's also But there there's plenty of others with billions of assets in them. I think there's 12 or 13 ETFs now. They're all per for the most part doing pretty well. One thing that no one is touching IBIT on from BlackRock is the volume and the options volume. I mean, they have 97 plus percent of the options volume. So, if you're trading and hedging and doing a lot of stuff like that, you're probably going to go more towards IBIT, particularly for shorter-term type trades. Obviously, um if you want there's leverage versions of these things as well. So, this is going to be geared, like I said, much more towards the advisor base, the people who are putting this in their retirement accounts. I mean, 14 like I said, if you can get it the lower cost you can get, the better off you are long-term. There's competing products.

Grayscale's BTC is only one bip more expensive, but we see like lower like if you have a fee that's one basis point lower, it can move flows by the billions in the equity side of the market. I don't see why that won't be the same case on crypto for people who are going to be cost conscious. So, long-term buy and hold investors and particularly advisors in wire or people at the wires, like at Morgan Stanley, um obviously, we we call it BYOA, bring your own assets. Morgan Stanley's wealth platform basically has over 7 trillion in assets. So, and they're advocating for some portion or an allocation to crypto or Bitcoin, you just take a small fraction of that, that puts a small fraction of that in their portfolio, and it can add up.

And so, for any Morgan Stanley advisors uh that previously wanted to, you know, put some allocation of Bitcoin in their clients' portfolios, they probably were sending sending them to a competing ETF. So, how does that affect the business of those products? Yeah. Um it'll be interesting. It it depends exactly what happens because one, if you're sitting on a loss, you can and you're going to sell. So, say right now a lot of people are probably sitting on losses in their Bitcoin ETFs. We know for a fact the average investor in Bitcoin ETFs are sitting on a loss. I think the average price is around 83K last I checked. Um So, one of the problems is if you sell at a loss, you can't buy something

that's substantially similar, theoretically, because of a wash sale rule. There's a lot of nuance here because crypto technically isn't subject to it, but an ETF is a security that holds an underlying crypto. Uh so, talk to your tax advisors, but um if you wanted to swap when it was up, then there is no time limit. So, basically, you can't do it immediately on the same day, but if you wait 30 days, I think is the number, you can do it. So, ironically, the, you know, selling to lock in losses might not be what they're going to do. Um so, one, that would be some of the money, right? Some of the some of the assets that are going to go into MSBT are going to be people moving from another product cuz they're going to go into something cheaper.

Um now it's the cheapest product on the market. Also, advisors coming into the market, new players that are trying to add allocations, if they're going to sort by fees, this thing is going to be at the top of the list, alongside, like I said, Grayscale and VanEck. Um so, those are the type investors that are going to come in. Again, it's not going to be the traders. It's those those people are unlikely to go here. Um it's easy to kind of eat market share and get flows and do well on AUM, but on volume, it's hard, and on options volume and options open interest, it's even harder. Uh because volume and the liquidity tends to, you know, go to the center. It's like a snowball rolling downhill.

Okay. And it so, I saw a lot of commentary was making a lot out of the fact that Morgan Stanley has 16,000 financial advisors who can help sell this. So, talk a little bit about how you think that affects how it competes long-term with, you know, the likes of IBIT or, you know, uh Bitwise or or any of these other products. Yeah. So, it's interesting. In the ETF market, there's there's always been this trend of these people trying to do but still it's the S&P 500 ETFs that

matter. With this, there is no like underlying index, so it kind of comes down to the brand name. And I think one, obviously, this is if you're if you're in the space, one, I think we could end up seeing other people cut fees. Uh right? If you're charging 25 bips or 22 bips and you're not doing as well or 21 or 20 or whatever it may be, and you think if you can get even if you don't want to go down to 14, if you go down to 17, it becomes a lot better of a conversation for an advisor. Right? If if if IBIT had come out and launched at, you know, 35 or 40 bips, it probably wouldn't be the dominant player it is.

But it got to 25, it was substantially similar to the lowest products on the market at 20 bips when all these things went live. And BlackRock's brand name and cachet and their advisor network was able to take off. Obviously, Morgan Stanley's at a bit of a disadvantage here. They're they're coming out two years later. Um but like I said, and as you said, they have 16 plus thousand advisors. They have 7 trillion dollars in assets. They are officially now recommending, I think, like a 2 to 4% allocation, depending on like the client's growth, if as long as they're like positioned for growth, not, you know, income or conservative portfolio allocations. They're basically saying it makes sense to put this as a, you know, a satellite position in your portfolio. So, um and then that that's just one wire house. That's just Morgan Stanley. You also have UBS and JP Morgan and all

these other things. We recently had Schwab come out with recommendations for putting Bitcoin into a client portfolio, depending on your growth and conservative characteristics. Um so, all of these things, if you're going to go in, the number one thing you're probably going to look at one, it might be track record, so it like I said, it could be a slow burn. Um so, if this thing is out for a year or two, there's no issues, it's still the lowest on the market, it could it it will be definitely beneficial. Um but yeah, that's that's the way I think it's all going to play out, and I'd be interested to see if we see some other players lower fees to compete. All right. So, yeah, let's dive in a little bit more into the fee thing because um I remember the day it was announced, you tweeted in all caps,

"Wow." And I wondered like why your reaction was so strong. Morgan Stanley isn't known to be the vanguard of anything. They are not out there offering super low-cost fee competitive products, let alone the leader in the clubhouse, again, absent fee waivers. So, like they also don't launch a ton of ETFs. Most of their other ETFs that are out there are technically under brand names. They own a company called Eaton Vance and Parametric. So, most of the ETFs that are out there aren't like Morgan Stanley branded ETFs. Um so, one, it's just fascinating from when they filed that they were going to do this because like I said, you can make the argument if you can make the argument that Morgan Stanley should launch a Bitcoin ETF, then why don't they just launch their own S&P 500 ETF or every other ETF in the sun and then just have only their

clients invest in those. And that's not what happens. It doesn't work that way for the most part because of, you know, what I said about liquidity coalescing uh as a like a ball rolling downhill. Um but they have a view here. And I I wonder part of it is they obviously think they're going to put client portfolios into it and they they're basically they I'm guessing they're offering this at cost to them. Like there's probably no money being made at 14 bips on this. God, I don't know what they're paying Coinbase and their other uh BNY Mellon and these other administrators for the fund. Um but I think it's one that and I think also they see how much money and they see crypto is growing. There's a lot of money still on like DeFi rails and crypto and people who don't have, you know, legacy assets like exposure to

equities and bonds or an advisor or broker to do this stuff for them. So, I think part of this might also just be branding and marketing for them. Like, look, we have the lowest cost Bitcoin product. We understand this thing. Let us Come to us and we'll make a portfolio for you. We'll do We'll do long-term financial planning. So, I think there's a whole bunch of ways you can game out why Morgan Stanley might have done this. Okay. So, um you kind of hinted before that potentially their entrance could spark Bitwise or it's not Bitwise, BlackRock to drop their fee. But as you mentioned, because a lot of people are underwater at the moment, like there might be just a period where where people aren't moving money initially.

So, in general, like how do you think things will shake out initially? Like do you think that BlackRock will cut fees? You know, do you think that um people will switch or like yeah, just just generally, how do you see competition playing out? Yeah, I don't know for sure. I I wouldn't bet my life on BlackRock cutting fees. That said, they are extremely competitive and they will like cut off their own leg to save the arm to save the body kind of thing with the They've done this in the past in the past in the ETF world. Um they're also it's it's 11 bips, so it's not that crazy. And like I said, they are the leader in the clubhouse and they're the most liquid. They have a lot of advantages. It's these other players that are, you know, now, you know, one of the more expensive products on the

market that might drop a couple bips to get more competitive, I think, uh to eke out, you know, some sort of competitive advantage. What What do I think will happen? Like I said, if you're trying to tax loss harvest um you know, some losses in Bitcoin and you're in an ETF and you're looking at what to do, I don't understand why you wouldn't consider just going to the lowest cost product, assuming you are have no problems, you're not concerned about the risk of the way these things are structured. And this thing is structured like every other product out there. And like I said, if you're an advisor who's extremely cost conscious, like and you're coming to the market, you're going to go here. So, I do think we'll see some money in the same way that we saw when these ETFs launched. So, we we

had 11 launch on January 10th, 2024. A lot of the money that went into IBIT and and BITB and ARKB and all these other products, HODL, it came from Grayscale's GBTC um cuz it was charging 1.5% and people were waiting for a cheaper, more efficient product. There was a lot of people just generally annoyed at Grayscale, even though most of it wasn't their fault. Um and money poured into these other products. I don't think it's going to be quite that bad. I mean, 1.5% is a world of difference uh compared to 25 bips, right? So, like I don't think you're going to see money pouring out or even 21 bips. But you could see some money move and we do see advisors that will just completely move all of their assets into the cheaper product for their clients um just to save a few bips

on on an on an investment. All right. So, in a moment, we're going to talk a little bit about what this move means for the broader, you know, category of bank ETFs. But first, we're going to take a quick word from the sponsors who make the show possible. Step into a new era of wealth. Discover Nexo, the premier digital wealth platform. Manage your crypto portfolio with confidence and control. Receive interest on your digital assets. Borrow against them without selling. Trade a wide range of cryptocurrencies, all in one platform.

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So, Morgan Stanley also filed for Ethereum and Solana ETFs. And I wondered if there was anything notable that you saw about those filings. And also, what it says to you that they made those filings, you know, about like their crypto strategy overall. Yeah, initially we only saw the Bitcoin and Ethereum uh Bitcoin and Solana and and people were like, "Oh my god, are they just going to skip Ethereum?" That was the first thing that jumped out at me. But honestly, the thing that really jumped out at me is one that it's they there's no like really differentiating factor here, right? Like sometimes you see a product come to market and it's like very differentiated in some way. Some of the Ethereum products have unique staking now. Um some retain the assets, some distribute the the staking income.

That's all interesting, but like there's nothing really that fascinating, like I said before. Like it's just it's holding Bitcoin. Uh so, it comes down to brand and fees. Um I think it's interesting they chose those three. I I tend to think of them as the big three in my mind, even though I know uh Solana isn't the third largest uh by market cap, but by some metrics, it might be. Um so, yeah, I I think it's interesting the sense that they're going after the big three and they're going to launch these products. Now that we've seen this one come in at 14 bips, which is the lowest in the market, I would not I'm you basically now have to completely expect they're going to come in as the lowest products in the market for those two products as well.

Um but they're obviously leaning into the space. This isn't like a one-time thing. And like I said, there's it's not just they want to offer these products in their advisors, they want to make money on it. Like I said, I think there's an ulterior motive here slightly to uh you know, look like the big bank that is leading most into crypto. Particularly when you have people like JP Morgan is doing a lot of stuff with blockchain and crypto and other things, but like Jamie Dimon is very vocal that he does not like it at all. So, like as if you're going to consider going if you're, you know, pro-crypto, pro-Bitcoin, what have you, and you're considering getting a an advisor, you're much more likely now to consider Morgan Stanley over, you know, UBS or JP Morgan or whoever else.

So, you feel like part of their strategy is to lean into this space as a way to appeal either to a new demographic or as a selling point for anybody that's considering a different or is you know, considering investment advisors. I have to think that's part of this. Yeah. That's That's my I I think I I'm not the first person to say this, so I don't want to act like this is my like I I came to this unique insight all on my own, but I my my view is that has to be part of it. I mean, even still, 50, 60% pullback here, there's still a lot of money in crypto and Bitcoin and they tend to be very uh a lot of these people with most of the money are very judgmental against TradFi. So, if you can, you know, even pull some of them away and

get those new assets in or convince people to put more assets with you, it could work out long-term as as a very profitable, you know, marketing expense in some ways. And so, now that we're seeing Morgan Stanley step into crypto in a big way, do you think we'll see anything from the likes of JP Morgan or Goldman or like how do you think competition will play out? You know, I I saw a couple people were like, "Why wouldn't every bank and every wirehouse just launch a new Bitcoin, Ethereum, and uh Solana ETF or what have you?" Um I I don't know. This I I like I said, I was surprised that Morgan Stanley filed. Um just because you're going to launch a product doesn't mean you can differentiate it via brand and what have

you to to to do this. Uh and now Morgan Stanley has done this, but I don't know. Maybe. I would I like I said, I I wasn't expecting Morgan Stanley to do this. That caught me caught me off guard. Um I just assumed like these wirehouses allowing you like we talked for years when this thing first came out most places still didn't even let you buy the ETFs. Like a lot of people didn't understand that like they they are guardians here at the wall allowing like certain funds to be investable and certain funds that are not investable and it took well over a year for most of these places even longer to even allow people to invest in them. So Morgan Stanley only allowed it in like the third fourth quarter of 2025. So like this is a very new thing for them and they're leaning hard into it and I got

to you got to give them kudos. They're not they didn't come in and then just say we're going to charge you know 2030 bips or the most expensive product in the market. They came in and undercut everyone and we're like we're we're being serious here and you have to respect it. And then so what was their justification for for not allowing it before and what is it that changed their mind about that? I think they were just always doing research right? Like there's no way to know without talking to the due diligence team but I've talked to a lot of these they're called they're called ETF due diligence and it's the same process for active managers. A lot of times it takes years.

They're going to look at the managers decision-making process. They're going to look at how the funds are structured. They want to understand where the where the underlying assets are being custodied. They're kind of game playing out any potential risks and usually they need like three years of history for like an active manager or a fund before they'd even consider allowing their clients to invest in it. At these big wirehouses usually smaller IRAs and stuff like that will move much quicker. That's who we saw the real early adopters of the Bitcoin ETFs aside from just normal retail people buying in the broker's accounts. But they have all these processes set up because they don't want to go into an ETF that's just going to liquidate a year later and mess up their allocations and or has tons of risk that they that weren't properly disclosed. So they just usually take a

year or two years or three years or even more before they even allow these funds to be bought on their platforms. And even then there's tiers of what is allowed and what isn't allowed. Like there's limits on how much you can buy. There's limits on who can buy. If you don't meet like certainly risk-taking ability or risk like ability to ability and willingness to take risk, you can't buy these things. So all of those things that it just takes time for these banks. These are huge institutions. They're battleships. I mean they're they're aircraft carriers. They're not going to like flip a switch on for this new asset. But so they actually move quick when you think about the Bitcoin ETFs.

But I think part of it is like it's just holding an underlying asset. So they just need to study Bitcoin. It's been around for a long time now. It's not like they need to understand what a portfolio manager is going to do with these investments. And what is the demographic of the typical Morgan Stanley wealth client? Like is it quite a bit older than older than average or I actually am not 100% certain but I I would say all of these are it tends to be skewed much older. These are high net worth individuals. I mean we're not talking always billionaires but these are usually people that make and have a ton of money. They tend to be much older.

So you know Morgan Stanley bought I think E-Trade. They bought a few different things to like try and like skew younger and get more technology into the into their wheelhouse. So I like I said I think a lot of this is a way for them to market to the younger demographic and the specific crypto demographic. Even if you're younger a millennial Gen Z in a couple years from now and if you're an advisor we've been saying this for a long time. Advisors many of them still don't believe in the space at all and can't couldn't really even talk to it. That's not really the case anymore. They've done their research and they as long as you've done your research and understand what's going on you can articulate why you don't think it should be in portfolio or why it should be. I think most people would be okay with it

but the advisors and people that couldn't even explain what it was or why it shouldn't be in a portfolio or they just didn't like it because it was scammy or fraud fraudulent in some way. Like that doesn't fly anymore. This it's an active decision at this point not to have any sort of crypto in your portfolio. Like for a while it's like if you wanted to add it that's that's good that you're taking a risk. But now at this point it's so large that it's an active decision not to own it. The the real neutral decision is to own some market cap weighted version exposure to it which is still very small for the size of the asset class but it's still a decision.

Okay and last quick question on this. If you were to project what the AUM would be of the Morgan Stanley ETF or of Bitcoin ETFs generally in about a year, I'm curious what you'd say because of what you talked about the slow roll earlier earlier. Yeah, so I think Eric my boss and colleague put the over under one year out at 5 billion and that's flows. So AUM I mean if Bitcoin doubles from here its AUM is going to double right? So like when you look at AUM there's two things that affect it. It's the money going in and the performance the underlying asset. >> And and that's for Morgan Stanley? Well everyone. So like yes for Morgan Stanley. For MSBT um I mean right now there's a I don't even know 100 billion dollars in these things. They peaked at like 180 billion.

So they actually held up really well during this massive sell-off. So yeah I I would I I think I would take the under on his 5 billion over under but he basically nailed the over under on the first day trading volume. So I won't second guess him but yeah I I think it's going to be a slow burn. I think a lot of the traders and people who are trying to make short-term tactical bets are still going to lean towards IBIT because of the liquidity it has. But honestly this thing will work just fine for whatever you want to use it for and particularly if you're trying to allocate longer term you're going to see people move there. So I'm I wouldn't be surprised if this thing has billions particularly with that you know 16 plus thousand advisors 7 trillion assets.

Even if you put a small fraction of them at the one to two percent allocation to four percent allocation they recommend that's a lot of money that can come in from Morgan Stanley directly. Yeah. All right so I could >> It it it might not happen in a year. It might happen sorry to interrupt you off but it could take a long time. Yeah yeah and obviously the Bitcoin price is you know it's going to affect that. So let's switch topics before we wrap. Strategy just posted a 14.5 billion dollar unrealized loss and then immediately went back and bought more Bitcoin. So I wondered you know what you thought would be the point when this could be a problem for shareholders or if you thought the fact that the fair

accounting standards board changed the accounting rule makes the loss like less meaningful to investors. I don't think it makes it less meaningful. I think if you're an investor in strategy like you want them to do this right? You're investing in them so they can allocate and buy more Bitcoin. You just hope it doesn't you know trade at a massive discount and what have you. There's only so much you can do but like this is what you're you're signing up for Sailor to do this in perpetuity. Like that's what he said he's going to do. Obviously he's doing unique stuff with his preferreds. I know he announced more stretch buying.

I mean they're buying a lot of Bitcoin. So yeah I don't know. I I am somewhat concerned about like the tail the tailwind effect here like it's just spiraling in a positive direction typically right now because they're still buying. It's concentrated. So those are minor concerns but the fact that there is losses here I mean you should understand this at this at that at this point. I mean this this asset class and strategy itself has dealt with 70 plus percent drawdowns in Bitcoin and all these things and so if you're signing up to be a shareholder and you're upset that he's buying more Bitcoin you probably shouldn't be a shareholder.

And I wondered if so I know this is a question more about Bitcoin but it could also just be about institutional investors and how they view Bitcoin. But as we just mentioned Sailor's buying hundreds of millions of dollars of Bitcoin weekly. It's not really moving moving the price. You know what do you think that says either about the Bitcoin market or about the general attitude of institutional investors to Bitcoin right now? Yeah. It's funny. So I talked to institutions who were all aboard and I obviously talked to institutions who think again this is pointless and there's no reason to do this. I mean Bitcoin feels like a coiled spring. It feels like it's going to have to go in one direction or the other. It keeps making like higher lows right now which I guess is technically positive but I'm not a technical analyst

so I'm not going to project the price. But obviously there's people still selling heavily if if he's buying hundreds of millions billions of dollars of of Bitcoin and we're still you know right around 70k. But I will say on on the flip side like this thing has held up pretty damn well for like what's going on in the Middle East and Iran. If you had told me that the weekend of when the US first started hitting Iran that Bitcoin wasn't going to go back to its recent low I would have been like no way. So I think I don't know. I I don't know what it says about the price. It says there's obviously a lot of selling. I don't know how much of it is quantum risk and people concerned about that or what have you but this thing is very range bound. But this

is an asset class like we're in a bear market. Typically bear markets particularly with Bitcoin are measured in two ways percent drawdown and length of time and we are nowhere near how long a normal bear market last. So I think some people are just you know people are dipping their toes in the water but I don't think anyone's buying hand over fists. This thing is a momentum asset and right now it's stalled. Okay. So last question about strategy before we go which is last year there were a couple opportunities where it could have been added to the S&P 500. Right now you know what do you think the prospects are for that and yeah.

Yeah. So it goes back to those accounting standards you talked about a minute ago. So they're not eligible because they have a massive loss sitting on their financial filings. The way to get in one they're they they were they're large enough now to get in. The problem that they don't have is you need to have a the most recent quarter has to be positive earnings and the prior four quarters together also has to be positive. Obviously the most recent quarter is negative as you said. So they basically need Bitcoin's price to go up for them to get into the S&P 500.

They were eligible. The S&P 500 committee decided to put them in. I think they there's a lot of concerns and reasons why they might do that but the S&P committee is is an active committee. They make very active decisions. Some of the names one of the names they put in this most recent quarter, uh didn't make much sense to me personally. Like I really don't know why they did it. It had to do with a company that owns a lot of SpaceX. Uh but really there was way other more particular companies that I thought were higher on the list of qualifying for the index. So, you got to remember one, the S&P 500, yes, it's an index, but people control it. And two, yeah, they're dependent on the price of Bitcoin because now their income is determined by their unrealized losses and gains of those holdings.

All right. Well, yeah. Um well, I guess it it tied its fortunes to the price of Bitcoin so >> Yes. Yeah. Yeah, that is what will determine that. All right, James. Well, it's been so fun chatting with you again. I'm so glad we were able to have you on the show. Thanks so much for joining On Chain. Thank you, Laura. It was was nice. All right. And thanks to everyone for joining live stream. We will catch you next week. >> [music]