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What's the Alternative? | Episode 11 | Crypto 101 featuring Matt Hougan
7 Plays6 months ago
Welcome to Banrion Capital Management’s What’s the Alternative Podcast! Join host Shana Orczyk Sissel, the “Queen of Alternatives” Founder & CEO of Banrion Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions and about the many different ways investors can use alternative investments to add value in their investment portfolios.
In this episode Shana sits down with Matt Hougan, Chief Investment Officer at Bitwise Asset Management, a leading provider of crypto solutions for financial advisors.
Matt Hougan is one of the world’s leading experts on crypto, ETFs, and financial technology. He is the Chief Investment Officer for Bitwise Asset Management, the world’s largest provider of cryptocurrency index funds. He was previously CEO of ETF.com and Inside ETFs, where he helped build the world’s first ETF data and analytics system, the leading ETF media site, and the world’s largest ETF conference. Matt is co-author of two publications for the CFA Institute Research Foundation: “A Comprehensive Guide to Exchange-Traded Funds” and “Cryptoassets: The Guide to Bitcoin, Blockchain and Cryptocurrencies for Professional Investors.” He is a crypto columnist for Forbes, a three-time member of the Barron’s ETF Roundtable, a member of the ETFdb’s ETF Hall of Fame, and the eighth person to receive a Lifetime Achievement Award from ETF.com for contributions to the ETF industry. Hougan sits on the board of directors for Equbot, creator of the first AI-driven ETFs (in partnership with IBM Watson), and is a strategic advisor to multiple crypto- and financial advisor-related startups, including Blockworks, Stratifi, and Advisor Circle.
Learn More About Bitwise Asset Management: Bitwise Asset Management
Connect with Bitwise on 𝕏: @BitwiseInvest
Connect with Matt on 𝕏: @Matt_Hougan
Connect with Matt on LinkedIn: Matt Hougan
Matt's Presentation to the CFA Society of Minnesota: A Guide to Bitcoin, Blockchain & Crypto for the Professional Investor
Matt's CFA Whitepaper: Cryptoassets: The Guide to Bitcoin, Blockchain and Cryptocurrency for Investment Professionals
Learn More About Banrion: Banrion Capital Management
Connect with Banrion on 𝕏: @Banrion_Capital
Connect with Shana on LinkedIn: Shana Orczyk Sissel
Connect with Shana on 𝕏: @shanas621
If you are an advisor wanting to check out our platform, we want to hear your feedback!
Important Disclosures:
The opinions expressed on the “What’s the Alternative Podcast” are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future
Recommended
Transcript
Introduction to 'What's the Alternative' Podcast
00:00:02
Speaker
Welcome to Bonnie and Capital Management's What's the Alternative podcast. Joining host Sheena Orsik-Sicil, the queen of alternatives and founder, CEO of Bonnie and Capital Management as she interviews leaders in the alternative investment space. Learn more about their firms, their passions, and about the many different ways investors can use alternative investments to add value in their investment portfolio.
00:00:30
Speaker
Hello everyone and welcome to the latest edition of What's the Alternative and today I'm super excited.
Sheena's Skepticism and Meeting Matt Hogan
00:00:37
Speaker
A lot of people know that I'm a fangirl of a couple of people. And one of those people is Matt Hogan from Bitwise. So I met Matt Hogan in 2018 during my time at Orion. He had Bitwise's
00:00:50
Speaker
kind of in its infancy at that point. Bitcoin was still people learning, especially in the advisory market. And I knew nothing about it. And I was one of the people who were like, oh, it's a hoax. People use it to do bad things and drugs and whatever. And Matt set me straight.
00:01:09
Speaker
and made me want to learn more, gave some book suggestions, and to this day I recommend everybody and anybody who's interested in learning about Bitcoin and the blockchain to watch his CFA Society of Minnesota presentation because it's the best one out there to learn the basics.
00:01:31
Speaker
So super excited to have you on the show. Matt, just for background, is the Chief Investment Officer at Bitwise, which is the leading provider of crypto solutions for the advisory market.
Understanding Blockchain Basics
00:01:42
Speaker
Welcome to the show. Wow. What an introduction. It's so great to be here. Really love the friendship and being able to work together over the years. And so excited to be on the podcast. This is fantastic.
00:01:54
Speaker
Awesome. So, you know, crypto is one of those things where I am dangerously knowledgeable. I know enough to be dangerous, but not enough to actually like really go down the rabbit hole. And I think that that's true with a lot of advisors that there's kind of on the surface, but I think we have listeners of varying degrees of sophistication. So I want to start with talking about what you and I have talked about before. Bitcoin, ETH,
00:02:22
Speaker
Polkadot, Solana, all of those things are fine. They all have their value, but their value comes from their blockchain. So let's talk about like the basics of blockchain. Like what is the blockchain and why is it different from say Venmo or Cash App? And why is it such a groundbreaking technology?
00:02:39
Speaker
Yeah, I love that framing because I think people get confused. They get too focused on these different things and how they compete or too focused on Bitcoin being a currency and they don't use it to buy coffee. The real fundamental breakthrough is the blockchain.
Blockchain vs Traditional Apps
00:02:54
Speaker
And the blockchain is just a fundamental breakthrough in computer science is really what it is. If you think about the way computers have worked historically,
00:03:05
Speaker
They rely on databases, but databases have all been centralized. Your bank has a database. Google has a database. I have a database on my computer. And the problem with centralized databases is that they have a hard time talking to each other. And so what a blockchain was, was the first time we've ever been able to have a decentralized database, which means that database that's available to everyone in the world
00:03:31
Speaker
that everyone can see into, that updates in real time, but that no single party controls, right? So your bank has a database, but it controls that database. My bank has a database, it controls that database. If I wanna send you money, your bank has to check with my bank to make sure I have the money. But if we have one database,
00:03:50
Speaker
that's everywhere that everyone can see into, that's always accurate, always updates in real time. Well, then we can move money virtually instantaneously and we can do a lot more than that. So it's just a new computing paradigm. It lets us do things we've never been able to do before. And we've been discovering all of those things year after year after year.
Blockchain's Disruption in Finance
00:04:10
Speaker
And it's interesting, I remember the first time you explained it to me, it was like, it's a protocol. Like VIOP is a protocol, or VOIP is a protocol. And all of those things are protocols and blockchain is a protocol that you're building off of, correct?
00:04:27
Speaker
That's exactly right. Yeah. And I often say, you know, if you go back to the early days of the internet, you couldn't actually do much with it. All you could do is send files over a protocol, file transfer protocol or FTP. Some of the listeners may remember FTPing someone to file and we thought it was amazing. And then sort of the history of the internet is every few years we come up with a new protocol that lets us send something else over the internet.
00:04:52
Speaker
So SMTP, which is simple mail transmission protocol, let us send text over the internet. And that was what created email.
00:05:01
Speaker
We couldn't send text before SMTP. We couldn't have email. Then we did. All of a sudden we didn't need to write letters. HTTP, which you see at the front of web addresses, is another protocol. Let us send links. Once we figured out how to do that, we got the World Wide Web. We disrupted all of media and advertising. More recently, you mentioned VOIP. That's the way to send voice.
00:05:23
Speaker
over the internet. There's also a protocol that lets us do video over the internet. Now we can have this conversation over Zoom or we can watch TV over Hulu. We couldn't do that originally. And what blockchain is, is the ability to send money natively over the internet and have property natively over the internet. And what's so exciting about that
Bitcoin's Role and Value
00:05:47
Speaker
is we've seen time and again, when you unlock a new ability on the internet, you disrupt a major industry, right? Text disrupted postal service, links disrupted media and advertising, credit card information, which we figured out in 94 created Amazon, voice disrupted telephone, video disrupted cable.
00:06:07
Speaker
Crypto, blockchain disrupts finance. And that's the biggest market the internet's ever gone after, right? It's bigger than voice. It's bigger than video. We're so excited about advertising. We're talking about money and finance. These are huge addressable markets. And that's why there's so many venture capital funds and smart money that's looking at the crypto space.
00:06:29
Speaker
Yeah, it makes total sense. So then when you understand the fundamentals of blockchain, then you get into what's on top of it. Now let's talk about how crypto like Bitcoin or ETH or Solana or Polkadot like what their role is on the blockchain because ultimately when you're trying to value a crypto asset, right, you're basing whether or not it has value on the blockchain it sits on, correct?
00:06:53
Speaker
That's right. You can almost think of them as companies that use the crypto capability in the same way that companies are built that use software, right? So Microsoft uses software to do one thing. Salesforce uses software to do another thing. Oracle uses software to do another thing. And the value of those companies based on how many people want to do that.
00:07:18
Speaker
The same thing is true in crypto. Bitcoin uses the fundamental design of blockchain to create a native store of wealth. All the decisions about how the Bitcoin blockchain specifically is built are designed to make it really secure.
00:07:35
Speaker
It doesn't update very often because that could introduce a bug. It's a very simple code base. You can only basically send Bitcoin or receive it or hold it. It's designed to be really secure. And so Bitcoin is going after this store of wealth or monetary market.
00:07:51
Speaker
Other blockchains like Ethereum are not like Bitcoin. They're more complex. You can use them to build, let's say a version of the New York Stock Exchange or a version of Charles Schwab or a version of a lending platform. They're very flexible. They're not as good at storing wealth, but they do all these other things. And so people are building on this capability of the blockchain to reimagine financial services. And you can go on down the chain, right? These aren't
00:08:17
Speaker
Different currencies is not the right way to think about them. They're different software applications that use blockchain and they're driven or produced by the asset themselves. And that's how it attracts value.
00:08:32
Speaker
Yeah, and the Bitcoin is kind of like the necessary part of the transaction in order to make the whole thing work. And I remember like there's a complicated math problem and that's the essence of mining. It's really just math. And the Bitcoin or whatever the crypto is is sort of the reward you get for solving the problem, correct?
00:08:58
Speaker
That's exactly right. Yeah. If you think about what Bitcoin does, it's very similar to what a bank does. A bank processes your transaction, secures your wealth, and for that you pay a fee. Bitcoin, the network, decentralized, 100,000 computers or whatever maintaining it, processes transactions and secures wealth. That's the mining process. And the way they're paid is they're issued new Bitcoin. And so that's what keeps the market going.
00:09:24
Speaker
Another way as a user to think about what Bitcoin is, is as a sort of software entity, Bitcoin provides a service, which is the ability to store digital wealth without relying on a bank. That's the service it provides. The only way you can access that service is by buying Bitcoin. So the more people who want to store wealth in a digital format without relying on a bank or a government,
00:09:47
Speaker
the more valuable Bitcoin becomes. And it's really as simple as that. It's a service in the same way that other entities offer a service. The more people who want it, the more people have to buy Bitcoin, the more price goes up. Of course, if fewer people want it, the price will go down as well. That can happen too.
00:10:05
Speaker
So let's talk a little bit about what the market looked like before the beginning of the year, right?
Impact of Spot Bitcoin ETFs
00:10:11
Speaker
So, you know, prior to the spot Bitcoin ETFs of which Bitwise has BitB, which is the one that we typically talk to our advisors about because we believe that Bitwise offers advisors the best service and support.
00:10:24
Speaker
And, you know, in my opinion, they're all kind of the same, a lot of difference. You're going to get the same relative performance, you know, give or take the fees and you guys have very little fees, some of the low list. So then it becomes like, who's the issuer and what do you get? And in my opinion, Bitwise has the best resources and support for the advisory market.
00:10:48
Speaker
But that's neither here nor there. I'm just using that opportunity to remind our audience that Bitwise is awesome. But I want to talk about what the market looked like before and why the issuance of these spot Bitcoin ETFs has
00:11:05
Speaker
basically like blown the doors off the ability and the likelihood of people to access this. Now, prior to this, you wanted to buy Bitcoin or any crypto, there were a lot of complexities to it or risks to it. And can you talk a little bit about what that looked like and how these ETFs have changed the game?
00:11:27
Speaker
Yeah, it has been a complete game changer for professional investors. You know, if you were a retail investor, investing a hundred bucks or 200 bucks, you could do it on an app on your phone like the Coinbase app. But if you were a financial advisor, you can't be allocating serious money through an app on your phone that someone could steal, someone could break into your phone, you could lose your phone. I mean, it doesn't fit into your reporting software. It doesn't work with your business.
00:11:55
Speaker
It was just very difficult. There were private funds that let you allocate. There were imperfect structures that traded with premiums and discounts that let you allocate, but there was no easy button. And financial advisors are very busy. They need a way to allocate where they don't have to worry about it.
00:12:13
Speaker
and where they know that it's held with an institutional custodian, they know that it's traded only with institutional counterparties and they know that it's audited by a firm like KPMG and they know that they get a simple 1099 tax return and it fits into their reporting software and they can bill on it.
00:12:32
Speaker
And that's what the ETF brought to the table. It made it easy for advisors to allocate before it was very hard. Bitwise served financial advisors before the ETF. We had a billion dollars in assets. We served a few thousand advisors. I appreciate the comments on the support, but you had to be really committed
00:12:52
Speaker
because it was going to be a lot of work to allocate on behalf of many clients. Now with an ETF, it's push button easy and you have the safety and security and it fits into your portfolio. It's a big deal. If you think about the wealth market in the US,
00:13:08
Speaker
Only about 20% is self-directed retail. It's a small fraction of the market. That was who was buying Bitcoin. The rest of the market is professionals, 80% of the market. So we talk about the ETF launch as Bitcoin's
Bitcoin's Fixed Supply and Investor Significance
00:13:21
Speaker
IPO because it changed the game at four or five X, the addressable market. And we've seen huge flows ever since it launched.
00:13:29
Speaker
Yeah, and I think it's interesting you're talking about that, you know, you talked about Coinbase, which is really the only survivor left, right, of the options like Binance is gone, FTX, but there was risk there because even I had a Coinbase account that I trade, you know, a couple of cryptos.
00:13:48
Speaker
have a little fun with it. But like, there was a point in time where after FTX and Binance and all the fraud, it was there's Coinbase next, right. And then the SEC and some of the regulatory bodies started to put pressure on what was the only
00:14:06
Speaker
person or custodial platform left. And then risks came to play. And then your other option was to have a cold storage wallet, which is super complicated, and like nobody does that. So, you know, you had to really like
00:14:23
Speaker
crypto and be committed to it to go through the hassle of doing all those things. And if you used a platform like Coinbase, you had to kind of go in with the thought process that, you know, these things may not, you know, will it be the next fraud? And then there was a risk associated with that that you needed to be concerned about.
00:14:42
Speaker
That's exactly right. You had to underwrite that risk. You had to do your own due diligence on a crypto platform existing in a sort of unclear regulatory era for an allocation that's a few percent of your portfolio. No adviser is going to do that or very few. It just became so much easier. You know, you have the administrator of these ETFs is Bank of New York.
00:15:03
Speaker
Again, the auditor's KPMG, they're following the fundamental rules that underpin ETFs and have for 30 plus years. We've seen this before. We saw this with gold. Before the gold ETF launched, you could buy gold. You could go on kitco.com or you could have gold bars shipped to your house. No one was going to do that. It's too hard. There are too many risks, hard to underwrite. There's not enough liquidity.
00:15:28
Speaker
The ETF just solves that problem. And I suspect we're going to see strong flows into these ETFs for multiple years. I don't think we've gotten past even sort of the initial demand. I still think there's a lot to come.
00:15:43
Speaker
Yeah, so let's talk about that. I get asked this a lot, like, why am I so bullish on Bitcoin right now? And I'm not necessarily like a hardcore crypto bull, but I'm also not stupid. And I can see the technical factors that are driving these things. And a lot of what I've learned and a lot of the talking points that I use are stuff I stole from you.
00:16:07
Speaker
And I give you full credit for that. It's not an original thought on my part, but you talk about this I've watched a couple of podcasts you've done when you talk about sort of how this is going to drive the price of Bitcoin up and up and up and up from a technical perspective.
00:16:25
Speaker
The ETFs are a massive driver of the continued growth and price movement of Bitcoin. And can you talk about why that is? Yeah, really two reasons, which I think are pretty simple. You know, people get all complex about valuing Bitcoin. Ultimately, it's commodity and commodity prices are set by supply and demand. We know the supply of Bitcoin. They'll only be 21 million.
00:16:50
Speaker
And actually the rate at which new Bitcoin is being created just fell in half as it does every four years. So there's less new supply. And then you have this massive source of new demand. I mean, we were just talking, it's forexed the addressable market.
00:17:08
Speaker
I've never seen a commodity in history that had a demand shock and a supply shock at the same time. This money has to find Bitcoin to buy. I think there will be hundreds of billion dollars of flows into these ETFs. And yeah, just at some point it's become simple math, supply and demand. The other thing that people don't necessarily talk about that much is that there's an element of reflexivity to Bitcoin's price as well.
00:17:35
Speaker
which is as we get more investors, as it becomes more normalized, as it becomes a little bit less volatile, it actually becomes better at what it's trying to do, which is to be a store of wealth. There's an element of as the price goes up because more people buy it, it actually does become more attractive. And it's important to remember
00:17:57
Speaker
You know, Bitcoin's been around for a while. It's gone from zero to sixty thousand dollars, give or take. But it's still very small. It's about eight percent of the gold market. Right. If it got to be 50 percent of the gold market, it'd be four hundred thousand dollar Bitcoin.
00:18:12
Speaker
uh if it got to be bigger than the gold market the prices are even higher so i do think it has a long way to run i think it's important to keep in mind supply and demand we have fixed supply and a big new source of demand sometimes investing is hard sometimes it's relatively easy and there's no guarantees but i think the setup is pretty good
00:18:34
Speaker
Yeah, so let's talk about that fixed supply part. I don't think people understand that there's rules associated with these things and whether or not there can be issuance. And part of Bitcoin's core fundamentals rules is that it is a fixed supply. Can you talk a little bit about how that decision is made and if it could ever change?
00:18:56
Speaker
Yeah, sure. Absolutely. We're chatting after a Fed day where 12 smart people get into a room and decide what interest rates are, and we print an unlimited amount of dollars. That's not the way Bitcoin works. The way Bitcoin works, written into the code, there will only be 21 million Bitcoin. There will never be more.
00:19:17
Speaker
We know exactly the pace at which it will be issued. Right now there's about something like 19.6 million Bitcoin, so there's some left but not much to be created.
00:19:30
Speaker
It really can't be changed if we wanted to get technical about it. If the majority of people who maintain the Bitcoin network, which is hundreds of thousands of people, decided that there should be more Bitcoin, theoretically that could happen. But in principle, it's never going to happen because it would be against their economic interests. It's been fixed since it launched. It will be fixed at 21 million forever.
00:19:54
Speaker
And that provides a lot of certainty for people, right? Our monetary system today doesn't have much certainty. Infinite QE variable interest rates. Bitcoin is just an alternative with a fixed supply and a known issuance rate that you can count on to always be what you expect.
Bitcoin Cash Split and Core Principles
00:20:14
Speaker
Now, correct me if I'm wrong, a couple of years ago, there was some infighting about this very topic that caused a split that produced a different crypto. And it's escaping me what it was called. Bitcoin Cash, yeah. There you go. For sure. Yeah. Because there was a contingent of folks that were like, no, there needs to be more Bitcoin. And so they decided to do something different. And that's what it came down to, right? They couldn't agree, so they just started something new.
00:20:42
Speaker
Yes, that's exactly right. They wanted to increase the block size, which would allow for more transactions to be packaged every 10 minutes. And the two communities couldn't work, so they went their separate ways. And Bitcoin stayed true to its core promise.
00:20:59
Speaker
And these people who had a different idea created a different project. It hasn't gotten much traction. But that's sort of the beauty of capitalism, right? Different ideas, experiments in the market. We saw what won. We saw what failed. But good for them for having a view and taking a shot. It's just like a startup ecosystem, right? These are all startup monetary networks. And so far, Bitcoin's been enormously successful. I think it will. But I love to see experimentation.
00:21:29
Speaker
Well, let's actually talk about that very thing about this like startup mentality. New crypto coins being brought to the market. You know, we had the Doge phenomenon. Doge really isn't like based on anything. And we have Polkadot and Barcelona and we have
00:21:48
Speaker
XRP, Ripple and all these other things. So like what fundamentally if somebody is interested in learning more about all these different cryptos, can you kind of walk us through like good resources they can go to and sort of what are the fundamental things you sort of look for to better understand each one?
00:22:06
Speaker
Yeah, absolutely. There's a lot of great resources out there. You mentioned the CFA presentation. There's also a CFA book that I wrote, which is available for free. You can find that. There are great resources at places like Token Terminal or the block that allow you to dig into it. But it's good to keep a broad framing in mind.
Crypto Experimentation and Success
00:22:27
Speaker
This is exactly like every other disruptive area of technology. When the internet really took off in the late 90s, there was Ash Jeeves and Yahoo and Google and pets.com and a million experiments, many of which were terrible and a few of which were great.
00:22:44
Speaker
When mobile took off, there were various games and various applications and there were new ideas, many of which were terrible and a few of which we use every day. And the same thing is true here. There are a billion experiments in crypto building on this new fundamental capability, which is money and property on the internet.
00:23:03
Speaker
And some of them have found enormous success, Bitcoin, Ethereum, Solana, Uniswap, a few others. Many others are experimenting. And then there's a long tail of assets which are going to face challenges. But some of them will succeed. Some investors will be smart enough to pick them out. Others will want to take an index approach. But that's the way to think of it, experiments with this new technology. But those are some resources, the CFA book, token terminal, the block, et cetera.
00:23:33
Speaker
And people can build stuff off of these. For the average person, I have a friend that is building an app that might do some transactions. If they wanted to incorporate blockchain, what is the most flexible blockchain to build something off of individually if you were doing something that was transaction-based?
00:23:55
Speaker
Yeah, you probably look at two choices, right? So Ethereum has the largest set of applications, something like five or 6,000 applications, tens of thousands of developers. It's the blue chip asset. And you'll pay higher fees to use Ethereum. Solana is an upstart. It's challenging Ethereum. It's similar to Ethereum, but has lower fees and is faster. And the trade-off you make is it's not as developed and it's uptime is not as good.
00:24:25
Speaker
It's sort of like glowing with a blue chip cloud service provider versus a upstart cloud service provider. So depending on your ethos and what you wanna do, you might choose one of those two ecosystems. But there are many out there. I do think people should experiment. There's a lot you can do with these platforms.
00:24:44
Speaker
Yeah, very cool. You spoke about ETH. It seems like ETH is the next shoe to drop, per se, when you talk about these spot ETFs.
Future of Spot Crypto ETFs
00:24:54
Speaker
We just saw, I think this week, the approval, the SEC approved a futures levered
00:25:02
Speaker
ETH ETF and we can talk about how that's absolutely insane that like a levered futures ETF is approved before a spot ETF, which seems like a much safer bet for investors, but it kind of what's the landscape look like in terms of like more and more of these spot ETFs coming to market and what do you think is kind of the cadence of like what's in the queue?
00:25:28
Speaker
Yeah, I love that. Obviously, I'm a risk tolerant investor, but I'm not sure I want to lever up a 90 vol asset too much. So I do wonder about that. You know, look, there are applications for a spot Ethereum ETF Bitwise as an application. As you know, I can't speak about our application, but broadly speaking,
00:25:47
Speaker
I think we've entered the ETF era of crypto. We're going to see more and more spot crypto ETFs over time. I think we'll eventually see index-based crypto ETFs over time. I don't know that we'll see them immediately. The SEC has been slow to move on spot crypto ETFs. Took us 10 years to get Bitcoin. So there's some Ethereum ETFs that come up for review in May.
00:26:14
Speaker
I don't know if those will get approved. I think Eric Balchunas at Bloomberg puts the odds below 25%. That feels right. But ultimately we're gonna get there because there are futures-based ETFs that settle to the spot price. And so I think we will get to a spot Ethereum ETF. And just like a spot Bitcoin ETF lowered fees, brought in more investors, made it safer and more secure, a spot of Ethereum ETF will as well. And I think that will be an exciting moment.
00:26:42
Speaker
investors can take two approaches to it. They can wait until we have a spot Ethereum ETF, or they can try to get in ahead of that potential approval through some of the less efficient vehicles that exist today. And so, yeah, I think we will get there. I don't know if it will be in May, but I suspect it could be within a year or so.
00:27:05
Speaker
Now, a couple of years ago, Eric Balconis, myself, and Phil Bock sat on a panel to talk about crypto spot ETFs and how that would impact price action within the market. One of the things that we debated was whether or not there was enough market cap of some of these cryptos to actually support the demand of an ETF.
00:27:23
Speaker
Bitcoin made sense because it had the largest market cap. But when you think about some of the others, is that a concern? Is that a risk? I mean, we're already seeing it with Bitcoin. You know, we know how much Bitcoin is out there. Then there's how much of it's actually traded, which my understanding is like 20 percent of total Bitcoin actually actively trades. And I'm sure that that's smaller market caps, similar functionality, similar dynamics. Same problem. How realistic is it to have a daily liquid spot product
00:27:53
Speaker
that isn't going to like, I mean, we're already seeing it with Bitcoin, like massively the impact price action. Yeah, I think it's a good question. You know, if you look internationally, if you look over in Switzerland, they're spot products on a large number of these crypto assets, maybe the top 10, roughly, give or take. And those have worked well. Now, Switzerland's a very small market compared to the US. But as this market matures, I think we're going to be able to get spot ETFs
00:28:21
Speaker
on five, six, seven, eight, maybe crypto assets if we get the right regulatory developments. It's not going to happen this year, but I think it'll happen in the coming years. If you look at the commodity markets,
00:28:36
Speaker
We've gotten down pretty far on the commodity spectrum to some relatively liquid assets, and the ETFs have worked well. I think we can get down through most of the top 10 eventually, sometime within the next five years, and have high quality ETFs. Can we have an ETF on the 30th largest asset? Of course not. It's too tiny. There's no trading. But some of the larger blue chips, I think there's space.
00:29:02
Speaker
Now, does that open the door? You mentioned it before. I know Bitwise has a private product that has like an index approach where it's a market cap weighted index of the top 10 crypto assets that are out there. Does that open the door? Do you think we get
00:29:20
Speaker
that type of index approach approved before individual spot ETFs of all 10? Or do you think that you gotta get all 10 before you can have the broader index type approach? Yeah, great question. I think you have to get the individuals before you'll get the index. I don't know that for sure, but I suspect that that's true. And it's important to note that after we get past Bitcoin and Ethereum, the other assets are harder because there aren't regulated futures contracts on those. So I think those will take some time.
00:29:48
Speaker
But eventually, we're going to get to a diversified product. And ultimately, I think that's probably the product for most investors, right? Most investors don't want to make a bet on Solana versus ETH. They just want to own crypto. They want to invest in blockchain. They want to invest in that big idea that we talked about at the start, which is money and property on the internet.
00:30:09
Speaker
And for them, an index strategy makes a great deal of sense. So ultimately, I think that's the killer app. But I do think we'll have to see regulatory progress to get past Bitcoin and Ethereum and get a few more assets in before you can get that index wrapper, which I think will ultimately be the largest of the products in this market.
00:30:27
Speaker
And I also think that that also opens the door then for crypto-based asset managers to really separate themselves, right? Because then you can start to do some active product and then your actual knowledge of the space is actually going to functionally make a difference in performance. And that, you know, right now you're just dealing with a single asset. It is what it is. There's really no talent that's involved there, but then you start talking about
00:30:54
Speaker
creating portfolios of multiple different cryptos or mixing the crypto asset with crypto related equities. And now you have an opportunity for competition and potential active opportunity that can really start to set apart folks like Bitwise and some of the others that are out there that have specific expertise in this space.
00:31:14
Speaker
Yeah, I think that's exactly right. And look, we're at the birth of a new asset class. I do think that's what we're seeing coming to the market. And you'll certainly see managers like Bitwise try to differentiate themselves. We're proud with our index strategy. It's been around for seven years. We avoided many of the blowups. We didn't own FTX. We didn't own Luna, the stable coin that collapsed. And those sorts of track records, I think will matter as we get into those more complex products.
00:31:42
Speaker
So, you know, a lot of people out there have this belief that these are scams and bad things can happen on these and, you know, illegal activity occurs on these blockchains with these cryptocurrencies. Now, how do we need to kind of address that? Because you and I both kind of know that, you know, that's true with anything. You can do that with dollars.
00:32:04
Speaker
You can do that with any currency. There's always going to have some black market. But these things are not this scam, illegal thing that a lot of people have this feeling about. Can you talk a little bit about why people should view this as a really legitimate investment opportunity?
00:32:25
Speaker
Yeah, absolutely. I have two things in my quiver that help answer that. You know, one is the Department of Justice and their core blockchain analytics provider, which is Chainalysis, have come out and said that the fraction of activity on these markets that goes toward illicit activity is vanishingly small.
00:32:44
Speaker
It used to be significant in 2012 and 2013, before there was AML KYC, before the regulators had gotten involved in the space, but the market has changed.
Legitimacy of the Crypto Market
00:32:56
Speaker
Now there is aggressive AML KYC.
00:32:59
Speaker
You know, now FTX is out of the market and Binance's CEO is going to spend time in jail, right? The market is dramatically cleaned up and the Department of Justice has come out and said, look, just not used for criminal activity. You can trace these transactions. Why would criminals use it?
00:33:14
Speaker
And so I think that fact is great. The other fact on the other side is you now have BlackRock in the market. BlackRock does their due diligence. They're not in the business of taking extreme risks. They're not going to enter a market whose predominant use is for criminal or terrorist or other activity. They've checked the box and they're building a huge business. They just launched a tokenized treasury fund on Ethereum. They have a multi-billion dollar Bitcoin ETF.
00:33:44
Speaker
I think between the Department of Justice and BlackRock, that's a lot of confidence that we're in a new era of crypto. And I think most investors can realize that.
00:33:55
Speaker
I also think a lot of people would be surprised to use that the government uses this technology. I worked briefly for a REA that was DC based that worked primarily with business owners that had government contracts, right? And we're selling businesses. And I had a friend that worked for a government contractor and we would go to these government contractor conferences together. And there's a surprising amount of stuff that's being done by this,
00:34:23
Speaker
the State Department and the CIA and the NSA that's based on using blockchain technology in their own cryptocurrencies to continue operations. So there's a lot of legitimate use to this technology.
00:34:40
Speaker
100%. And actually, you know, the core the crypto in cryptography, the core basis of this was development, developed by the government and underpins how we do all communications in the military, you shot 256 and RSA cryptography. So of course, they understand why that can be valuable.
00:34:59
Speaker
and the ways it can be used. But I love that example. This is a fundamental technological breakthrough. And just like any fundamental technological breakthrough, yes, it can be used for ill, but mostly it's used for good. And so I think that message is becoming apparent to people in the market.
00:35:16
Speaker
Yeah, I always tell people, like, stop thinking, oh, it's Bitcoin. Oh, it's ETH. And think about, like, what you're really investing in is a technology that's the blockchain. All this stuff is just making what happens on the blockchain possible and has its own, like, benefits, each one. Like you said,
00:35:37
Speaker
Bitcoin is just super, super secure. It doesn't do a lot of transactions. ETH is very flexible. Solata has flexibility too. And so you look at the blockchain and you think to yourself, like, what's it capable of? But at the end of the day, when you're making the investment, the investment you're really making is in the underlying technology itself.
Investing in Blockchain Technology
00:35:56
Speaker
That's exactly right. Yeah, it's the service. And I've seen this in prior technologies. People get so obsessed with the details. In the early days of the internet, we were obsessed with optical multiplexing and which company had the bet. What matters is the service it provides and the services that this technology can provide are pretty amazing. You can store wealth without a bank. You can program money like software. I can move money 24-7, 365, anywhere in the world, almost instantaneously.
00:36:25
Speaker
These are things that we should have and you can invest in that through these investments in crypto and public blockchains. So I know you recently did some traveling worldwide as it pertains to this wealth management adoption. Can you give us a little insight into your key takeaways from that trip?
Practical Implementation of Crypto
00:36:46
Speaker
Yeah, that's right. I was on a many week road trip across the US and globally. The biggest takeaway is that the conversation has changed substantially. So I've been traveling for bitwise talking to financial professionals about crypto for six years, but this was the first major trip since the ETF launched. And the change that happened in the questions is from
00:37:13
Speaker
theory to implementation. It's what was, you know, what is Bitcoin for? Is it going to be around? What about its environmental impact? Those were the questions that I answered for five plus six years. Now it's
00:37:29
Speaker
how much of my portfolio, how often should I rebalance, how do I value it, is now a good time, should I DCA or lump some into it. It's really just a sea change from theory to implementation. And that was my biggest takeaway. That doesn't mean everyone's already bought in, due diligence takes a while as your clients know, but it does mean that they've changed from
00:37:52
Speaker
you know, what is this to how do I use this to build my business and build portfolios? And that's just a night and day change.
00:38:00
Speaker
Where's the vast majority of the asset flow coming from right now? Because as we both know, these ETF launches have been some of the most successful. I think, is Bitby at 3 billion yet? Has it crossed that threshold or is it pretty close? It's getting close, yeah. It's been phenomenal. Our ETF has grown basically the same speed as the gold ETF when it's launched. And we're one of 10 ETFs that launched. It's amazing.
00:38:25
Speaker
Amazing fact, I think there are three buckets, three major buckets right now, and then a few minor buckets which are growing. Certainly retail investors are buying these ETFs, we know that from the flows. RAAs, independents are buying these ETFs, we know that from the flows. And significant
00:38:43
Speaker
single and multifamily offices are moving into these ETFs in size. There are other players. We have a corporate in our ETF. We have some private banks that are beginning to make allocations, but those are the big three, retail, RIA, and multifamily and single-family offices.
00:39:02
Speaker
Waiting in the wings, coming soon, Wirehouse advisors and institutional consultants, and maybe some of the earlier small endowments, et cetera. Those conversations are ongoing now, and I think that's a Q3 and beyond phenomenon.
00:39:18
Speaker
And I don't think people realize how big the wirehouse market is I, I was at the Tiburon CEO summit last fall and they were talking about like market share right of like wallets of the retail market for the mass output and like, you know, we live in the REA space so, and that's a massive space.
00:39:36
Speaker
thousands and thousands of REAs that manage trillions of dollars. But it's like a tiny, tiny drop in the bucket compared to what Morgan Stanley and UBS and Merrill Lynch, those firms actually have the vast majority of the assets under management of the mass affluent market. And they're not in this game. And I can't emphasize enough, when they are, this thing goes parabolic.
00:40:04
Speaker
That's exactly right. You have this vanishing window. An ETF spigot doesn't go from 0 to 100. It goes on a little bit and a little bit more and a little bit more, and then Morgan Stanley approves it, and then UBS approves it, and then Wells Fargo approves it. We're only about 30% on right now. We're waiting for those platforms.
00:40:26
Speaker
the advantage of being an independent, the advantage of being an REA is you can make decisions faster than those platforms can. And so now's the time to be doing that due diligence. It's really an exciting moment, but it won't be there forever. They will eventually come on board.
00:40:43
Speaker
Yeah, I, you know, that's one of the reasons why for boundary and it's so important for us to start getting a crypto partner onto our platform, because we know that this is a huge advantage to REAs. We've always talked about this. And it's something I'm super passionate about, like the advantage REAs have versus their wire house counterparts, the way they compete and win that business is that they can be more nimble and they can do some of these things.
00:41:08
Speaker
Now, of course, the risk is there's greater risk to that, right, from a fiduciary standpoint, unlike those wire house advisors who have some cover that comes from the fact that they're recognized differently by the regulators in terms of their actual responsibility to their client. So there's greater risk there. So then platforms like what we do at Bondrean, where we are doing the due diligence for you, and we're doing a lot of the vetting upfront for you,
00:41:34
Speaker
become so important. But I think that's especially true with crypto, like you want to be in front of these wire houses getting these things available to them. Because as you just pointed out, and again, past performance, and this is just theory and like, this is our opinion. Of course, you don't want to get compliance and trouble here. But, you know,
00:41:57
Speaker
those opportunities and the assets that all of a sudden come into play once those fickets get turned on is substantial. And it really can push that price forward. And I think you talked about this on another podcast, and I'd love for you to touch upon it here. But because such a small percentage of Bitcoin and ETH or whatever actually actively trades, what would push the long-term holders
00:42:22
Speaker
to potentially start to like loosen the grips on their, you know, the wallet in order to increase the available tradable amount of the crypto that's out there. And because that's gonna be really important as we get, you know, the Morgan Stanley's, the UBS's and the Wells Fargo's of the world start to approve these things.
00:42:47
Speaker
It's such a great point. Look, there are two kinds of sellers in the Bitcoin market. There are the people who mine Bitcoin who have to sell it to cover their costs.
00:42:56
Speaker
And then there's everyone else who only sells if they want to. And the people who mine Bitcoin right now, they're producing about $10 billion of Bitcoin a year. Well, these ETFs have pulled in $13 billion in their first few months in the market. So they're buying more than 100% of the new supply. And what that means is they have to shake loose Bitcoin from people who only have to sell if they want to.
00:43:20
Speaker
And what the data shows is a lot of that Bitcoin hasn't moved in a long time. 70% of the Bitcoin hasn't moved in over a year. These are long term investors that are unlikely to sell. If you see a significant acceleration of ETF flows in the second half of the year, as these large platforms come on board, they're going to be chasing Bitcoin from people who don't have to sell if they don't want to.
00:43:44
Speaker
And if the market is in a strong bull uptrend, it can be very hard for them to source that Bitcoin. So I do think that's a very positive situation. Again, most of the Bitcoin hasn't moved in over a year, which is not true in other markets. Stocks trade hands very frequently, but most of the Bitcoin hasn't moved in over a year. And I think it's going to be hard to get that Bitcoin out of their hands if there is substantial demand.
00:44:13
Speaker
I think you also touched on another point, which is, you know, we started this conversation talking about how this is sort of an open source market where you can actually have full transparency. Now, as you were talking, what reminded me was, you know, people actually write stories about movement in Santoshi's wallet, right? You know, like, we actually know the wallets and
00:44:35
Speaker
how long they've been stale, and when something starts to happen, that's how transparent, that's how open this network is. When you think about it, you don't know what's in my bank account or when I move money, but in these blockchain networks, you actually do have this complete open architecture. You may not necessarily happen to know that that's the wallet that is attached to whoever
00:45:02
Speaker
whoever Santoshi is. But we can see every wallet. We can see how long it's been dormant. We can see that. We can see which ones are active and which ones are not. It's amazing. Imagine if that were true in the equity market. If you knew how much Tesla stock had been sitting there for five years,
00:45:23
Speaker
because those are dedicated Tesla investors. They're never going to leave. So you can effectively assume that won't trade. And then how much trades in the last month, those people are short-handed people. You can see all of that in the blockchain universe. You can look at it, how it compares in Bitcoin versus ETH versus Solana.
00:45:42
Speaker
And what you'll see, particularly in Bitcoin, is there's a large contingent that's, you know, hodling, which is the Bitcoin term for buy and hold investing that's, you know, owned it for more than a year through big ups and downs. I think a lot of those people are holding on for much higher prices. And so you're really dealing with a fraction of the market that's a shorter term investor. It's a phenomenal view into the market that you can only get in crypto.
00:46:10
Speaker
that you should be able to get in other markets, but it's just not set up to allow you to do that. Yeah, I can't stress enough. For all the people out there that still aren't convinced that this is actually a safer and more transparent market than any market that's ever existed, this is a perfect example of just that. If you haven't been convinced by anything else, this should be the thing that convinces you. But thank you very much for your time. I know we're getting up on the time here. Is there anything you want to leave our audience with that we didn't cover?
00:46:40
Speaker
No, I think we did a great job. I appreciate you having me on. Bitcoin and crypto is a volatile market. And to me, what that means is if you consider it for portfolios and not everyone needs to, you need to think about appropriate portfolio sizing, which is relatively small portions of the portfolio and ideally long periods of holding. I don't know what Bitcoin is going to do next week, next month.
00:47:05
Speaker
But I'm very optimistic about what it's going to do in the next year, the next three years and the next five years. So I would just keep that in mind. Size your portfolio and think about this as a long term holding as opposed to a short term trade, because it's really hard to predict those short term movements. But over the long term, Bitcoin's done and crypto's done exceptionally well.
00:47:27
Speaker
Yeah, at Bonry and our open architecture ETF model, we have a 3% position in that model to bit B. And I have been doing presentations about alts, and I've always talked about 1% based on some work that Bitwise had done in the past. But I think that now with greater adoption and greater opportunity here, some of the volatility will
00:47:51
Speaker
subside a little bit, you know, as more and more players come into the market, you know, that tends to help with volatility. So I've increased it to three. I know I've heard you talk about some people saying five that feels aggressive to me just because of the volatility. But yeah, I agree with you wholeheartedly. And our general rule of thumb at boundary is somewhere between one and three.
00:48:13
Speaker
I love that. Yeah, I think that's completely smart and backed up by the data as well. So kudos to you. Awesome. Well, thank you so much for your time, Matt. We loved having you on. Like I said, I was so excited to get you on the podcast. I've been anticipating this for like two weeks. I'm like, oh my God, I haven't met Matt Hogan. I'm telling everybody about it because to me, you are the foremost expert
00:48:37
Speaker
And it's not that you're knowledgeable. It's that you can explain these things in a way that you're not talking over people's heads. And there's so much value to that. I just think that people, especially our audience, they want to ask questions, but they don't want to sound stupid. And you are able to explain these things in a way where they can really understand it. And that is a talent you have that is very rare. So thank you for being on the show. Well, thank you so much for those kind words. And thanks for listening, everybody. Really appreciate it.
00:49:06
Speaker
Thank you everyone for joining the show today. As always, if you liked what you heard, make sure you subscribe or press the like button on YouTube. Until next time, have a great day.
00:49:36
Speaker
about the
00:49:46
Speaker
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00:50:15
Speaker
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00:50:37
Speaker
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Speaker
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