Tidal Financial’s Michael Venuto on cryptocurrency regulation

Michael Venuto is chief investment officer and co-founder of Tidal Financial Group, as well as portfolio manager of the Amplify Transformational Data Sharing ETF. He joins Opto Sessions to discuss Amplify’s blockchain ETF, and why many of the downsides of crypto investing stem from a lack of regulation, rather than any deficiency in decentralised finance.

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Tidal Financial Group is one of the fastest growing platforms for entrepreneurs who want to launch and grow ETFs.

Prior to founding the platform, Venuto worked as head of investment at Global X Funds and as senior vice president at Horizon Kinetics. He was selected as an ETF.com all-star in 2014, and appears regularly in Bloomberg and Reuters.

Venuto explains that he likes to meet the management teams of companies he invests in, and says this has enabled him to avoid some of the worst impacts of the recent turmoil in regional banks.

He tells Opto Sessions: “We exited Signature Bank in January, because we heard that their commitment to mortgages on the blockchain had dissipated… We held on to both Customers Bank [CUBI] and New York Community Bank [NYCB] because we heard from clients that they were moving from Silvergate and Signature to those banks.”

This conviction enabled his team to buy the dip, increasing their position in Customers on a day the stock was down 40%, says Venuto.

To crypto investors like himself, the crisis, and resulting calls for restrictions on short-selling banking stocks, are added tailwinds for decentralised finance.

“Anything that is delegitimising of the traditional banking system is a huge win for blockchain and Bitcoin,” he tells Opto Sessions.

Venuto shares this view with Michael Saylor, co-founder and executive chairman of MicroStrategy [MSTR]. MicroStrategy offers Bitcoin exposure since Saylor converted half of its cash reserves to Bitcoin in 2020, and is the Amplify Transformational Data Sharing ETF’s [BLOK] top holding, with a 4.73% weighting as of 18 May.

Regulation

Venuto makes the case that the struggles cryptocurrency endured last year had nothing to do with cryptocurrency, or decentralised finance. “GBTC, FTX, Voyager… All of those were the second-oldest profession in the world, which is financial fraud.”

Venuto explains his views on the crypto winter, saying that US regulatory inaction is the main factor extending it.

“[Regulators] won’t stand up and say Bitcoin is X and treated Y, and here are the accounting standards and all of that. And therefore, Tom Brady invested in a fraudulent company instead of the cryptocurrency itself — because there’s more regulation around that fraudulent company than the commodity of Bitcoin.

“The longer we wait for some clarity, the more likely it is we’ll have more scams, which sets us back.”

He calls for positive regulation of cryptocurrencies, including clarity on tax treatment and the rules around investing into the space. Such moves would, Venuto believes, discourage the malpractice with which cryptocurrency is currently associated.

“The reason there’s not a spot Bitcoin ETF in the market today is because there’s not already a law that says Bitcoin as an investment is treated the same way as a stock: meaning, if you hold it, you can’t pump it.”

He also takes aim at the confusion that arises as a result of the US government’s refusal to define an asset class for Bitcoin. “It’s got to come from the administration or Congress. The Security and Exchange Commission’s job isn’t to decide what Bitcoin is, or to take the government stance on it.”

Venuto is unconcerned by threats of bans based on Bitcoin mining’s energy consumption, describing these as “just narrative”.

“Bitcoin mining globally uses one third the energy of gold mining. Okay, what’s the application for gold?”

What does scare Venuto, though, is the prospect of central banks issuing their own digital tokens. “That’s real control over the populace,” he says.

BLOK

BLOK seeks to provide investment exposure to blockchain technology. Venuto emphasises that this doesn’t equate to cryptocurrency, but that the fund will inevitably bear some correlation to crypto performance; over the last four or five years, he explains, it has had an approximately 70% correlation with Bitcoin.

Outside the world of cryptocurrency, however, blockchain encompasses a range of applications.

“In that world, it’s about logistics,” Venuto explains. “It’s about better use of things. It’s about sharing information.”

The fund’s safe haven assets are typically in this ecosystem. Venuto explains that, during last year’s crypto winter, the fund’s largest positions were in the Chicago Mercantile Exchange Group [CME].

“The CME has the futures. And if everybody’s shorting Bitcoin, what’s the best way to short Bitcoin, especially now that FTX is gone? It’s CME.”

The fund also takes a disciplined approach to balancing, dividing assets into core and non-core. Core positions start at 3% and are capped at 5%, while non-core start at 1% and are capped at 3%.

That rebalancing “has saved us more times than not. There have been a lot of times where people said, ‘Wow, you got that right at the right time’. And we say, ‘No, it became a 7% position, and our mandate says bring it back down below 5%.’”

The fund divides assets into segments including transactional (25%), miners (20%), venture (11%), application (10%), exposure (10%) and private blockchain (10%), with the rest going to conglomerates and semiconductors. Each of these segments is capped at 25%.

Going forward

Venuto sees the future of blockchain as being in what he calls the “applications” segment. An example of this was New York Community Bank’s bid to provide mortgages on the blockchain, although this never got off the ground.

As a segment, Venuto says, there’s not a huge amount happening in it right now. He believes that “there will be more and more applications” but that the segment is currently in a “Pets.com era” — in other words, sound business models are being created and deployed before the market or infrastructure to sustain them has caught up.

“A lot of these applications are early,” he says. “They may or may not make it, but they will be reborn someday on the established Bitcoin blockchain.”

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