Ep. 555 Institutions Eyeing the Bitcoin ETF with Matt Hougan from Bitwise

In this episode of Crypto 101 we have Matt Hougan who is the CIO of Bitwise in this CAN’T MISS EPISODE. If you have ever seen a Bitwise commercial on TV odds you saw Matt giving you some fun facts about the crypto space. Bitwise is leader in the Crypto index fund space and Matt himself has been a leader in the financial markets his whole career in traditional finance and then made the jump to crypto when he saw the massive opportunity it brings. We talk about the current state of the crypto markets, how the Bitcoin ETF would change the landscape for investors and what you should be looking for to make sure you don’t miss out on this ever changing crypto landscape.

 

— TRANSCRIPT —

 

SPEAKERS

Matt Hougan, Bryce Paul, Aaron

 

Bryce Paul  00:09

All right, everybody. Welcome back to another episode of the crypto 101. Podcast. I hope you’re having a fantastic morning, noon night, wherever you guys are in the world. You’re certainly in the right place. Because we are joined today by an incredible, incredible man, a visionary, a pioneer in the space Matt Hogan, who’s the chief investment officer of bitwise. Matt, welcome to the show.

 

Matt Hougan  00:38

What an incredible introduction. I’m so excited to be here. Thanks for having me.

 

Bryce Paul  00:43

Absolutely. No, we’re happy to have you. And you’re an incredible guy you were you were a godfather of the ETF world. Now you’re a godfather of Asset Management here in crypto. Let’s let’s catch the good citizens of crypt nation up on who you are briefly before we dive into some exciting things like the Bitcoin spot ETF, like some new initiatives that bitwise is undertaking, but But who are you?

 

01:11

Sure, yeah, I love that. Let let a couple lies as you as you suggest. So I’m the chief investment officer of bitwise Asset Management. bitwise, of course, is a specialist crypto asset manager. We’ve been around since 2017. We run the world’s largest crypto index fund and have done a lot in research and in spot Bitcoin ETFs that I’m sure we’ll talk about. So I look after our investments and our index strategies there. And before I moved over to bitwise, I had a whole career in the ETF space. So I was the CEO of etf.com, I created the world’s first ETF analytic system, I wrote the CFA Institute’s guide to ETF ease, and then wrote the CFA Institute’s guide to crypto. So I wrote a book covered both of those spectrums. So yeah, ETFs and crypto put them together. And and that’s what you’re looking at, for better or worse.

 

Bryce Paul  02:06

And then I’m hearing ETFs are eating up all the mutual funds now?

 

02:11

They are they are $7 trillion, and going a trillion dollars a year. And yeah, mutual funds are Dead Man Walking ETFs are the future.

 

Aaron  02:20

So what exactly is an ETF? And why is it such a big deal for Bitcoin? And crypto? And we’ve been hearing this narrative for years, as soon as a spot Bitcoin ETF comes, it’s to the moon. But a Is that true? And B, if so, why?

 

02:37

I think it’s a journey to the moon. I think that’s the destination, but it won’t be overnight. So the backup, of course, and ETF is just a kind of mutual fund a mutual fund is how most Americans invest in the stock market. Instead of buying just Tesla stock, you can buy a mutual fund that holds 100 or 500 stocks, maybe it tracks an index, maybe it’s actively managed. And those were created, you know, about 100 100 plus years ago, this idea of a mutual fund, an ETF is an updated version of that. It’s like a mutual fund, but it trades intraday, and it’s a lot more efficient, a lot cheaper, and a lot more tax efficient. And that’s why, as Bryce mentioned, it’s taking over the world, right? There are no flows into mutual funds, there only flows into ETFs. So you can think of when you hear ETF think how America invests in stocks, and bonds, and commodities. And that statement is why the Bitcoin ETF is so important, because right now, retail investors and more importantly, financial advisors, people who manage money for other people and institutions can’t access Bitcoin or crypto in the same way they access stocks and bonds, etc. It’s like they have to run two tracks at the same time. So what a spot Bitcoin ETF would do, is it would make it as easy for a financial professional to buy bitcoin, as it is to buy the s&p 500. And that history suggests would bring a lot of assets into the market. And when we talk about a lot of assets, we’re talking about 10s of billions of dollars consistently, year after year after year, forever. And that sounds real nice for the space, right? Yeah.

 

Bryce Paul  04:25

No, I mean, you paint you paint an awesome backdrop for where we’re at and where we’re going. I think a lot of people get confused because they think, Oh, well, why can’t my financial advisor you know, buy Bitcoin for me or whatever, you know, what is that gap where people say, Hey, I’ve got you know, an extra 10,000 bucks in my IRA or whatever, why can’t I go to my financial advisor and just put that in Bitcoin? Why is there not a product that tracks it? That just the everyday person can can do what what is that gap?

 

04:57

Yeah, the short answer is and this is a frustrating answer. But it’s reality? The short answer is there are ways to do it. They’re just really hard. So bitwise is business exists to serve this financial advisor market, and we have maybe 2000 financial advisers who use our products. But in order to use our products, they have to have separate contract agreements, they have to underwrite the risks, they have to understand the custody, they have to build separately on their crypto stuff versus their non crypto stuff in many cases. And that’s just a lot of work. And so an advisor who might make two or 5% of a client’s portfolio, and crypto isn’t going to jump through those hoops. It’s also the case that people rely on an ETF as a signal that the market is relatively mature. And so there’s some hesitancy to get into it. So advisors are doing it today, but they’re only doing it in a fraction of the way. And I’ll give you a perfect example. You know, gold has been around for 1000s of years, people have thought about investing in gold for 1000s of years. But until there is a gold ETF, which was in 2003, we didn’t appear in any financial adviser portfolios, it was just too hard to buy a gold bar gold coins and store it safely. Yes, you could do it. But you weren’t going to do it because it was too hard. A gold bullion ETF was approved. And over time, something like $80 billion flowed into it, it’s just making it easy is a big differentiator for this advisor market.

 

Aaron  06:29

With all the ETFs that have been filed recently in the past month, including some from the largest asset managers in the entire world. I think there’s never been a more bullish sentiment that something’s gonna get passed. How does this affect bitwise? Or you guys have filed an ETF as well, you know, not commenting on whether yours will get accepted or not. But how does this affect bid wise as a company now having so many new kids trying to enter the playground where you really had your run of the mill for the past decade? Yeah,

 

07:00

it’s a great question and completely reasonable. The first thing is for bitwise. And for everyone that’s listening to this podcast, it’s just a great thing. You have the world’s largest asset manager that manages almost $10 trillion in assets, putting its flag in the ground and saying bitcoin is an asset that will matter in the future, that financial professionals will want exposure to it, that they’re willing to stick their neck out, just to open up that opportunity. That’s the maybe the largest, most important endorsement of Bitcoin in its history. So the whole pie is going to get a lot bigger. And a bit wise, we’re more concerned with growing that pie than with our specific slice of pie. But I do spend a lot of time thinking about my specific slice of pie too. And there, you know, the reality is in the history of asset management when you get niche asset classes, specialists tend to win more than their fair share. So sure, Blackrock is a giant institution, an incredible company, but bitwise has more people working on crypto than Blackrock does and that specialization does matter. So we’re confident that we’ll get our share we welcome all these other people to help grow the pie and they can have their own little slivers as well. But we’re gearing up you know to fight in friendly competition with with BlackRock and hopefully win,

 

Bryce Paul  08:26

ya know what so what makes you know, you and everybody who has an active Bitcoin spot ETF filing, what makes you guys are you I guess you can only speak for yourself so what makes you think that this time is gonna be different? Right, like we’ve had I think 20 sort of ETFs that have been declined. And it’s funny I saw this like meme that was like BlackRock, Scott, you know, 575 out of 576 approvals. They got 99.95 but the SEC is 20 for 20 on on declining ETF so the odds are in their favor What do you think of all this craziness?

 

09:06

Yeah, it’s like a heavyweight boxing match. Two times title fighters you know, this is be our third time at bitwise finally, first bought Bitcoin ETF so you know, Third time’s the charm. I think there are three big changes and I would say they’re, they’re Blackrock bit o and GBTC. So to take them, you know, is

 

Bryce Paul  09:27

the each one of the spot ETFs are the future

 

09:31

CTF? Yeah, and I’ll explain why that matters in one sec. So take those in as order Blackrock is the big dog. And when they come into the market, you have to listen. And actually, as a big provider, they have a unique capability that a company like bitwise does not have, which is that they can encourage their partners like exchanges or like authorized participants to do things that it’s harder for a small company to encourage them to do it. So they’ve encouraged NASDAQ to stick its neck out and fill out these surveillance sharing agreements with Coinbase. Because they carry a big stick, and they have a lot of business there. And that opened up a new aperture that didn’t exist before. And so Blackrock coming into the space is both important from a narrative perspective. But actually from a technical perspective, too, because we’re now talking about things that were hard to talk about, before we had that big club in the marketplace. The second one is, is bid o or the the pro shares Bitcoin futures ETF, which was approved almost two years ago. And the reason that matters is that it’s traded exceptionally well. It’s tracked the spot price of Bitcoin fairly well. And it’s caused the Bitcoin futures market to grow substantially. And a big part about getting the SEC comfortable with the spot Bitcoin ETF is convincing them that that regulated futures market is of significant size and really important. And the fact that that market has expanded a lot that there’s over a billion dollars in open interest that there’s 10s of billions of dollars of trading volume, that helps as well. And then the last thing, of course, is GBTC, which is engaged in a lawsuit with the SEC, and pushing them over whether they’re distinction between allowing a futures product but not a spot product that is sensible, and that’s adding pressure. This isn’t 100% chance we’re going to get improved, approved, but when you combine those three things, the market getting better Blackrock opening up new avenues and GvtC pressuring the SEC, we thought, you know, it was worth filing. I think that’s what you’ve seen from, I guess it’s eight of our peers have also filed and put their paperwork in.

 

Bryce Paul  11:44

That’s awesome. That was a beautiful summary. I mean, it makes it makes me feel like we’re in the sweeps right now for crypto right plus, we just had the XRP thing fold up finally positively for the crypto industry broadly, we got the Coinbase verse SEC thing moving along all these ETFs grayscale, but I want your point on Black Rock was you know, prescient because even my dad who’s you know, he’s a boomer he’s you know, not deep into crypto at all. And here I’m his son right like you know, been doing this for for seven years and he’s you know, never wanted to buy bitcoin but he I over Father’s Day, he was like, You know what, Bryce? This whole Blackrock ETF really is getting me off of zero. I think I could, you know, put so my retirement, I was like, BlackRock, this, this is a company that doesn’t even care about you. I’ve been praying for you to buy Bitcoin for years. Frickin Larry Fink and get you off the couch. But it is like you said, they carry such a big stick, because he’s like, Well, they carry my entire retirement account. So it’d be very easy for me to just, you know, I trust them already. And it’s already there. Right. And at the end of the day, I think this will bring, like you said, 10s of billions of dollars off of zero, and get just, you know, 1% of his portfolio and that kind of thing going. But you know, I like the recurring idea, because, you know, people are always working people are always contributing to their IRAs and their 401 K’s. But yeah, yeah, crazy.

 

13:14

I love that story.

 

Aaron  13:15

So one of the are a couple of the reasons that ETFs in the past were declined. The SEC cited a lot of market manipulation in crypto. And to be fair, that was true a couple of years ago, I think, you know, Bitcoin was still maybe 60% washed trading from offshore exchanges at that time. And there was no real good banking grade custody provider out there. There was some good cold storage solutions. There was some institutional grade stuff, but it was really, really difficult to work with. And those were a couple of the reasons that were cited for the declines not because of Bitcoin itself. Have you seen a lot of improvement in those areas over the past couple of years, Matt, where the markets have been cleaned up, and it’s easier to handle some things now?

 

14:03

Yeah, I think that’s such a fabulous point. And we don’t give the SEC enough credit. You know, the first spot Bitcoin ETF was filed in 2013, the Winklevoss boys, the Winklevoss boys, and you all remember crypto back then it really was a wild west. Right? Mt. Gox was the largest custodian, you know, sort of thank God that a Bitcoin ETF didn’t get approved way back then the market wasn’t ready for it. Big time. It’s gotten way better custody has gotten so much better. You now have a large variety of qualified custodians that have been in the market for years, whether you’re talking about Coinbase or even big names like Fidelity or nationally chartered banks like Anchorage, the trading has improved dramatically. You know, bitwise wrote that report. You probably remember if 95% of reported Bitcoin volume being false. I know it’s hard for people to imagine what it was like then, but you would go At coin market cap.com And you would see exchanges that literally no one had ever heard of the number one exchange was something called coin bend a or coin being I don’t even know how and there

 

Bryce Paul  15:10

was like L bank and F token or whatever it was called.

 

15:14

Totally wild it was all fabricated and that’s a longer tree you go to you go to coin market cap that comments like yep, yep, yep, these are the these are the places trading takes place. So the market has improved really dramatically and I think that’s why I’ve always said a Bitcoin ETF as a matter of when not if because this market is moving up into the right in terms of its quality. And it’s just a question of when it gets over the SEC line and I think we’re over it now.

 

Bryce Paul  15:42

least I hope so. Yeah, Couldn’t have said it better. Yeah, so I’m my memory I’m like going into flashback mode slash you know, having PTSD from all of those you know, crazy exchanges

 

Aaron  15:55

trading on bit Forex.

 

Bryce Paul  15:56

Oh my God, there’s so many just scam exchanges. And I think you know, even like if we if we did have the Bitcoin ETF already and then Celsius and Voyager in Genesis and all these, you know, block phi, they were involved, that would have been chaos, it would have made this thing orders of magnitude, you know, worse. And so the fact that we’ve now got like pizza mind, like you said, we’ve got the space cleaned up a little bit. And on the right track, and you know, we’ve got the good actors, you know, spreading and growing like the bid wise of the world, the coin base is of the world, we kind of have the more gray area actors, ie by Nance shutting things down, basically moving their operations essentially offshore, with no US dollars on onshore anymore and closing down 1000 positions and threatening more. So you have like the right trajectory? And like you said, it’s just a matter of when, not if, and so I like where we’re going. But my question also stems beyond just Bitcoin, right? A lot of the conversations on Bitcoin right now, but I think the logical next step would be okay, Bitcoin gets approved, maybe that trades for a year or two years, gets comfortable that but then we could have Aetherium we could have maybe even XRP not a huge fan, you could all have to get warmed up to it, but you know, Doge, all these other things that you could say, Okay, well, we could apply that ruling. Maybe people are calling it the Torez doctrine. Now with this new, you know, sec sort of discussion on these coins not being securities dt. Matt, do you think that we could have more ETFs eventually even just Bitcoin?

 

17:40

Oh, definitely. Absolutely. For one, if you look abroad, whether it’s Canada has Bitcoin and Aetherium, Switzerland, as you know, maybe a dozen different ETFs trading. I think we will get there in the US. I suspect that the next shoe to drop is an Aetherium futures ETF, right, there is a regulated Aetherium futures market. A few people have tried, and it hasn’t looked like the SEC was ready. But there’s no fundamental wall between a Bitcoin futures ETF which is already trading and an Aetherium futures ETF. And then once we get a spot Bitcoin ETF, I do think we cascade down I bet we get eath, I bet we get an index product. I bet we get more specific tokens that will all transpire my guess over the next five years, and it’ll transpire at an accelerating rate. In other words, it took so long to get a spot Bitcoin ETF, it’ll take less long to get an ETF and then the walls will come down. And crypto will enter the traditional capital markets on a side by side basis, that will really be no major distinction.

 

Aaron  18:49

Yeah, with the XRP. Ruling and providing some clarity finally, around alt coins? And what is or isn’t an investment contract with the token, does this change some of the available assets that you have to choose from to put into your index funds? Or are you still waiting for even more additional clarity on specific tokens that were named in the Coinbase? lawsuit by the SEC, such as like a medic or a Cardano?

 

19:16

Yeah, I will I’ll without getting into specifics, I’ll say that the decision on which, you know we have a rule in our index that we won’t hold an asset that’s an undue risk of being found in violation of federal securities law. That was a very specific saying, because that’s a quote from our methodology. So with every index, we have to evaluate whether that asset is over or under the line, and we have a whole internal process. I’d say that the Coinbase and binance lawsuits as well as the XRP ruling will enter into that mix. And we’ll have a large discussion at at at the index committee level about whether that changes our mix it may it may not. These are complex analysis. sees with many different factors. But you have seen for instance, a few exchanges relist XRP as an example, and you’ve seen them maybe be more resolute in not D listing some of the assets the SEC named. So I do think these are important facts. They’re just not the only facts that you have to consider. Very cool.

 

Bryce Paul  20:21

I want to I want to kind of touch on the I don’t want to botch this. It was the big Q bit wise innovators bitwise crypto industry innovators fund, is that right?

 

20:32

Good. Good job. Yeah, I know.

 

Bryce Paul  20:36

I tried to memorize this. The bitwise crypto industry innovators fund. Tell us about it because I saw a headline that it craft crossed $100 million in assets under management.

 

20:48

Yeah, you know, as mentioned, I come from an ETF background and created the first ETF analytics system. And one of the things that we really focused on when we were building that system was helping investors ensure that what a ETF says is what it holds. In other words, if it says it’s a homebuilders, ETF, let’s make sure it holds homebuilders and not like Home Depot. If it says it’s an oil. Jason. Exactly, exactly. So we like pure play thematic ETFs as they’re called. What big Q is, is it’s the first crypto ETF that launched that actually was able to use crypto in its name. And the SEC as a rule that in order to use a word in your name, you have to prove you have 80% or more exposure to that word. Oh, wow. And so that’s like a cheat code for ETFs. So we think it’s the best pure play crypto equity ETF in the space, it’s had a tremendous 2023 I think it’s up something like 200% that’s no guarantee that it will continue to go up. But that’s just its return this year, it was down a lot the year before. The solution it provides is particularly right now, people want exposure to crypto in ETF format, and they can’t get it through a spot Bitcoin ETF, but you can get it through crypto linked equities, miners, Coinbase, etc. And so big Q holds a portfolio of those companies, Bitcoin miners, trading firms like Galaxy exchanges, like Coinbase, etc. And historically, it’s been like a levered exposure to Bitcoin. That’s his pattern of return. So we love that fun. We’re excited. It’s growing a lot of advisors like it, and we think it has a nice future.

 

Bryce Paul  22:31

Ya know, that I love that idea. If you kind of take a look at some of the charts like MicroStrategy, for instance, which I imagine is in bit queue, is it? Yep, yep. MicroStrategy is up like 130% this year, and like bitcoins up, you know, 80%. And, you know, I see riot and marathon. Imagine they’re in there. You know, they’re, you know, huge. And so, you know, how can an average investor get exposure to something like bid Q? Or do you only do it really through? You know, maybe you got to be a qualified, you know?

 

23:04

Yeah, great, great question. Big queue trades, like any ETF, so you can buy it through a traditional brokerage account, whether that’s Schwab or Robin Hood or

 

Bryce Paul  23:14

fidelity brokers, maybe

 

23:15

Interactive Brokers. Yeah, of course, you should be aware of the risks and the risk of loss. Every investor with access to a brokerage account can find becu at their fingertips. And it’s a, you know, it rebalances on a regular basis, it’s managed by a professional team. So we’re proud of that fund.

 

Bryce Paul  23:34

What what products get the most interest that you guys have? Is there one that kind of stands out? This is the flagship, this is where there’s the most interest?

 

23:44

Yeah, great question. They’re too. Big Q is one of them. So big Q is growing very fast, because people want exposure to diversified crypto equities. And they find it an efficient way to get exposure to the crypto ecosystem. The second one, of course, is our bitwise 10 large cap crypto index, which people call the s&p 500 of crypto. And it’s just an easy way to get diversified exposure to the crypto ecosystem. But we offer I think, more than 20 products now, we offer ETFs private funds OTC QX trusts SMHS we have an active fund of funds. What we try to do is provide a variety of strategies and a variety of wrappers, but connected by expertise in the crypto space. So when you dig under the surface, we understand the tokens we understand custody, we understand trading and, and and we present it to the world in all these different packages.

 

Aaron  24:40

The Crypto space has grown so much in just the past year, calling it the crypto space almost sounds like a an umbrella term that doesn’t really define it anymore. We’ve got real world assets coming in decentralized physical infrastructure, decentralized science, to say the AI of course has been linked The hottest new niche this year that’s really taken the whole world by storm of all these new things that are coming out in, you know, the quote unquote digital asset space or web three, what has you most excited for? 2023? Or 2024?

 

25:13

Oh, great question 2023. I do think because of the momentum behind it, you’re gonna see a lot of excitement in Bitcoin itself. We’re really excited to see what emerges in the Aetherium ecosystem, as the killer app. And my view is that we haven’t seen the killer app there. We’ve seen huge infrastructure improvements with the rise of layer twos, we’ve seen interesting experiments via defy or stable coins, or big brands, embracing NF T’s or gaming. I think that’s very exciting, or decentralized compute, or decentralized, graphical rendering. I think all of those are exciting. But we’re still waiting to see what would break through, I do think we’ll see something breakthrough with real mainstream adoption within that time period that you looked. So you know, broadly speaking, I’m excited for the Aetherium ecosystem. And then I’m waiting to see what is the thing that really catches fire? Right, what is the thing that is the next stable coin or Defy? And I think I think it’s going to emerge, but I don’t know what it is.

 

Bryce Paul  26:20

Yeah, I’m curious if there’s going to be new, like, like, basically, you know, kind of harkening back to this XRP rule. And there’s going to be some sort of new capital formation mechanism that kind of comes from these new guidelines, or this kind of outline of what’s legal, what’s not. Whereas, you know, we had the ICOs, that boom and bust we had the defy mining, what is it called? Liquidity, mining and yield farming, that kind of had a boom, bust? Um, it feels like airdrops are really in the clear, it seems like there’s got to be some other distribution mechanisms for issuers of these tokens that really do like, you know, kind of spur another, another big run up? I don’t know. Do you have any thoughts on on any new mechanisms that might come through this?

 

27:07

That’s a really, that’s a really interesting question. I think a lot of people are working on that, you know, I think a lot of the next generation of massive zero to 100 leaders are going to be actual applications as opposed to infra tokens. And I’m excited to see how they, how they structure those if there’s a corporation, if there’s a token at all, I think those are interesting questions. But that’s where I would look, I don’t have any specific fundraising mechanism in mind. But I think that’s one. And I’d add, I’d add an old school one. You know, there is a pipeline of companies waiting to go public, in the crypto space that are fairly significant. And I think people have forgotten about that, because they were crushed in the bear market. But you know, as excited as we were to see Coinbase go public. I suspect over the next three years, you’ll see a new wave of companies going public in that space as well.

 

Aaron  28:02

Interesting. I want to take the conversation in a slightly different direction than what we’ve been on. So far. There’s been a lot of chatter on Twitter, from Bank of America customers that are having their accounts closed down. And it’s presumably for interacting with Coinbase. And I don’t use a bank, I use a credit union and I’ve had no issues so far. But now that I’m looking at the domestic wire form that I’m about to fill out, brand new, it says if you’re planning on wiring this to a cryptocurrency exchange, we reserve the right to cancel this wire. And I went oh my god, this is insane. So the

 

Bryce Paul  28:38

thing you read the fine print? Yeah. How often do you do that? Dude?

 

Aaron  28:43

Dude, it’s right there at the top. It’s not even fine print. It’s in bold. No, you are not allowed to do this anymore. So the banking sector has not caught on to the bullishness of crypto in the US yet. Are you hearing any rumblings or rumors in your neck of the woods that might finally change this? So we can actually, you know, get our money into this before it’s too late.

 

29:06

Yeah. It’s a great point to raise. And the short answer to that is no. I mean, I do you think it drives to an important point is that in part because prices have come back and in part because we have new narratives to glom on to we’ve sort of forgotten the regulatory assault that was hitting crypto in q1. That started in late q4, that continued into q2, Operation choke point 2.0. You know, the shutdown of silver gate and signature. That’s still very real. And you’re pointing out another example of how that continues into this space. The The short answer is no. I don’t know that things are getting much worse, but I don’t think they’ve crossed over and gotten much better yet. I think we’re going to need to see possibly legislative action before that trend. and really reverses, it’s still a difficult market environment. And of course, that raises risks. You know, there’s also these, you know, accounting rules that are making it more difficult for traditional providers to enter the custody space. You see some of those traditional providers stepping back from that space like NASDAQ did. So there is still this negative regulatory overhang that hasn’t gone away, it’s still a headwind for us, we would be higher without it, it still raises risks. And you’re pointing out an important thing to remember, it’s there.

 

Bryce Paul  30:33

Before we wrap everything up, I want to get some insight into your fund to funds. I’ve heard rumblings about this has that launched? And if so, what is it? Yeah,

 

30:42

absolutely. We think there’s room in the market for an actively managed fund of funds. You know, I can’t speak to our our specific fund with much focus. But I think what’s missing in the market, there are a lot of institutions that are interested in allocating the crypto hedge funds, but are uncomfortable doing the due diligence and don’t even know the right questions necessarily to ask from a due diligence perspective. So we think there’s room in the market for strategies that are highly due diligence that have high risk controls around them, and that provide exposure to some of the interesting things that are happening in the crypto hedge fund space. You know, the thing to remember about crypto is it’s an entire asset class. And as a result, you’re going to have investors take different approaches, people, we’re going to do it themselves and buy individual crypto assets, they’re going to buy crypto funds that are index funds, they’re going to buy crypto funds that are actively managed, and they’re going to allocate to hedge funds, they’re also going to allocate to venture capital, all of those, those five paradigms are going to grow. The only two that are really big, are retail investors, and venture capital, everything else in the middle is still in an emergent phase and is likely to get in my view 10 to 100 times bigger in the future. And so that the hedge fund space is another space that I think could 10x or 100x. They’re interesting Alpha opportunities, and I’m an index guy, right? I manage the Journal of indexes, I wrote about ETFs for a decade. But I look at the crypto space and I acknowledge that there are active opportunities there that well structured funds can get after if they can control their risks. So we’re looking in that space. We think it’s interesting,

 

Bryce Paul  32:28

incredible. You know, I don’t want to ask any secret sauce or anything but you know, I think maybe people who are listening and thinking, Well, geez, of a hedge fund can do it, can I do it? Um, are there are there at home strategies or anything like that, that people could kind of take out? Take a thought of, like, for instance, one of the trades that I heard about was people just saying, Hey, I’m just gonna buy grayscale Bitcoin trust at a discount. And then the bet is, you know, if it goes back to parity, because it becomes an ETF, then you kind of get two for one Bitcoin. And again, the grayscale, Bitcoin ETF might go kaput, that might become 80% discount and go to zero. So of course, you have to manage your risk. But that’s like one trade idea where there’s clearly like, you know, a huge, you know, arbitrage opportunity. You know, are there any other kind of ideas of like, how people can actively manage trades or what they should look at or anything like that? Yeah,

 

33:25

I would, I would, without getting to a specific recommendation, I would tell people that they have two major advantages and one major disadvantage. And so they think about those. The disadvantage is that from a due diligence and risk perspective, it’s very difficult as an individual, you can’t visit a custodian and test their processes, you have to rely on others. So be aware of those risks. But you have two big advantages. One is that you’re much smaller than a large institution. So there are a lot of interesting ARB trades that work if you have $100,000, that don’t work if you have $100 million. And that’s like an unexplored opportunity that retail investors are uniquely capable of attacking if they’re smart about it. And then the other thing is, you have control over your duration, by which I mean, like the GBTC, as an example, if you’re going to hold that for a month, who knows what the premium or discount is going to do, but you might have conviction that if I can hold it for an unlimited time, it’s going to convert to an ETF. And then your only risk is you’re paying the management fee, or you could be wrong about that conversion. And so if you think about being small as an advantage, and having control over when you need liquidity as an advantage, and then use that framework to evaluate different trading strategies,

 

Bryce Paul  34:46

I love it. Now one of the things that that that kind of notion of no expiration, brings to mind is like I think of a lot of these altcoins as uninspiring call options, where they’re jumpy, they’re super are volatile, they might just grind lower, lower, lower, but they’re not, you know, oh, you’re expiring and getting rolled to, you know, on the end of the quarter, they just don’t expire, they’re perpetual. And so you could hold them and get out on a on a quick move when everybody gets excited and make sure you know, you’re not buying during the periods of excitement, you’re kind of buying during the periods of doom and gloom, which hopefully everybody who’s listening has been doing at home, on their own buying during the bear market, to prepare to reap the rewards of the bull market. But one other question for you. I know, we mentioned diligence. Is there any like, again, take away at home things that we can do to diligence, the sea of 25,000 cryptocurrencies, and you don’t need to speak to specifically how bitwise is, but I know that you guys have a big process to select which coins are legit, and which ones you should probably quit?

 

35:54

Yeah, you know, when I think of diligence, what I try to avoid is things that unexpectedly go to zero. Sort of binary risk where it falls to zero, there’s no way to deal with diligence, if it’s gonna go up or down in value, I can’t provide much guidance there. But there are a few tricks of the trade that could be helpful on avoiding real blobs. One is if you look at the best custodians in the world, the ones that are regulated, the Coinbase is the Geminis the fidelity, they publish lists of which assets they custody. And if you’re looking at an asset that no major custodian custody is, that is a red flag of significant risk. The same thing is true, if you look at where it trades, if it’s only trading on unregulated exchanges, that doesn’t mean it’s not a valid asset. But it does mean there’s additional risk. And you should be aware that there are those risks, this won’t help you avoid every blow up, there certainly have been high profile crypto assets that you could custody anywhere that blew up. But they’re good screening mechanisms to get you down to a still fairly large set of options, but not 25,000. Right, the leading custodians may be custody 100 150 assets. And it just if it’s not on those lists, that should be a red flag for you, or at least a yellow flag that you need to do an additional layer of research before you decide to invest.

 

Bryce Paul  37:15

Love it that was again perfectly described and definitely hit the nail on the head. And my last question for you, before we let you go, you know, you you saw very clearly, in the early 2000s, what the future of ETFs would become you kind of were writing the book on it. You were the CEO of etf.com. And And now your vision has really been fulfilled. As you know, the boomers favorite method of investing, the mutual fund has now been cannibalized by the ETF, which is now everywhere. So you were right on that. But you left that world to kind of start up in crypto. So what’s the future of crypto if we could take your, you know, learnings from ETF? Is it going to be a similar trajectory? Where you know, crypto is going to eat the world in some capacity are going to ETFs? Even maybe?

 

38:05

Yeah, yeah, I wouldn’t have moved me ETFs to crypto unless I thought it was a bigger opportunity. And I think it is a bigger opportunity. I think in the future, you know, the vast majority of our financial activity will be transacted over public blockchains, the way we think about money will be intermediated by public blockchains. And a lot of our culture, anywhere where there’s a valuable object to own, whether it’s data or a good will be through the lens of crypto and public blockchains as well, that is an enormous many trillion dollar market. And I think, you know, people who are early to that space may be rewarded, because I do think it’s going to disrupt a huge chunk of our economy and make it make it ultimately better. So that’s why I made the switch. It’s a bigger market than ETFs by a significant factor. And I’m really excited to see where we are in another five or 10 years. I

 

Bryce Paul  39:04

love it. Matt, thank you so much for coming on to the crypto one on one podcast. I couldn’t agree more. This was awesome. And if people want to actually get involved, or learn more about the products, where would where can we send them real quick?

 

39:18

Yeah, sure. Come over to bitwise investments.com. You can sign up for our, our various research and newsletters or look at some of the product descriptions on that website.

 

Bryce Paul  39:28

Awesome. Thank you so much. And yeah, we’ll talk to you soon. Hopefully you can come back on the show. And there’s another big announcement.

 

39:34

I love it. Great questions. Thanks, everyone. And thanks for listening. This was fun. Take care.

 

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