At the Money: Crypto Curious

Are you crypto-curious? Are you interested in owning some bitcoin, Ethereum, or other crypto-coins? How can investors get exposure to the space? Matt Hougan, Chief Investment Officer at Bitwise Asset Management speaks with Barry Ritholtz about the best ways to responsibly manage crypto assets. His firm runs over $10 billion in client crypto assets. 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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• 1:08Speaker 02

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• 1:33Barry Ritholtz?

  How should retail investors responsibly think about crypto? Are you crypto curious? Are you interested in owning maybe some Bitcoin or Ethereum or some other crypto coins? How should ordinary investors interested in the cryptocurrency space get exposure to that asset? I'm Barry Ritholtz, and on today's edition of At the Money, we're going to discuss how retail investors can responsibly invest in crypto. To help us unpack all of this and what it means for your portfolio, let's bring in Matt Hogan. He is the Chief Investment Officer at Bitwise Asset Management. The firm manages over $10 billion in client assets in crypto.

• 2:18Barry Ritholtz?

  Let's start with just the basics, Matt. For the longest time, it's been challenging and difficult to own crypto. There were wallets and coins and crazy passwords, lots of hacks and other problems. Tell us about what's going on in the world of actually owning cryptocurrencies.

• 2:37Speaker 04

  Oh, it's great to be here, Barry. It's getting a lot easier to own crypto. You know, in the past, this was a new disruptive market. It was challenging. You had to write down your secret password and not lose it. There are all these terrible stories about people losing passwords that are now, you know, would have gotten them $100 million or whatever. But this is just like any other technology. You and I remember when the internet was hard to use. I remember looking up websites in a book, which I now sound absolutely insane. But technology has advanced. It's now easy to get high-quality access and secure access to crypto if you use the right tools.

• 3:17Barry Ritholtz?

  Really interesting. So it sounds like the Wild West of crypto has been tamed a little bit. There certainly has been a push by well-known financial institutions into the space. You can own crypto coins and ETFs. You can own them in closed-end funds. What are some of the advantages and disadvantages of the various ways and methodologies of owning this?

• 3:42Speaker 04

  Yeah, I have to say, I'm a huge fan of the ETFs. You know, obviously, we offer them, so I'm talking my book. But broadly speaking, the ETFs came out in January of this year, and they let you own crypto at such low costs and with such institutional quality custody and trading. Retail investors today can get the same sort of setup that the largest institutions in the world were getting in crypto a year or two ago. So these ETFs make it easy to buy exposure to Bitcoin in a brokerage account and know that the crypto is being, or the Bitcoin is being held by an institutional regulated custodian with insurance in place, with all the bells and whistles, but they don't have to worry about it.

• 4:25Speaker 04

  Five years ago, you had to worry about that personally. The ETFs have sort of taken that complexity away and made it cheap and safe to own.

• 4:33Barry Ritholtz?

  And you're really a fascinating person to talk to about this because you come from the ETF side of the industry. You spent how many years, 20 years, working on ETFs? Tell us a little bit about your background and what led you into the crypto side to come up with ways to put coins in ETFs?

• 4:54Speaker 04

  Yeah, absolutely. You know, 15, 20 years in the ETF industry, the CEO of ETF.com. There are actually so many parallels between ETFs and crypto. I know ETFs today are the apple pie of investing. They're everyone's favorite tool, but 20 years ago, they were considered risky and disruptive and hard to access. The Financial Times called them weapons of mass destruction. There were congressional hearings, Barry, about ETFs destroying the American dream, if you can believe it. But ETFs had this core advantage, which were they were lower cost, they were more tax efficient, they were easier to use. And over time, the world woke up to the reality. The same thing's happening in crypto. You can

• 5:35Speaker 04

  see it before your eyes. A few years ago, Larry Fink called Bitcoin an index of money laundering. Today, he's talking about it transforming the world of currency and he holds more Bitcoin than almost anyone else. So it's going in that direction. And absolutely, you're seeing these two worlds come together, where this new financial innovation of crypto is now being packaged in this beautiful package of an ETF and making it easy for every investor to access. It's a beautiful thing.

• 6:04Barry Ritholtz?

  And I want to talk a little bit about the the safety aspect and the institutionalization. None of the coins are regulated. It very much has been the Wild West. But you're not a crypto exchange. You're a fund manager, you're a financial manager. Who is the regulatory authority that supervises Bitwise?

• 6:29Speaker 04

  Yeah, all of them. With all the letters, all the letters, Barry. You know, we're regulated by the SEC because even though the crypto assets aren't, the funds that we offer, the ETFs that we offer, are regulated and passed through the SEC. Of course, also the CFTC for products that hold futures contracts. FINRA, which is another regulator, has oversight over broker dealers. And so our distribution team sits under that. All our materials are reviewed by FINRA, the NFA. It's an alphabet soup of regulators, but it's a good thing for investors. Because one thing that is true about crypto is in the early Wild Wild West days,

• 7:12Speaker 04

  when you had offshore exchanges doing shady things, people lost money. A great thing that has happened is that has moved into these regulated formats like ETFs. So you do have some protections from the SEC, the CFTC, FINRA, the NFA and others. And of course, Bitwise sits within those protections as an RA.

• 7:32Barry Ritholtz?

  That's really interesting. So, so you're a regulated entity. Where do the ETFs and various funds get custodied? How are they held? Who does the administrative reporting? I mean, I think of these as complex questions for a coin, but really they're kind of run of the mill questions for an SEC regulated entity like Bitwise.

• 7:58Speaker 04

  It looks exactly like or very similar to any other ETF manager. So the crypto assets are held in a regulated qualified custodian. In the case of our Bitcoin ETF, it's Coinbase custody, which is the largest crypto custodian in the world. The funds are audited by big four auditors. In our case, it's KPMG. They're administered by firms like Bank of New York. If you looked at the sort of stack of participants, it would look just like, you know, a traditional equity ETF. And that's what it should do, right? These are trusted rails that have been proven over years. And we've just applied them to crypto to give the similar protections to crypto investors.

• 8:39Barry Ritholtz?

  So the one thing that I find kind of amusing and ironic is the whole DeFi nonsense, the decentralized finance, turns out to have been a narrative that kind of faded away because crypto, for all the talk about outside of the financial system, has been dragged kicking and screaming right into the heart of the financial system.

• 9:03Speaker 04

  I admit that there is an irony there, but I actually think it's more of a continuum. Sort of the core idea of DeFi is that the existing financial system is too slow, too intermediated, too costly. And all of that is true. DeFi offers the potential to improve that. But of course, the two systems have to come together. And you're seeing it. So you're seeing, you know, from the crypto side, the launch of ETFs, moving into the traditional financial system. But you also have firms like BlackRock and Franklin Templeton issuing money market funds on public blockchains like Ethereum. So you are seeing this coming together. I wouldn't write off DeFi 1.0 very.

• 9:47Speaker 04

  I think there'll be a DeFi 2.0 that is much more significant.

• 9:51Barry Ritholtz?

  Really interesting. So, so let's talk about individuals who want to own crypto. What sort of strategies do they deploy? Is it Bitcoin or bust? Or should they own Bitcoin, Ethereum and a bunch of other coins? Give us some investment strategies.

• 10:07Speaker 04

  Yeah, I mean, without telling anyone exactly what to do. I'm an index investor at heart, right? This is a disruptive early market. You know, my family owned a Betamax. I remember using a BlackBerry. It's hard to know exactly how this market will turn out in the future. So I think taking a diversified approach to this market is probably a sensible approach for many investors. There's certainly people who are Bitcoin only, who only care about the monetary aspects of crypto. But in any disruptive technology, my history, you know, having grown up through the tech bubble, tells me that a diversified approach may be a good idea for many investors.

• 10:46Barry Ritholtz?

  Makes a lot of sense. Whenever I talk about stocks to, to an investor, I always warn them, hey, listen, you know, you get a 10 to 20% pullback two out of every three years, 20% comes along just about every third year. With crypto, I love the expression crypto winter. And we've had a number of them when for a year or two, cryptocurrencies can be down, you know, 50% or worse. We've probably had three of them over the past, you know, 10 or so years. So how should investors prepare themselves for what seems to be an inevitable drawdown?

• 11:23Speaker 04

  Yeah, it's a really important question. People ask me all the time what the biggest risk in crypto. Is it regulatory? Is it technical? Is it quantum computing? It's none of those things. The biggest risk is behavioral risk by investors who either chase prices when they go up or sell when prices go down. This is an asset that has huge volatility. You're going to get thirty, forty, fifty percent drawdowns in the future. I feel confident about that. As you mentioned, we've seen those in the past and there's no reason to expect that will change. For investors, what that means is two things. One, you need a long-term discipline. If you're buying Bitcoin for the next week, I have no idea where it's going. I'm optimistic over the next handful of years.

• 12:07Speaker 04

  And the second is you need to size your portfolio appropriately. Don't put in so much that if it pulls back fifty percent, you're going to panic and sell. Because that is the worst-case scenario. You're better just sitting on the sidelines. Put in a small amount if you're going to invest, so you can handle that up and down and it won't overly impact what you're doing.

• 12:29Barry Ritholtz?

  Really, really kind of interesting. So you mentioned price, Bitcoin goes way up, it goes way down. Is there a way of looking at these from a fundamental perspective? How do we value coins other than whatever their last trade was?

• 12:44Speaker 04

  Yeah, it's unfortunately a little bit complex. Bitcoin's valuation technique is different from other crypto assets like Ethereum. When you think about Bitcoin, what I think Bitcoin is trying to become is a digital version of gold. A way to store money outside of central banks in a digital format. And we have digital versions of everything. We have digital versions of newspapers. We have digital versions of ads. I think the world and younger generations want a digital version of gold. The reason I raise that is you can look at Bitcoin today, it's a little under two trillion dollars. You can look at gold, it's a little under twenty trillion dollars. Do you think it'll get half that market? Well, then you think Bitcoin will five X from here. Do you think it'll get, you know, that full market?

• 13:28Speaker 04

  You're more optimistic? Or do you think it'll be less successful? That's absolutely the best way to value Bitcoin. These other crypto assets like Ethereum are different. They actually have cash flow-like characteristics. So they behave a little bit more like stocks. They're more sort of fundamentally valued than Bitcoin, which is this monetary asset. And so you have to think of the two different sets of assets a little differently.

• 13:52Barry Ritholtz?

  So you and I are both index guys. That's that's our background. If I'm an investor and I want to put 2% or 3% of my portfolio into coins, what do I do? Do I? Tell us about some of the options that you guys have. Is it, you know, should I be going 2X levered Bitcoin? Or am I better off with, hey, here are the five biggest coins or 10 biggest coins and own them all?

• 14:19Speaker 04

  Yeah, I wouldn't go 2X levered Bitcoin. You know, Bitcoin is volatile enough. I think investors can make a choice. Within the ETF space, the only coins that we have access to are Bitcoin and Ethereum. And the good news is those are the two largest assets. They're leaders in their spaces. So you can do worse than go two parts Bitcoin and one part ETH and have at least broad-based exposure. If you want to be more diversified and take an index-based approach, you know, we at Bitwise have the largest crypto index fund. It's available in a wrapper, but that wrapper is more like a closed-end fund. So it can trade at premiums and discounts, and you have to be aware that you have that extra layer of volatility.

• 15:01Speaker 04

  So either approach can make sense for the right investor, as long as you understand what you're getting into.

• 15:07Barry Ritholtz?

  So I want to not get too lost in the weeds on the technical issues, but I keep hearing about the halving that's coming up, and what does that mean to, what should laypeople understand about this?

• 15:22Speaker 04

  Yeah, so if you think about Bitcoin when it was created way back in 2008, 2009, there were no Bitcoin in existence. And we all know, or many of us know, that eventually there'll be 21 million Bitcoin. The way we get from 0 to 21 million is every day a little bit more Bitcoin is issued. What the halving refers to, Barry, is that every four years, the amount of Bitcoin that's issued falls in half. And the last halving was earlier this year, right? It dropped in half. What that means is there is less new supply coming into the market. In the end, Bitcoin's price is set by supply and demand. You have all these people buying Bitcoin through the ETF and other means. And then you have supply.

• 16:05Speaker 04

  And supply is either this newly developed Bitcoin or existing people selling it. So what the halving does is it reduces the amount of supply in the market. If I told you that the amount of oil coming out of the ground would fall in half tomorrow, you might be bullish on oil. The same sort of narrative is true in Bitcoin. The amount of Bitcoin coming out of the ground, if you will, falls in half every four years. And we're just sort of starting to feel the impact of the most recent halving now.

• 16:32Barry Ritholtz?

  So all of these challenges, whether it's the limited amount of supply, the halving, should be fairly well-known by investors. None of these are surprise. It's not like an earnings surprise. Hey, everybody who's a Bitcoin investor understands these. So the question becomes, what are going to be the future drivers of Bitcoin returns? Should we be thinking about Bitcoin like a commodity, like a currency? You know, you mentioned, you know, just under $2 billion, $2 trillion in market cap for Bitcoin. That puts it somewhere between Meta and Alphabet, Facebook and Google. Do we think about this like a large tech company?

• 17:17Barry Ritholtz?

  How should we contextualize the coins themselves?

• 17:20Speaker 04

  Yeah, I mean, I think of Bitcoin specifically as a commodity. It's a commodity with scarce supply and its price is set by supply and demand. One of the reasons I'm so optimistic about Bitcoin right now is we have major new sources of demand. Institutional investors are just now buying Bitcoin. There's talk of the US government acquiring 1 million Bitcoin. Corporations are acquiring Bitcoin. None of that was true in a major way a year ago or two years ago. And so you have all this new demand. But unlike other commodities, unlike gold, unlike oil, unlike copper, you can have all the demand in the world. You don't get any more supply. The supply is literally fixed. It's pre-programmed.

• 18:05Speaker 04

  So when you think about Are you optimistic or pessimistic on Bitcoin? I like to think about that supply, demand dynamic. And from what I see, there's a lot more demand coming online and limited new supply coming online. That makes me optimistic. It's not a guarantee. We can see some of those things not materialize. We could see investors scared off. But I like the long term framing of it from that simple supply, demand perspective.

• 18:32Barry Ritholtz?

  So to wrap up, investors who are crypto curious can buy various coins today much more easily than it used to be. If you wanted to own any sort of coin, you could buy it in a closed end fund or even easier in an ETF. Be very aware that you have to position size appropriately. Hey, if you want to own a percent or three in your portfolio and your liquid net worth. The responsible way to do this is not through a leveraged product, not anything that's reflective of the old Wild West ethos of crypto. But a traditional ETF, you have a small position as you would for any particular company.

• 19:15Barry Ritholtz?

  And be aware of your own behavior when it comes to managing yourself around the volatility of Bitcoin. I'm Barry Ritholtz. You're listening to Bloomberg's At the Money.

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