Hello dear listeners, it’s been some time since I published an episode, but now I am back. And I am sharing an insightful conversation with Matt Hougan, the head of research at Bitwise Asset Management. Bitwise is the first provider of cryptoasset index funds. In my view, these are very important tools for the growth of crypto’s market cap as they allow accredited and institutional investors to easily enter the crypto asset investment class.
Before entering crypto, Matt was the CEO of ETF.com, where he created the first-ever ETF data analytics system. He is also the person behind the biggest ETF conference and the biggest ETF website.
Matt and I discuss the history of gold along with the recent introduction of tokenized gold coins. Matt goes on to explain why he doesn’t hold gold in his personal portfolio but instead he does hold bitcoin and other crypto assets. He further outlines the characteristics which make Bitcoin an emerging store of value and he draws some absolutely fascinating similarities between the history of gold and the history of bitcoin.
- Matthew’s background.
- What is an ETF?
- How Gold ETFs attributed to the price growth of gold in the past decade.
- The 3 reasons Matt finds tokenized gold superior over gold ETFs and physical gold.
- How gold ETFs drastically reduced gold trading spreads.
- Which Gold ETF Matt recommends buying.
- Why Matt holds crypto (instead of gold) in this personal investment portfolio.
- Similarities and differences between gold and bitcoin.
- Bitcoin as an Emerging store of value vs Gold as an Established store of value.
- The surprising similarities between Gold’s volatility in the 1970s and Bitcoin’s volatility in the past decade.
- What features of Bitcoin make it an emerging store of value.
- Can tokenized gold make gold great again? Will it be used as a medium of exchange and a unit of account?
- Matt’s view on bitcoin completely overtaking fiat currencies.
- The 2 reasons why Matt is NOT worried about a few individuals owning a major part of the Bitcoin supply.
- The scenario of returning to a world fiat system backed by hard money such as gold and bitcoin.
- What does Matt do day to day within Bitwise Asset Management?
- The 3 biggest objections of traditional advisors against investing in Bitcoin.
- Bitwise’s fees.
- Bitwise offshore fund for non-US entities and individuals.
- Why Matt joined Bitwise over Gemini when it comes to ETF.
- How Bitwise changes its allocations to crypto assets.
- Bitwise’s work the Bitcoin ETF and other crypto ETFs.
- Matt’s Twitter – https://twitter.com/Matt_Hougan
- Bitwise’s website –https://www.bitwiseinvestments.com/
- Bitwise’s Twitter – https://twitter.com/BitwiseInvest
- Find out about all gold ETFs for free on https://www.etf.com/
Full Episode Transcript
(00:02) George Manolov:
This is the Borderless Crypto Podcast.
Hello everyone. I’m your host George Manolov, and in this series; I bring you exceptional entrepreneurs, investors, hustlers and thought leaders from the cryptocurrency and fintech space.
Hello, dear listeners, it’s been some time since I published an episode, but now I’m back and I’m sharing an insightful conversation with Matthew Hogan, the head of research at Bitwise asset management. You might have heard of Bitwise in the beginning of this year when they published a report that exposed that most exchanges out there are having fake volumes, and that there are only 10 cryptocurrency exchanges which are actually reporting real trading data. Now, apart from doing research, Bitwise is actually the first provider of crypto asset index funds, and in my view, these are important tools for the growth of crypto’s market cap as they allow credited and institutional investors to easily enter the crypto asset investment class.
Before entering crypto, Matt was the CEO of ETF.com, where he created the first ever ETF data analytics system. He’s also the person behind the biggest ETF conference and the biggest ETF website. If you’re wondering, Hey George, what the hell is an ETF? Don’t panic. In just a couple of minutes, Matt will explain it to you in detail.
Matt and I also discussed in depth the history of gold, along with the recent introduction of tokenized gold coins. Matt goes on to explain why he doesn’t hold gold in his personal portfolio, and instead why he does hold Bitcoin and other crypto assets. He further outlines the characteristics which make Bitcoin an emerging store of value and he draws some absolutely fascinating similarities between the history of gold and the history of Bitcoin.
Please note that anything that I or my guests say in these talks is for informational purposes only and should not be treated as investment advice. Although during daylight, I’m part of the team behind the crypto lending platform Nexo, at night when I do these talks, I share only my personal thoughts, which in no way represent Nexo’s opinions.
Now, it’s time to get the podcast started in three, two, one.
(02:49) George Manolov:
Matt, as a start for this conversation, could you please share a little about your background?
(02:56) Matt Hougan:
I was involved in the ETF industry. I was the CEO of ETF.com, created the first ETF analytics system, and the first ETF data system, which now powers all FactSet’s ETF data, as well as the largest media site and the largest conference in the ETF space. I obviously bring that up because one of the biggest ETF stories over the last 15 years was the introduction of GLD and other gold ETFs in the middle of the first decade of the 2000s. GLD was the fastest growing gold ETF ever to launch, hit over $1 billion in three days, was briefly the largest ETF in the world and remains a significant way that investors gain exposure to gold.
One more thought there, and I’ll pivot to tokenized gold. GLD, I think, was a game changer, in terms of allowing people to easily access gold, it allowed people to buy and sell gold in a truly liquid format at spreads that they had never had before, and to use it as a portfolio asset in a way that simply hadn’t existed before. Prior to that, some central banks had gold holdings, but retail investors mostly accessed gold by acquiring gold miners and not by having direct gold exposure. So, the launch of that made it easier for people to get access to the returns of gold and made the discussion of gold’s place in a portfolio come to the forefront and be at the front of people’s minds. I think that attributed significantly to the uptick in gold prices that we saw in the first decade of the 2000s.
(04:31) George Manolov:
For those listeners who don’t really know in depth what an ETF is, how it works, because a lot of people in the crypto space have just been owning crypto assets. So, what is an ETF and how can one get into an ETF?
(04:45) Matt Hougan:
Sure, that’s a great question. An ETF is just a mutual fund that trades a stock on an exchange. In the same way you might open a Coinbase account and be able to acquire digital assets like Bitcoin, Ethereum and other crypto assets, you could open an account with a traditional broker like Charles Schwab, TD Ameritrade, E-Trade or some of the newer generation brokers like Robinhood. You can buy exposure to ETFs that represent a variety of assets, whether that’s US stocks, international stocks or indeed things like gold, oil and a handful of other commodities. So, they’re the modern version of traditional mutual funds, and GLD was the first gold ETF, and that was really the first time that you could buy gold by clicking a button, before that you had to go to a jeweler or a gold trader, or buy it through futures. It was complex and the costs were high, so GLD made it as easy to buy gold as it was to buy a share of Apple. That’s the role that it played.
(05:53) George Manolov:
Okay. Having said that, gold ETFs do not have the backing of physical gold itself, right? You cannot exchange your investment in a gold ETF for physical gold.
(06:04) Matt Hougan:
It’s nuance to that; it’s backed by physical gold in that the fund, which is an independent entity, owns gold in HSBC’s warehouse in London, and you get a pro rata right to that, but you as an individual can’t redeem your ETF and get actual gold, as an individual you can only trade in your ETF and get paid in cash. I think there’re 2 reasons that tokenized gold is interesting, maybe even 3 reasons. One; is that a number of the tokenized gold projects that are out there allow this redemption for physical and allow you as an individual to have a direct & verified peer-to-peer ownership of gold, which is interesting. Two; a lot of trading is moving into tokenized assets, settlement is easier and you get a global network, so it just represents a new way to invest in gold.
(07:06) George Manolov:
Now, there is probably a third thing which I have been considering. So, for example, who can access GLD or other gold ETFs? Is it available for people of any nationality in any location or is that harder? Because I have the feeling that it’s not really accessible for anyone anywhere.
(07:25) Matt Hougan:
I think that’s fair. There are gold ETFs that exist in other countries, and in many major developed economies, it would be relatively easy to gain exposure, but when you get into certain emerging market economies, notably India, I know that it’s not easy for the average person to access these sorts of mainstream financial products. So, I think that a lot of the interest in tokenized gold comes from finding a pathway to allow people in emerging market economies the same kind of access to gold as we have at our fingertips here in the US.
(07:58) George Manolov:
Before we continue this discussion, I’m just curious, do you hold gold as an asset in your portfolio, whether it’s physical gold or gold representation in the form of an ETF?
(08:10) Matt Hougan:
It’s a great question. No, I don’t. I’m a fan of gold and I understand the role that it plays in certain people’s portfolio, I don’t hold it in my portfolio, and I don’t feel like I need that role. My alternatives allocation and my non-correlated asset allocation is held in crypto, but I respect people who have gold in their portfolio and I understand the place that it can play.
(08:30) George Manolov:
Why do you choose to hold Bitcoin over gold?
(08:33) Matt Hougan:
That’s a great question. I think when you think about gold, you have to think about capital preservation. There’s an old saying about gold that an ounce of gold will buy a good man’s suit and it has for hundreds of years. In other words, 200 years ago, you can walk into a tailor’s with an ounce of gold and get a good suit, and today you can do the same thing. But it’s not the case that you can now buy 2, 3, 4 or 10 suits, so it’s preserving your wealth and insulating you from the ravages of currency inflation, but it’s not good at wealth creation.
While, the place where Bitcoin sits is an emerging store of value. Eventually, I think that if we fast forward 20 or 30 years, I think Bitcoin will occupy a very similar place in the world to gold, in that it’s a non-sovereign scarce asset that you can hold and protect yourself from inflation of fiat currencies. But right now, not everyone believes that Bitcoin will play that role, and as more people come to believe that Bitcoin will play that role, its price is going up. I think that explains a lot of why the price has gone up so much over the last 10 years, and I think that we’re still early in that process. So, I hold Bitcoin in my portfolio because, like gold it has low or zero correlations to stocks and bonds. In other words, it doesn’t move like stocks and bonds, but unlike gold, it’s in a period of capital appreciation as opposed to just capital preservation.
(10:03) George Manolov:
You have a very interesting historical comparison between gold and Bitcoin; you essentially said that gold is a store of value and Bitcoin is an emerging store of value. Could you please elaborate on the comparison between those?
(10:19) Matt Hougan:
That’s absolutely great. The thing that people today amazingly don’t get about gold, is that for hundreds of years, gold was just tied directly to currency and held it a fixed currency rate; the US was on the gold standard, and other currencies were linked to the US Dollar, so the price of gold didn’t move until the 1970s. But between 1971 and 1973, the US broke off of the gold standard and we entered this new era of fiat money. And as we entered this new era of true fiat money, gold also entered a new era, which is that it became this non-sovereign store of value.
There was no government backing, and it had no ties to traditional fiat currencies. What happened to gold during that period was fascinating. From 1973 to 1980, gold went through this amazing period of appreciation; the price of gold went up 1300%. It was hugely volatile, some years the price went up 120 – 130%, other years the price fell 20 or 30%. It regularly had large moves, I think 1 out of every 10 days or so, it had a 3% move. So, gold was in an emerging store of value space, there were people who believed it would be a non-sovereign store value, and there were people who thought it would be cast in the dustbin of history as a barbarous relic as Keynes would call it. After 1970, it entered a mature phase where most people accepted it as a non-sovereign store of value, a place to park wealth, and since 1980 its compound annual return is 1.9%, but during this chaotic seventies period when it was emerging as a store of value, its price appreciated tremendously.
Bitcoin is in that equivalent to gold in the 1970s, that’s the period that it’s in. There are some people like me who believe in the future that there will be a digital, non-sovereign store of value, and that Bitcoin will own that space and that space could be as big as gold. If you believe that, then you think that the price of Bitcoin should be substantially higher than it is today. If much value is stored in Bitcoin as stored in gold, Bitcoin’s price would be about $500,000 per Bitcoin. There’re some people like me who believe we’re on that journey, then there’re a bunch of people who don’t, who think Bitcoin will never amount to much, and that it’s worse than tulip bulbs to use, a common saying, and that it’s value will go to zero. So, that difference in opinion is what creates the volatility that you see. But as more people shift into believing that Bitcoin has a role to play in the world, that volatility declines and the prices go up, and that’s what we’ve seen. Bitcoin’s volatility today is significantly lower than it was 5 years ago. 5 years ago, the daily volatility was about 10%, now it’s down to 3%. I think we’re in this period where Bitcoin is going through what gold went through in the 1970s, as a result, you’re seeing the same thing you saw in gold, which is a massive price appreciation and a falling of volatility. Eventually we’ll get to the point where Bitcoin is relatively boring, where its volatility comes down and it’s a good store of value. But until we get there, we’re in this period of massive capital appreciation and it’s a very interesting time.
(13:44) George Manolov:
Okay. Couple of questions. First of all, one simple yet important question for part of our audience would be, what are the features that you find in Bitcoin which make it an emerging store of value, aside from just price movement? Why do you think it could become a substitute or a compliment to gold? Why would people choose Bitcoin as opposed to gold?
(14:04) Matt Hougan:
That’s a great question. I’ll answer it in 2 different ways because I think it’s really important. One, Bitcoin shares a lot of the core values that gold has; it’s scarce, it doesn’t decay, it can be divided, it can be exchanged for fiat money in 200 countries around the world, and it’s a solid asset that doesn’t go away. It’s very much like gold in its characteristics, it’s just a digital version. In fact, and this was the other point I was going to make, one way to think about Bitcoin is as the world’s first scarce digital asset. In the past, any digital asset could essentially be copied by copying the code, Bitcoin is the first thing that we can say is truly scarce, there is a limited quantity of it, that quantity will never increase, and you simply can’t copy and paste and create more. So, as the first scarce digital asset, it is naturally filled into a role similar to gold, which is a place to park money.
My general philosophy on these things is that I think that the internet was a fundamental disruption in society and we’ve seen a huge number of things move from the physical world into the digital world. A huge number of things that people were skeptical about for many years; people were skeptical about media like newspapers moving into the digital world, people were skeptical about commerce moving into the digital world, and they were very skeptical about advertising moving into the digital world. But in each case, today the digital version of retail, media, books, and advertising are all as big or bigger than their physical component. So, it stands to reason that now that we have a scarce digital asset, there will be a digital version, if you will, of gold; a scarce asset where people want to store money online.
As to why I think people want Bitcoin instead of gold; as I said earlier, it’s in a different place. Gold is about capital preservation, while Bitcoin right now is about capital appreciation, and a lot of people are looking for capital appreciation. Long term, I could argue that Bitcoin may become bigger and more important than gold, because while it shares all the core characteristics of gold in terms of being divisible, stable, fungible, and exchangeable for fiat currencies, it’s also transportable instantly anywhere around the world, and it’s a lot easier to store it; it’s not bulky, and you can move it across borders with a password in your mind. So, it does the same thing as gold, plus it does a bunch of other things. I think that over time it may actually become the most important non-sovereign store of value. I definitely think there’s still a role for golden portfolios, it’s been around for thousands of years, it’s much more stable, and it’s unlikely that it’s going anywhere, but I think Bitcoin is disrupting that space in the same way we’ve seen other digital versions of traditional physical things disrupt retail, commerce, advertising, telephones and many other things.
(17:05) George Manolov:
That’s totally fair, but at the same time you’re saying that a digital version of gold makes a lot of sense because a lot of other things have become digital, and Bitcoin is one version of a digital gold, but then tokenized versions of actual physical gold itself are now becoming a reality. Right? So, it make sense to think that these new versions of an asset, which is already proven throughout history and it’s something that people understand and know; there was this one person I was watching who said that everybody in the world knows what’s gold while very few people know what Bitcoin is, and it’s very hard to explain what Bitcoin is, everybody understands gold and the moment it becomes super cheap, easy, accessible, and understandable to access gold, even if it’s not physical, but it’s a digital, tokenized representation, it has the potential to grow as much as Bitcoin has, but it still delivers a lot of potential.
One thing that also comes to mind is that as you said, gold has been used as a store of value, but people don’t usually walk around with gold in their pockets, they don’t exchange gold, they don’t buy stuff with gold, but once you have these tokenized versions, which are easily accessible, then gold, once again, have its use as a medium of exchange, and as a unit of account as it was used to be in the past.
(18:28) Matt Hougan:
All those are very real possibility; I wouldn’t circumscribe the possible implications of a digital version of gold. I think to the extent that it makes it easier for people to acquire it, that will be positive for the price of gold. Yet again, hearkening back to the ETF; the fact that the ETF made it easier for investors in developed markets to acquire gold, that attributed significantly to the strong returns it had in the first decade of the 21st century.
I think unlocking that ease of access for people in emerging market economies through a tokenized version of gold could have the same positive tailwind impact on gold prices. I think it’s definitely possible, and I could imagine a world where it became used as a medium of exchange on crypto applications outside this stablecoin world, because even though fiat currencies have their issues, people are paid in fiat currencies and there’re basis risks in using a different currency, but I can imagine a world where that is true as well. So regardless, every time you open up the possibility of acquiring an asset like gold to a new group of investors, that’s a tailwind for prices. To me, the bull case for tokenized gold, is making it easier for people, particularly in emerging market economies, to gain exposure and to buy and sell the asset. So, that’s the primary use case and I agree that there’s a possible world where it returns to its role as a medium of exchange.
(19:56) George Manolov:
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Now, back to our conversation.
(21:37) George Manolov:
Now comes the question of what’s your view on fiat, gold and Bitcoin, long-term? Because you say that Bitcoin is an emerging store of value. Do you believe that it can grow into a real store of value over time or do you think it could also substitute the role of fiat money? A lot of people, especially the Bitcoin Cash hodlers and the Bitcoin Cash community, believe that Bitcoin should be used as a medium of exchange, as a peer to peer cash system. Not just them, but a lot of crypto hodlers, believe that once Bitcoin becomes a store of value, once it becomes less volatile, it could largely, if not completely, substitute fiat currencies overall, what’s your stance on that?
(22:19) Matt Hougan:
For the most part, I’m skeptical of that in developed market economies, because no matter how stable it is, you’ll be taking on significant basis risk versus the prices you see in everyday use. So, if your mortgage is nominated in dollars, but you’re transacting, or if your salary is in dollars but your mortgage is dominated in Bitcoin, then you’re taking on significant risk of price movement, and most people don’t want that risk.
I think the place where it could fill that role, and I wouldn’t be shocked to see it fill that role, is in economies that have significant challenges in maintaining their currencies. You see that all the way around the world. In fact, the majority of countries have inflation rates that are significant, I’d have real issues with their domestic fiat currencies. But in the U S where I live, I find it unlikely that I will be using Bitcoin as a significant medium of exchange anytime in the near future. But, could you see countries in emerging markets Bitcoinize in the way that some of them have currently chosen to dollarize?
I think you could see that, and I think you could see significant penetration over there, and there’re already established examples where digital versions of transferring value have become the dominant means of exchange in emerging market economies like Kenya. So, I do think there’s a possible application there. It’s not the primary use case that I’m personally most excited about for crypto assets, I’m really excited about the store of value use case, and the disruption of traditional financial services. While the third piece of a medium of exchange, even though it was in the founding title of the Bitcoin white paper, is a hard nut to crack long-term, but I think you could see it in certain places in the world.
(24:04) George Manolov:
Another thought that came to my mind as I was listening to you comparing gold to Bitcoin is that: with Bitcoin, there’s a very significant amount of Bitcoin that is concentrated in a rather small size of the population. I cannot cite numbers right now but let’s use this price prediction that 1 Bitcoin might truly become worth $500,000, if that happens, then we would see the early adopters of cryptocurrency become the world’s richest people, with each worth trillions of dollars. Don’t you think that this distribution of Bitcoin essentially creates a huge vulnerability and a potential flaw in the system in the sense that these people, some of which are unknown, could have a huge impact and influence on the value of Bitcoin. So, if Bitcoin became a store of value at some point, then one of them decides, for whatever reason, to place a huge order out there, he could totally manipulate the price and he could totally play with the store of value thesis.
(25:12) Matt Hougan:
Although it’s a smart thing to raise, I don’t worry about it for two reasons. One, Bitcoin ownership has gone through a period of exponential decentralization since its founding. Originally, one person owned 100% of all Bitcoin and today that’s no longer the case. Even the largest single wallets are relatively small in the scale of Bitcoin’s overall market capitalization. I think that radical decentralization will continue and therefore the concern that you raise right now won’t be as big a concern in in the future, as extremely wealthy people choose to diversify their assets as any reasonable person would do.
The other reason is game theoretic; the people with the largest positions in Bitcoin are actually incentivized to have that asset be as valuable as possible, and to suggest that they would act against their own rational economic interest seems unlikely to me. It also runs counter to the data which suggests that these large whales are actually the longest-term holders of Bitcoin. So, I understand the concern, centralization of wealth is a concern in many areas, centralization of shareholder ownership is a concern in corporate America, but if you look at the data, they tend to be the longest holders. There is this decentralization of ownership going on and there is this game theoretic reason why they wouldn’t act against their own self-interest, but it’s something that’s worth thinking about.
I do think it’s worth pointing out that the Bitcoin market and the liquidity in that market has radically changed in the past 2 or 3 years, some of the largest institutional algorithmic, traditional wall street financial firms are making markets in the Bitcoin market, and it’s become just exceptionally more efficient, it has also become exceptionally easier to hedge your positions through the growth of futures market, institutional Bitcoin shorts, and short lending markets. So, the market that was relatively easily moved maybe 4 or 5 years ago, is not the market we have today, it’s much more akin to a well-developed, well-oiled, two-sided market with lots of risk hedging tools, options, futures and other spaces. So, it’s a great thing to think about, but it doesn’t actually concern me.
(27:25) George Manolov:
Another question which I have is that, in your latest investor newsletter that you send out twice to the investors and subscribers, you had this reference to an article which essentially points out that the US Dollar has lost 93% of its value over the past 100 years, and that this trend is continuing. And with the recent actions that we are seeing from the president and the Fed, this looks like it will be continuing, and this is essentially the nature of fiat money, right?
(27:59) Matt Hougan:
Yes. It’s an explicit target of the federal reserve to have inflation rates above 2% a year, and if you compound something even as low as the 2% rate over hundreds of years, you see the kind of dilution that you’re talking about there. So yeah, I think it’s a fundamental feature, even if we’re not entering a massive inflationary future, which there are definitely two debates on whether the next 10 or 20 years is going to see significant inflation and debt monetization as Ray Dalio has said, or if it’s going to be more subdued because of technological advances which some other people espouse. But when the fed is targeting explicitly couple percent of inflation a year with the potential to miss on the upside, you have to assume that this is the nature of fiat money.
(28:44) George Manolov:
Do you think that there is a possible scenario where we could reverse back to a dollar or to fiat currencies which are backed by gold or by Bitcoin, essentially by hard money, as it used to be before 1972?
(28:59) Matt Hougan:
That’s an interesting question. I think you’d have to see cataclysmic results for the governments to put the genie back in the box, we’d go through a period of severe economic hardship before we get there. I don’t think it’s a zero chance, it’s something that you hear more seriously discussed now than you did at the past, but I think it’s unlikely because the pathway to that would be very painful economically. So, I’m hopeful that doesn’t happen actually, but I don’t think you can say it’s a zero chance.
(29:27) George Manolov:
I now want to get a little more into your work at Bitwise if you could share a little bit about what you do at Bitwise and what is your place in the cryptocurrency space?
(29:38) Matt Hougan:
Bitwise is a specialist crypto asset manager. We create simple crypto funds, mostly for professional investors. So, we created the world’s first index fund, which holds the top 10 crypto assets, and we have standalone funds that track Bitcoin and Ethereum. What we’re trying to do is make it safe, simple and easy for US investors to access crypto markets. Right now, particularly for professional investors like financial advisors and family offices and institutions, the means of accessing the crypto markets are not as easy as they should be, so we’ve developed these funds that help make it easy.
Our general position is that crypto assets have a role to play in many investors’ portfolios, that they can help provide diversification and increase returns. Thus, we’re trying to make it easy for people to do that. What I practically do during most days is that I spend a lot of time researching the crypto markets, then a lot of time talking, mostly to financial advisors and family offices about the role crypto can play in their portfolios. Those of us in the crypto world are often out of touch with how far away mainstream America is from understanding crypto. So, we spend a lot of time trying to educate broad groups of people on what crypto is, why it matters, and how an allocation to crypto can fit in people’s portfolios.
(31:07) George Manolov:
How do you do that in practice? Do you persuade people one-on-one?
(31:10) Matt Hougan:
Yeah, a lot of it is one-on-one. We have a sales and distribution team who reaches out to financial advisors. There are 300,000 financial advisors in America. Collectively, they control about half of all the wealth in America, we reach out to them on the phone, we go to cities around America and host lunches for 10 – 15 people at a time, we speak at conferences, and we try to write articles and pieces in the media that help people get their head around it. It’s not true that it’s easy for someone who doesn’t spend their time digging into crypto to understand what it really is and where it fits. There’s a lot of bad media reporting around crypto, and there’s a lot of misconceptions you have to break down.
So, we think it’s a multiyear multi-touch process, but practically the way we do it is by calling financial advisors, hosting webinars, hosting lunches in cities around America, and going into offices and meeting them one-on-one. It’s a lot of hand to hand combat.
(32:07) George Manolov:
So, these are financial advisors of high net worth individuals or at least credited investors, I imagine?
(32:14) Matt Hougan:
That’s correct. All of our funds that exist today are available only to accredited investors. That’s what we’re working on. We have also filed for a Bitcoin ETF, which is with the SEC right now, and they’re reviewing it, but right now our funds are for accredited investors only.
(32:31) George Manolov:
And ETF will allow basically anyone to use your services?
(32:33) Matt Hougan:
Yeah, if the SEC approves our ETF and we’re able to launch it, it will allow anyone to buy it in the same way that they currently buy Apple stock and through the same user interface and systems that they buy Apple, Microsoft, Tesla or what have you. So, that’s the other piece that we’re trying to achieve. Until we achieve that we’re doing what we can, which is offering funds for accredited investors only.
(32:58) George Manolov:
What of the biggest complaints or doubts that financial advisors, family offices and accredited investors that you talk to have? What are their biggest objections, doubts or reasons for not getting in?
(33:08) Matt Hougan:
I think that’s a great question. There are really 3. The first one is that they just have a misconception about what crypto is, they figure they’re not spending Bitcoin to buy their coffee at Starbucks and therefore it’s not a real thing, so you just have to break down to them through the core understanding that what crypto does is that it moves money onto the internet for the first time ever. That’s a major financial disruption, so some of it is just core education.
The second issue is that from a portfolio perspective, Bitcoin is extremely volatile. We saw that in 2018, it fell nearly 80%, it’s gone through six 70% pullbacks in the history of its life, and most financial advisors aren’t used to assets that are that volatile. So, getting them to understand that despite the fact that it’s volatile, it can still have a place in a portfolio is a significant issue.
Then the third one is a technical issue, which is that financial advisors typically buy funds through advisory platforms and custodians. Even though ours is a private fund, most advisors go through a custodian like Schwab or Fidelity, so we have to work with those custodians to make it easy for advisors to access our funds.
These folks are busy folks. We spend 24/7 thinking about crypto. These folks might spend 7 minutes a week thinking about crypto. So, bringing them up to speed with how the market has evolved, where the market is and where it’s going, just takes some time. But those are their concerns.
(34:41) George Manolov:
So, to put it very simply, accredited investors give you fiat, which you then use to buy crypto assets and custody them.
(34:52) Matt Hougan:
We work with a third-party custodian, but we let them invest in crypto funds, that whole assets, in an institutional custodian and they would have difficulty creating that relationship or accessing and trading those assets themselves.
(35:06) George Manolov:
Do you do something with those assets?
(35:10) Matt Hougan:
Yeah, held in a 100% cold storage, what our customers want is to know that their assets are safe, secure, and not going anywhere, so we don’t lend them out and we don’t state them, they just sit there in cold storage as safe as they can be, and the advisors are able to participate in the upside in prices that we’ve seen since the creation of crypto.
(35:30) George Manolov:
What is the business model behind it? Is it just a retainer or a commission based on the amount of assets that you clients hold with you, or is it a performance-based fee?
(35:39) Matt Hougan:
No performance-based fee. It’s just a straight annual fee, 2% for the institutional share class of our index fund, 1% for the institutional share class of our Bitcoin and Ethereum funds, and slightly higher fees for the retail versions of the share classes, which is a smaller investment level, but there’s no performance fee at all.
(36:02) George Manolov:
Do you exclusively work with US citizens or can people from other jurisdictions, I imagine if they are accredited, also join your funds?
(36:10) Matt Hougan:
We have an offshore fund that’s available to all institutional investors for our index funds. That fund has a $100,000 minimum, so that’s the hurdle. But we have a significant number of international clients that access us through that offshore funds.
(36:25) George Manolov:
But it’s focused on institutionals?
(36:27) Matt Hougan:
Actually, I believe it’s the case that it’s open to everyone as long as they meet the $100,000 minimum investment.
(36:33) George Manolov:
If there’re people listening to this, how can they go about and invest in your fund?
(36:38) Matt Hougan:
I would just go to “Bitwiseinvestments.com”, that’s our website and you can find out about our offshore fund in the funds file, then you can reach out to us and we’ll help you out. There’s a click invest now button that we linked up with our investor relations team and they can help sort out the paperwork and get you into the product.
(36:57) George Manolov:
Beautiful. One other question which I wanted to ask in the beginning, but I still believe it’s important, which I’m just curious about; how did you yourself enter the crypto space? Did you read something? Was there some particular person who got you in the space?
(37:13) Matt Hougan:
My first real interaction with crypto came in 2013 when I was running an ETF conference and we had Tyler and Cameron Winklevoss come down and speak to our conference about Bitcoin. I’m good friends with the lawyer they were using at that time on their ETF filing, Kathleen Moriarty. The fact that she took crypto seriously enough to work hard on that project made me take it seriously as well. So, I followed it since then with different interests. Then after we sold my ETF business, I was looking around for the next major disruptive financial technology where I think I could have an impact and crypto was it. I was fortunate to find Bitwise, which had a remarkable team, and the best design product for professional investors. I’ve been happily involved 24/7 in the crypto industry ever since then.
(38:06) George Manolov:
How did Bitwise convince you, or why did you think Bitwise were better than Winklevoss capital as they are also working on ETF?
(38:15) Matt Hougan:
They were working on an ETF; I don’t know where they are with it. I was introduced to Bitwise through my good friend Spencer Bogart. Spencer is a partner at Blockchain Capital, he used to work for me at ETF.com. The thing about Bitwise that I love is that I’m an index investor at heart, I have a high degree of confidence that crypto will be more important in 10 years than it is today, but I have a relatively low degree of confidence in terms of which specific asset will be the most important.
I could paint you a world where Bitcoin remains in its dominant position and indeed becomes more dominant, crowding out other assets and accrues most of the value. I could paint you a world where Ethereum fundamentally disrupts big chunks of the financial industry and becomes really significant. I can paint you a world where privacy coins fundamentally disrupt the offshore wealth market, which is a $30 trillion market and has a massive price appreciation. Or I could paint you a world where some new asset emerges with an extremely slick, scalable blockchain and disrupts these other established coins.
The truth is, I honestly don’t know which of those worlds is going to occur, but what I do know is that the future of finance is going to run through crypto assets and blockchain. I feel very confident about that and if that’s what you know, what you want, in the best of all worlds, is a well-designed index fund that gives you exposure to all of those assets, so that you can just park money in there with your one core thesis that crypto is going to be important and be guaranteed that you’ll participate in the upside.
That was Bitwise’s flagship product. They were the first company to offer an index fund in the crypto space. I was also very impressed by the founders of the firm and by their venture capital backers. And I just thought that this is going to be a really significant financial company in the future. I loved its culture, I loved its product, I loved what it was doing, and I was happy that they invited me to join the firm.
(40:16) George Manolov:
You said that you don’t know which exact asset is going to be the biggest thing. How do you go about the fund allocating capital? I know that at this point you have about 70% or more dedicated to Bitcoin, there’s less to Ether, Bitcoin Cash, Litecoin, etc. I assume you have some rules and mechanics in which you change that allocation over time, how does that work?
(40:40) Matt Hougan:
We let the market decide. First of all, we look through the list of all existing crypto assets and we figure out which ones can be safely held and which ones are liquid. There are certain assets that don’t meet our standards for custody, there’re certain assets that don’t meet our standards for liquidity, and we exclude those, what you’re left with is a set of assets that can be safely held and easily traded, then we take the market cap weight. In other words, the total value of Bitcoin versus the total value of Ethereum, versus the total value of Bitcoin Cash is what determines the percentages.
The beauty of this approach is that those percentages shift over time as the market decides, which is the most valuable. Every month we look at the market again, take the top 10 assets again, and maybe we add an asset that’s emerging and drop an asset that’s declining. This index-based approach, is now the dominant way people gain exposure to the equity market and I think it’s actually the most rational way to gain exposure to the crypto market. So, the short answer is, we make sure it’s safe, secure and liquid, and we let the market decide.
(41:48) George Manolov:
Talking about this, you’re working on a Bitcoin ETF, but based on what you are saying, I assume you would also be working on an ETF that is based on the Bitwise 10 or some other basket.
(41:59) Matt Hougan:
(41:59) George Manolov:
How is that growing?
(42:02) Matt Hougan:
The answer is baby steps. Right now, the SEC hasn’t allowed any crypto ETFs to come to market. The first asset that they’re likely to allow is a Bitcoin product, because the Bitcoin market is more well established than any other asset. It’s the only market where there’s a regulated futures contract, it has the most custodial options, it’s the most efficient traded market, it’s the oldest market, and it has the most market makers. So, the first door that the SEC is going to open, if they open a door at all, is going to be for Bitcoin.
Over time, it’s my hope that the space matures and we’re able to bring a diversified index approach to investors in the US through an ETF. But right now, we’re a long way from that. It’s not a criticism of the SEC. The SEC is there to protect retail investors from risks, and the truth is that there are significant risks as you move down the capitalization spectrum in the crypto market, that, at least in the SEC’s mind, is something that I don’t think they’re close to being comfortable with, but over time I expect there to be more ETFs and more diversified ETFs, and hopefully it will be a leader in that space.
(43:06) George Manolov:
What is stopping the SEC from approving the Bitcoin ETF? And are they vocal about it? Are they clear about it?
(43:14) Matt Hougan:
They’ve done a great job, I will say. They rejected the Winklevoss ETF in 2018 and they published a 92-page-paper detailing the reasons that they rejected it. They have concerns about a number of things from custody to audit, but their real concern is that the underlying markets where Bitcoin trades, in other words, Coinbase, Kraken, Binance, and all the others, are not regulated in the same way that stock markets are regulated, and in some cases aren’t regulated at all. So, they worry that there’s the potential for market manipulation on those exchanges.
We’ve been working to try to use research and data to assuage their concerns, but that’s their primary concern that, Bitcoin trades mostly on unregulated exchanges and they want to make sure that the markets are functioning clearly, safely and appropriately before they approve an ETF. So, that’s their blocking obstacle at this point.
(44:10) George Manolov:
Before we finish, I would just like to jump quickly through a couple of questions about gold ETFs. I’ll probably paste this somewhere else, but I think these are important questions for the audience. You mentioned early on that the gold ETFs, for the first time in the gold market history, made the bid ask spreads between buy and sell very tight. Why was that? And how big are the spreads today?
(44:32) Matt Hougan:
That’s a great question. Before the gold ETF launched, really the only way to buy and sell gold was on the over the counter market. Realistically, that meant for most investors going down to the gold shop and buying gold coins from your local retailer, and there wasn’t a national or international market for most investors to access. There’s obviously a significant market in London for gold for the LBMA dealers. If you’re in London and you’re a major institution, you can get relatively good pricing. But for most retail investors, their best choice was to go buy coins or bars from their local dealer. And like any local retail merchants, the spreads that you pay there are significantly higher. So, you’re talking about spreads of 1, 2, 3, 4, 5, 10%.
What GLD did was that it brought that onto a national high-speed arbitraged regulated exchange market, and the spreads are one penny. So, if gold is trading at $1,300 an ounce, you can trade it with a spread of a penny, which is pretty phenomenal. Thus, it just made it significantly easier to access, but also broaden the cost of trading dramatically by bringing it from an OTC isolated market into a centralized exchange traded, technology-driven market. As a result, the prices came in.
(45:59) George Manolov:
You’ve mentioned the GLD ETF, but at the same time there are bunch of other gold ETFs, not just in the US but I believe over the world. So, how would one, and how should one go about selecting a way to invest if one wants a gold ETF exposure? What’s your view on that? As, probably, one of the most experienced people in the ETF space.
(46:23) Matt Hougan:
My view is that most investors in the U S who are retail investors are probably best served by just buying the cheapest gold ETF, which I think the ticker on that is BAR from GraniteShares. It provides the exact same exposure as GLD, but costs a little under half as much. If you’re an institutional trader, there are reasons to buy GLD because it has greater liquidity. For most retail investors, a fun light BAR works very well. As you said, there are a large number of these ETFs, they all have unique wrinkles. Some store their gold in Switzerland, some store it in London, while some distribute it in multiple locations. It depends on how much that matters to you. None of that would matter to me. I think these ETFs are safe and secure and therefore I’d buy the cheapest one which is BAR. All that said, the two big ones, GLD & IAU also give you good exposure and are also relatively low cost, so you can’t go wrong. You can find out about them, honestly for free, on the website I used to run which is “ETF.com”. If you just go there and type one of those tickers in you can learn more about them.
(47:36) George Manolov:
Beautiful. I’ll definitely put the links down below this recording.
(47:39) George Manolov:
A couple of things before you take off. First, if you enjoyed this episode, be generous and share it with your best friends. They deserve it, they will appreciate it and they will be grateful to you.
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Finally, if you have any suggestions, feedback, or anything that you want to tell me, you can find me on Twitter at “@BorderlessBTC”, or on my website “Borderlesscrypto.com”. Thanks for tuning in, and I’ll see you again, soon.