Original text: Bankless

Compiled by: Yuliya, PANews

According to Samara Cohen, the leader of ETFs and index investments at global asset management giant BlackRock, the financial markets are undergoing a critical transformation. In this in-depth conversation hosted by Bankless, Samara, who manages $6.6 trillion in assets, shared her unique insights on digital asset ETFs, the modernization of markets, and the integration of blockchain technology with traditional finance. PANews has compiled the text of this interview.

Samara: A Driver of Market Modernization

Before joining the ETF industry, Samara focused on fixed income and derivatives at a large investment bank. She describes herself as a "driver of market modernization," dedicated to enhancing market resilience, increasing transparency, and expanding investor participation. At BlackRock, she works closely with Robbie Mitnik, the head of the digital assets department, to explore the potential of cryptocurrencies and digital assets.

Samara believes that ETFs themselves are a disruptive technology, aligned with the goals of blockchain technology: to modernize markets and achieve innovation and transformation in financial markets. She points out that technological innovation has always been the cornerstone of market modernization, a principle that has not changed over the past several thousand years.

The Integration of Blockchain and Traditional Markets

Samara states that we are currently in a phase of integration between blockchain assets and traditional financial markets. She notes that the launch of the U.S. Bitcoin ETP (Exchange Traded Product, not an ETF, which is an important distinction) marks the one-year anniversary and signifies an important watershed moment, while also being just the beginning.

The significance of these Bitcoin ETPs lies in their role as a bridge between the crypto world and the traditional finance (TradFi) world. Surprisingly, this bridge has had a positive impact on participants from both worlds:

• Traditional investors can access Bitcoin through familiar investment tools.
• Digitally native investors also find that ETPs meet their needs.

Data shows that many investors are encountering this product category for the first time through Bitcoin ETPs, subsequently expanding to other ETPs. This integration currently involves only a few crypto assets and relies on traditional financial infrastructure. Samara believes that the ideal direction for development is to create bridges that draw on best practices from all sides, rather than completely disrupting the existing system.

Technological Evolution and Market Transformation

Samara likens the current development of crypto assets to the transition from dial-up internet to broadband: initially, internet data was transmitted over phone lines, and now, conversely, phone calls are made over the internet. Regarding the future development of crypto assets, there are two perspectives:

1. Current stage ("Dial-up internet" stage):

• Bitcoin ETFs, Ethereum ETFs, etc., are "simulated versions" of crypto assets.
• This is akin to forcibly fitting crypto technology into traditional financial frameworks.

1. Future vision ("Broadband era"):

• Traditional financial institutions (like BlackRock and Nasdaq) may shift their operations to blockchain.
• There may emerge dedicated financial institution blockchains.

However, Samara raises a critical question: Is this completely decentralized vision truly the best fit for the current market and investors? She analyzes the issue from the perspective of the necessity of balance:

• Acknowledging the advantages of crypto technology in terms of transparency and auditability.
• Questioning the necessity of complete decentralization.
• Pointing out the historical value of intermediaries: allowing people to focus on their areas of expertise.
• Suggesting the use of crypto technology to improve trust mechanisms rather than completely replacing intermediaries.

Development of the Options Market

BlackRock's iShares Bitcoin ETF and Ethereum ETP dominate in terms of options trading volume. BlackRock has established an options ecosystem through partnerships with institutions like Nasdaq, where Bitcoin ETF options were launched a day ahead of similar products.

The iShares platform covers multiple asset classes and national markets, establishing extensive connections with the trading ecosystem. In the Bitcoin market, the following characteristics are the focus of market attention:

• High volatility.
• High volatility of volatility (volatility of volatility).
• Positive skewness characteristics (volatility tends to rise when prices increase).

The development of the options market has introduced new trading mechanisms for cryptocurrency ETFs. Although there are many sources of price information in the cryptocurrency market, by introducing volatility tools into exchanges and listed trading, the market has achieved:

• Standardization of funding methods.
• Measurability of volatility trends.
• Real-time monitoring of trading conditions.

Data shows that the ETF market has experienced significant growth over the past 20 years, with a considerable portion of 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 needs.

The development of the options market has expanded the diversity of market participation methods, specifically reflected in:

• Standardization of trading methods.
• Improvement of price discovery mechanisms.
• Increase in risk management tools.
• Enhancement 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 primarily revolves around risk management, how to use risk to achieve portfolio diversification, and studying the interactions between portfolios.

Although Bitcoin reached new highs at the end of the year, investors need to remain clear-headed: while 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 characteristic that gives Bitcoin unique value as a portfolio diversification tool. Without these volatility characteristics, Bitcoin might not have the same investment argument it does today.

For institutions like BlackRock, which primarily cater to 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 cryptocurrency space: many believe that the success of an ETF is directly related to the rise in the price of the underlying asset. However, this is entirely different from the actual metrics for measuring the success of ETF products.

BlackRock measures the success of ETPs (Exchange Traded Products) based on:

• Whether the product meets investor needs.
• Whether it provides an effective market access mechanism.
• Whether it has good liquidity.
• Whether it can achieve effective price discovery.

Metrics for ETF Success

As a traditional finance (TradFi) expert, Samara points out some misunderstandings between the cryptocurrency community and the traditional finance sector, particularly regarding the performance evaluation of Bitcoin ETFs and Ethereum ETFs. Samara specifically notes that many believe that Ethereum ETFs are less successful than Bitcoin ETFs, but from the professional standards of the ETF industry, the launch of Ethereum ETFs is actually quite successful. She emphasizes that the primary criterion for judging whether an ETF is successful is whether it can achieve its intended goals.

Metrics for ETF success:

1. Tracking accuracy

• Must accurately track the underlying index.
• The importance of Bitcoin ETFs stems from solving problems previously faced by investors.
• Provides new options beyond self-custody and exchange-held assets.
• Avoids the position limits of futures ETFs.

1. Market quality

• Requires comprehensive ecosystem support.
• Includes trading volume, liquidity, and exchange access.
• Establishes a creation/redemption mechanism for authorized participants (AP).
• Both Bitcoin and Ethereum ETFs demonstrate good market quality.

Flow difference analysis:

• ETFs themselves do not directly drive capital inflows.
• Investor sentiment and investment philosophy are key.
• In 2020, the investment philosophy for Bitcoin was clearer and more specific than for Ethereum.
• This explains the difference in capital inflows between the two.

Actual performance:

• Bitcoin ETFs have broken historical records.
• Ethereum ETFs still rank among the top 20 ETF issuances in the U.S. this year.
• Both are considered successful products.

Key findings:

• Bitcoin's marketing story is simpler and more direct (21 million limit, digital gold).
• Product success depends not only on technical performance but also on a clear narrative and identity positioning.

ETF Trends

Regarding the development history of Ethereum ETFs:

• The SEC unexpectedly approved Ethereum ETFs in May 2023.
• The industry faced uncertainty regarding the trading launch timeline from June to July.
• There was a need to simultaneously prepare portfolio, trading operations, and education strategies.

Current market trend analysis:

1. Investor characteristics

• Ranges from small investors to complex investors.
• Self-directed investors are the main driving force.
• Investors generally understand the differences between Bitcoin and Ethereum.

1. Advantages of Bitcoin investment thesis

• Aligns with current geopolitical tensions.
• Addresses concerns about the U.S. dollar deficit.
• Serves as a diversification tool for traditional portfolios.
• Particularly valuable in the context of the dual hit to stocks and bonds in 2022.

1. Challenges facing Ethereum

• For U.S. investors already holding tech stocks.
• Ethereum is more like an "amplifier" for existing investments rather than a "diversifier."
• There is a high correlation with large tech stocks.

Market education process:

• Investors' understanding of the two assets is deepening.
• Bitcoin currently better meets portfolio allocation needs.
• Market education is still ongoing.

ETF Protocol Upgrades

Regarding potential future protocol upgrades for Ethereum and Bitcoin blockchains, BlackRock's position and perspective as an ETF issuer are noteworthy. When participating in industry discussions, BlackRock's views are primarily based on the following principles:

• Focus on how the ecosystem can best serve the needs of companies and clients.
• Tend to support open architecture and interoperability.
• Consider the practical needs of institutional-scale operations.

Due to BlackRock's large operational scale, operating within a closed ecosystem often faces many limitations. This is also why the company has clearly shifted towards supporting public blockchains rather than permissioned chains in recent years. This shift reflects the institution's emphasis on openness and scalability.

In terms of specific positions, BlackRock is more inclined to focus on:

• System scalability.
• Conditions for counterparty participation.
• The overall openness of the ecosystem, rather than taking a stance on a specific crypto platform.

ETF Development Forecast

In terms of the outlook for ETF development in 2025, BlackRock has proposed several key observations and expectations.

• First, they hope to see continued deepening of research on Bitcoin in portfolio construction. The focus of the discussion should shift from "whether to invest in Bitcoin" to "how to reasonably incorporate Bitcoin into a portfolio."
• The second important development is the launch of Bitcoin ETP options. This innovation has already shown its significance in November 2023. Generally, the options ecosystem helps create a more balanced trading dynamic, with buying pressure during market downturns and selling pressure during upswings. 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, enhancing investor education will become increasingly important.

Other ETF Plans

Regarding BlackRock's future plans for digital asset ETFs, the company has adopted a relatively cautious and pragmatic approach. Here are the main points of analysis:

Differences Between Market Perception and Reality:

• There is a common misconception in the market that the launch of an ETF will inevitably lead to an increase in the price of the underlying asset.
• The success of Bitcoin ETFs has somewhat reinforced this perception.
• The performance of Ethereum ETFs shows that this correlation is not necessarily the case.

Actual Impact of ETFs on Assets:

• They provide a more convenient investment channel.
• They bring a certain degree of legitimacy.
• They reduce regulatory risks.
• They may attract new pools of capital.

BlackRock's Investment Decision Principles:

• Based on clear investment rationale.
• Focus on cash flow assessments of underlying assets.
• Emphasize risk measurement.
• Consider client portfolio needs.

Observations on Capital Inflows:

• Bitcoin ETFs have accumulated approximately $36 billion in net inflows.
• Secondary market trading volume is nine times that of the primary market.
• Institutional investors participate through various channels, with ETFs being just one of them.

Current Focus of BlackRock's Digital Asset Strategy:

• Operations and development of Bitcoin and Ethereum ETFs.
• Tokenization projects, particularly the tokenization of government bond funds.
• Stablecoin-related businesses.

Looking Ahead:

• The company is currently primarily focused on Bitcoin and Ethereum ETFs.
• The digital asset strategy encompasses three pillars: cryptocurrencies, stablecoins, and tokenization.
• New product development will continue to be customer-driven.

New Government Impact

A new government is about to take office, with a positioning that leans more towards free market and pro-market policies. An important change for the cryptocurrency industry is that SEC Chairman Gary Gensler will be stepping down. This change will not only affect native cryptocurrency enterprises but also mainstream financial institutions like BlackRock, which are closely monitoring the situation. Notably, the SEC's influence is not limited to the U.S. market; it actually extends to global financial markets.

Historically, the U.S. market has performed better than other global markets in balancing support for innovation and investor protection, a balance that has contributed to the U.S. market's dominant position today. The current regulatory environment is largely shaped by the market changes of 2020-2021. During that period, individual investor participation significantly increased, primarily due to trading platforms beginning to offer commission-free services, heightened acceptance of technology during the pandemic, and government stimulus funds. Subsequently, many individual traders transitioned to index and ETP investors, a shift that has also driven ongoing market transformation.

Future Outlook

BlackRock holds an optimistic view of the future, hoping the market can return to a direction of balanced development. Despite recent regulatory opacity regarding cryptocurrency ETFs, this situation is expected to improve. They look forward to a more innovation-friendly regulatory environment while also 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 to clarify the attributes of various digital assets.
• Clearly delineating jurisdiction to determine the responsibilities of specific regulatory bodies.
• Establishing collaboration mechanisms between the public and private sectors.

Regarding the existing FIT 21 bill and stablecoin legislation, BlackRock views these as positive developments but believes they need to be better integrated with the traditional financial (TradFi) system to avoid creating a completely independent crypto ecosystem that could hinder the participation of existing financial institutions due to overlapping regulatory frameworks.

She observed that while 2023 was full of challenges and there was strong dissatisfaction with the regulatory environment within the industry, it is now time to refocus on the core mission: to create a more transparent and inclusive financial system.

The industry is entering a potential "golden age," primarily due to three key factors:

• Lower-cost block space.
• More convenient development environments.
• Clearer regulatory prospects.

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