At the Money: The Tech Behind a Crypto Future

What is the value of crypto-currencies as a technology? How do the technologies that underlie Bitcoin and Ethereum work, and what are their futures? Matt Hougan, Chief Investment Officer at Bitwise Asset Management speaks with Barry Ritholtz about the future of crypto-technology. His firm runs over $10 billion in client crypto assets. Each week, “At the Money” discusses an important topic in money management. From portfolio construction to taxes and cutting down on fees, join Barry Ritholtz to learn the best ways to put your money to work. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

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• 1:23Barry Ritholtz?

  What's going on with the technology underlying cryptocurrencies? What is Bitcoin and other cryptocurrencies and what are their future? I'm Barry Ritholtz and on today's edition of At the Money, we're going to discuss all sorts of cryptocurrencies. To help us unpack this and what it means for your portfolio, let's bring in Matt Hogan. He's the Chief Investment Officer at Bitwise Asset Management. The firm runs over $10 billion in clients' crypto assets. So Matt, let's start with a really basic question. What is Bitcoin? What is Ethereum? And what use cases do these coins have?

• 2:05Speaker 03

  Oh, amazing. Well, it's great to be here. You know, Bitcoin is a crypto asset. The way I think of it is the first way that investors can store wealth in a digital format without relying on any government or any bank. It's built on a major technical innovation called the blockchain, which took forty years to develop. Trying to figure out how to make this possible, Bitcoin broke through that in two thousand eight, two thousand and nine, and it's been gaining steady adoption ever since. Ethereum is something more complex than Bitcoin. If you think of Bitcoin as digital money,

• 2:42Speaker 03

  you can think of Ethereum as making money and and compute programmable in a public setting, and you can build applications on that. You can build smart contracts, you can build stable coins, you can build other applications. I think it's a very exciting technology, but you can think of Bitcoin as digital money, Ethereum as sort of public compute and programmable money, and you'd be pretty close to reality.

• 3:07Barry Ritholtz?

  So you mentioned smart contracts. I'm kind of fascinated by that. When when we were talking about this a few years ago, the idea for smart contracts for concert tickets had come up where, hey, Taylor Swift is unhappy that in the US scalpers are buying up their tickets, keeping them away from the fans and selling them for five thousand dollars. If we were to put Taylor Swift contracts on Ethereum, she could sell her tickets at fifty dollars and whoever buys them, if they want to resell it at a higher price, she says, great, this contract says I get half of that. And so the idea is to encourage it going to fans and making it

• 3:51Barry Ritholtz?

  less profitable for scalpers, but even if they do scalp it, well, then the artists themselves get it. How realistic are are applications like that? And and when might we see something along those lines?

• 4:04Speaker 03

  I love it. It's all going to happen, Barry. I think they're all realistic. Crypto enables frictionless programmable money. So what you're raising there is an example of allowing money to be programmable. It's not just concert tickets. You could say the same thing about art. Artists are always upset that they sell their art and then it 100 X's in price and they don't benefit from that directly. And so this idea of attaching revenue streams downstream from it is something that you can do easily in the blockchain setting. The natural question is, why hasn't it happened? Right? If we were talking about this two years ago and it's such a great idea, why hasn't it happened? And there are two reasons for that. One is that crypto has had a regulatory cloud hanging over it.

• 4:50Speaker 03

  The SEC has been launching lawsuits against crypto. There was concerns in Congress. A senator was building an anti-crypto army. If you're a mainstream corporation, are you going to build a new business in an area where a senator is building an army to crush you? You're not. So we didn't see any of that. The second is that blockchains were slow and costly until about a year ago. Sort of we've gone through in blockchains, what we went through going from dial-up to broadband internet. Now we have highly performant, low-cost blockchains that can perform a lot of transactions and we have a positive regulatory environment. I think you're going to see a flowering of a million use cases over the next two or three years in crypto.

• 5:32Speaker 03

  They're going to blow people's minds. I think they're going to go mainstream. You're going to be using crypto apps without even knowing it. And I think people haven't woken up to that reality yet.

• 5:41Barry Ritholtz?

  So you're really suggesting we're like 1993 in the internet? Is that, is that a good frame of reference?

• 5:48Speaker 03

  That is exactly right. And you're seeing these crypto apps pop up and break through people's consciousness. A good example was Polly Market during the election.

• 5:58Barry Ritholtz?

  Oh, sure.

• 5:59Speaker 03

  Everyone was looking at Polymarket for the prediction odds on who would win the presidential election. It was it was in the Bloomberg terminal, right? The data from it. That was a crypto app. It could only be built on crypto. Crypto enabled it to happen. And yet, no one was talking about that. So yeah, it's 1994, 1996 and the internet. We're starting to see a few examples. Yahoo's jumping up, you know, email is jumping up, Hotmail is happening, but it hasn't gone mainstream yet. It's about to.

• 6:28Barry Ritholtz?

  So it sounds like there are a lot of new use cases for things like Ethereum. Give us some other examples, because you're obviously much more knowledgeable about this than I.

• 6:38Speaker 03

  Stablecoins are one of the great killer apps to develop in crypto. A stablecoin is a money market fund, but on a blockchain, right? It's a way to access dollars on a blockchain. So why is that a killer app? There are two reasons. One, it puts a US bank account at the fingertips of anyone with a cellphone, anywhere around the world. And if you're in Argentina, or you're in Turkey, and you can't easily access a US dollar bank account, but your currency has high inflation, you're going to want access to stablecoins. That's built primarily on Ethereum. If you're in a sub-Saharan Africa, there's a company called Yellow Card, that's using stablecoins to do country-to-country payments between business

• 7:20Speaker 03

  entities. It's growing at an exceptional rate. The US dollar is a phenomenal tool, and most people don't have access to it. Stablecoins make that instantly accessible globally. And so I think that's a good example of how crypto can really go mainstream at a very fast rate.

• 7:38Barry Ritholtz?

  So let's talk a little bit about security. I recall 10 years ago, crazy numbers, something like, a lot of hacks, a lot of thefts. And we talked previously about passwords, something like 20% or 25% of all Bitcoins have been lost because the owners either misplaced the drive it was on, or misplaced the password. That sort of security issue seems to have been taken care of. Of as this has become financialized and you can buy coins in ETF fashions. Tell us a little bit about custody and security of crypto assets.

• 8:19Speaker 03

  Yeah, I mean, it's worth noting those those stories always sound so ridiculous. How could these crazy people lose their passwords now worth a billion dollars? But remember, at the time, it wasn't worth a billion dollars. It was worth a few bucks, right? Somebody bought two pizzas for 80,000 Bitcoin. That's now worth a billion dollars. I sure hope they were good. But but you know, you have to think back to then when Bitcoin was trading for a few cents. People weren't as careful as they would be today. But the technology has improved exponentially. Now, the way most people custody their Bitcoin, their Ethereum, their other crypto assets is through regulated qualified custodians with insurance from leading insurance providers

• 9:00Speaker 03

  who have been doing it this for years and have hundreds or thousands of people who help manage that securely. And the track record for those qualified custodians is sterling. And so I think it's really improved sort of exponentially.

• 9:15Barry Ritholtz?

  And to give you a sense of how long that's been going on. In November 2017, there was literally an episode of The Big Bang Theory where they talked about mining coins and putting it on a drive that subsequently got lost. And back then in 2017, it was, you know, tens of thousands of dollars. Today, it's a it's a whole lot more than that. So I keep hearing from some skeptics who are saying this is a bubble. All these cryptocurrencies are just speculative excess. How do you respond to that?

• 9:51Speaker 03

  Well, you know, they may be right, of course. That's what makes a market. But many of the smartest investors in the world are allocating to Bitcoin and crypto. Stan Druckenmiller is allocating to crypto. You know, Abi at Fidelity is allocating to crypto. BlackRock is building a huge business in this. 60% of the world's largest hedge funds have a position in Bitcoin. It may be that those people have a right point of view as well. When I look at crypto today, it looks To me, like a technology that is just crossing the chasm from early adopters to mainstream and has yet to gain that sort of mainstream attention. It's of course possible, Barry, that the price will pull back. It's been the best performing asset in the world for the last couple of years. It could be due for a pullback.

• 10:37Speaker 03

  But long term, it's not at a mature state, right? Bitcoin is not standing shoulder to shoulder with gold. Ethereum is not standing shoulder to shoulder with Amazon cloud services. We think of them at a discounted level until they're standing shoulder to shoulder. I don't think we've reached maturity or bubble level. You know, and I think we have, I think we're getting there, but I don't think we're there yet.

• 11:04Barry Ritholtz?

  So let me ask you a two sided question and you can ask, answer them both. What do the skeptics not understand about crypto generally? What do you think the advocates either get wrong or overemphasize?

• 11:19Speaker 03

  What do the skeptics not understand is a really great question. I think many of them are anchored on the first time they heard about Bitcoin. And something that crypto needs to admit is the first time many people heard about Bitcoin or crypto was in a negative light. Maybe it was FTX. Maybe it was the collapse of Mt. Gox in 2014. Maybe it was Silk Road and illicit use. And the problem is, from a psychological anchoring perspective, they have such a negative first take on Bitcoin. They're not able to evaluate it properly. They still consider things like, what about the illicit use of Bitcoin? Well, the Department of Justice has come out and said that Bitcoin's illicit use is so small. And it's not worth, you know, monitoring.

• 12:03Speaker 03

  It's much lower than it is for cash. So I think many of the skeptics don't evaluate where the data is today. Because they're taking a 2022 or 2018 or 2014 view of Bitcoin and crypto.

• 12:16Barry Ritholtz?

  I mean, we've seen some pretty extreme forecasts on prices that, that, you know, kind of raise red flags when people are talking about, you know, a million or five million as a Bitcoin target. It seems like they're trolling us a bit.

• 12:34Speaker 03

  It does seem like they're trolling us a bit. I think they underestimate the efficiency of markets and the ability of markets to accurately value what an asset is. Just because Bitcoin has gone up in the past and crypto has gone up in the past does not guarantee that it will go up in the future. And there are significant foreseeable and unforeseeable risks in the future that we should think about. Their regulatory risks, their technology risks, their adoption risks. You know, look, it's hard to be the best performing asset in the world for 10 consecutive years and then tack on an 11th. And I think there's probably just too much sort of assumption that there is a manifest destiny of Bitcoin going to a million.

• 13:16Speaker 03

  There is no such guarantee in the market. There's always risk.

• 13:20Barry Ritholtz?

  Well, well, the trend is your friend. That's the old trading desk statement. So that that leads to a really interesting question. Are these coins an investment or are they a speculation?

• 13:32Speaker 03

  Yeah, they're absolutely an investment and some of them have elements of speculation. Let me give you an example of Bitcoin. I think when you're investing in Bitcoin, Barry, you're making two bets. One, you're making a speculative bet that Bitcoin will stand shoulder to shoulder with gold as a store of value asset. Right now, it's about 10% of gold. You're saying, I think it'll be 20, it'll be 30, it'll be 40, it'll be 50, it'll be 100. The second bet you're making is that the US government has $36 trillion of debt and is printing another trillion every 90 days. The store of value market is going to become more valuable in the future and Bitcoin is a piece of that. To me, that's a fundamental bet and the other one is a speculative bet about it maturing.

• 14:16Speaker 03

  The reason Bitcoins performed so well over the last handful of years is both of those have come true. And if you have two bets that are both coming true, you know, it's not one plus one, it's two times two equals four. It's it's sort of an exponential bet. So there's elements of speculation, but there are elements of fundamental investing behind these crypto assets as well.

• 14:37Barry Ritholtz?

  So to wrap up, investors should pay attention to the various coins, in particular Bitcoin and Ethereum, as a new technology that is crossing the chasm from early adopter towards mainstream investing. It doesn't mean that you outsize your position, it doesn't mean that you oversize holding Bitcoin. Think about this as a new technology that is starting to be adopted more broadly in the world of both finance and technology. And try and, you know, every beer commercial ends with "drink responsibly", "invest responsibly" if you want to take a few percentage of your portfolio and throw it into a Bitcoin ETF.

• 15:21Barry Ritholtz?

  There's nothing terrible about that. You just don't want to go hog wild and get sucked into the bubble mentality. That's where people run into trouble. Thanks, Matt. This has really been interesting. I'm Barry Ritholtz. You've been listening to Bloomberg's At the Money.

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