Bitcoin’s Evolution: From Risk Asset to Portfolio Tool With Matt Hougan

I'm so excited to be here.

[00:00:24] Doug Heikkinen: Can you believe we did our first podcast with you on Bitcoin in 2020?

[00:00:33] Matt Hougan: It's an era ago. A lot has changed since 2020. You would hardly recognize Bitcoin today.

[00:00:40] Doug Heikkinen: How has that journey been?

[00:00:43] Matt Hougan: It's been fantastic. It's been really exciting. I will say that Bitcoin matured. Faster than I expected. It's exceeded my expectations. We've seen the launch of an ETF, the most successful ETF launches of all time.

We've seen a swing from regulatory challenges to regulatory tailwinds. We're now seeing government adoption and institutional adoption. It's been a volatile ride, don't get me wrong. We were joking pre-show about my hair turning a little gray. There's a reason for that. But it's been a very positive ride, net net.

[00:01:19] Doug Heikkinen: Yeah. More on that you, you recently wrote Bitcoin's Remarkable Resilience, where you highlight how Bitcoin has withstood a range of macro and geopolitical effects. So what factors are most responsible for this new level of stability?

[00:01:34] Matt Hougan: Yeah, I think from a 30,000 foot view, Bitcoin has been significantly de-risked over the last five years since we last talked.

When we last talked, even simple things like custody was still an emerging topic and you would speak to investors, they really want to know the specifics of how you're custodying your Bitcoin. Today we have fidelity and BlackRock has an ETF. Custody is table stakes. Trading and liquidity was challenging back then regulation was very challenging.

You had unclear regulation from the SEC. You had no approval of an ETF, no robust regulated derivatives market, and then you just had generalized government risk. Would the government allow this to be an asset that exists in the world or would they ban it or seize it the way they did gold in the 1930s? All of those have been removed, right?

Custody is easy. Trading is easy. Access is easy via an ETF. Regulation is positive and it has government support. And that means that all of a sudden institutions can treat it for what It really is. Not just an emerging technology that trades like a risky asset, but as a new digital form of hard money that has risk off characteristics. And as a result in this specific macro pullback, with the sort of tariff tantrum and the broad American asset sell off, Bitcoin's been outperforming risky assets. It's less volatile than many of the Mag seven stocks. It's like a teenager growing up before our eyes.

It's beautiful to see.

[00:03:10] Doug Heikkinen: Yeah, but some critics still label Bitcoin as too volatile or speculative. How do you counter that view today, especially given its performance in the recent financial stress scenarios?

[00:03:21] Matt Hougan: Yeah, to be sure it is still volatile. This is not gold. This is not short term T-bills.

It is still volatile. But it's much less volatile than it was a year or two or three years ago. The way you counter it from a portfolio perspective is you have to size your position appropriately. The average Bitwise client is something like two and a half percent Bitcoin. If you're two and a half percent Bitcoin, you can stomach the volatility. Where you get in trouble is if you're 25% Bitcoin, right? Then you get the pit in your stomach, then you get bad behavioral outcomes. So from a portfolio construction perspective, the answer is portfolio sizing. From an asset perspective, I think you just have to accept this is the normal course of business. If you admit, Doug, that it's physically possible for a new store of value to emerge into the world, that history didn't end with gold. Like, there's a possibility of a new version. You would expect it to start extremely small, not worth much, and very volatile, and over time, become larger, worth trillions of dollars, and have the volatility come down. It can't go from zero to a hundred. It first has to go to one, to two, to three, to four to five, and that's what we've seen.

Volatility is down 60 plus percent over the last 10 years and it continues to fall. So volatile, yes. Size your portfolio appropriately. But is it following a path to become a mature store of value asset? I think it's following exactly the path you would imagine.

[00:04:55] Doug Heikkinen: I think it's just that it's getting your head around allowing something new to become valuable.

[00:05:03] Matt Hougan: That's exactly right. I think a lot about my teenage son who's 15 and is going to be a great productive human, but he's not yet. But at least now he has, he has his first jobs, right? He umpires baseball games. He's moving into that productive phase. You can't expect too much for this asset that's literally 15 years old effectively.

It is maturing, just as you would expect. If we went back to 2020, and I had told you that nine of the 10 largest hedge funds would own Bitcoin, that Larry Fink would manage $50 billion of Bitcoin, that multiple governments around the world would own it, you would've laughed at me, but that's exactly where we are today.

Again, it's allowing a new thing to emerge and getting our heads around the fact that can happen.

[00:05:47] Doug Heikkinen: I think I wouldn't have laughed at you. I think I said to you, you climbed one mountain. What the heck are you doing?

[00:05:56] Matt Hougan: I love mountains. I love mountains.

[00:05:58] Doug Heikkinen: That's what you said then, too. So what would you say to financial advisors who are still too hesitant to add Bitcoin client portfolios, especially managing retiree or conservative client basis?

[00:06:09] Matt Hougan: Yeah. So the first thing I would say, and this is really important, is even if you're not going to add it to the portfolio, you should have a conversation with your clients about whether they're doing it themselves, because crypto is widely owned by Americans.

There are more Americans who own crypto than own dogs. So there's a reasonable chance that you have a client that owns crypto directly. And the biggest risk in crypto is behavioral. It's chasing it when it goes up and selling when it goes down. So I think advisors, even if they're personally not going to allocate for most of their clients, can do a service to their clients by asking them if they're allocating on their own and then making sure their clients are doing it sensibly.

For others who have a more open perspective, look, no one has to own crypto. There's no rule that says you have to own crypto. But the data suggests that historically, it's been a good portfolio enhancer at small levels. 1%, two and a half, 5%. And now it's easy to access with an ETF. So if that's appealing for your clients, great, but the place I would start is by having a conversation. Because I do think, controlling for that behavioral risk, your clients are part of the world. They're watching CNBC, they're reading the newspaper. They know that Bitcoin's gone up 10000% over the last 10 years. Make sure you're at least having that conversation so you can control the behavioral issues around crypto.

And then of course, I would argue most clients would do well with crypto, but not everyone has to.

[00:07:40] Doug Heikkinen: So you're saying the sweet spot for allocation is the 1%, 2%, 5% that they should be looking at to balance opportunity and risk.

[00:07:48] Matt Hougan: That's exactly right. There's actually an important dividing line at 5%, from a historical perspective, is 5% is where crypto becomes the primary driver of the maximum drawdown in your portfolio.

And I think that increases your behavioral risk. Below 5%, stocks are what's wagging the volatility dog of your portfolio. Crypto is just enhancing those returns. So what we see is 1% to 5%. With some sort of rebalancing tolerance. Now, I personally own more. I should disclaim that because I have very high conviction.

But I think for many people that is the sweet spot in that 1% to 5% range.

[00:08:29] Doug Heikkinen: Okay, let's talk about SPOT Bitcoin ETFs, which it takes the access barrier for advisors, it lowers it dramatically. But does easier access automatically make it a smart move?

[00:08:41] Matt Hougan: I think they're the lowest cost and most secure way for most people to access Bitcoin.

The great promise of ETFs, as you know, throughout history, and I come from an ETF background, is they let every investor invest on the same terms as the largest investors in the world. That's the beauty of it. And that's true with ETFs as well. Again, nine out of 10 largest hedge funds own Bitcoin ETFs. The Abu Dhabi Sovereign Wealth Fund owns a Bitcoin ETF. And you in your small account, whatever you are, you can own the same ETF as the Abu Dhabi Sovereign Wealth Fund. That's incredible. The reason they're using an ETF to access this market is these ETFs are so cheap, right? Our ETF is 20 basis points. That's like the range of the expense ratio. And for that you get institutional custody, institutional trading, tax and audit from a big four accounting firm. It's an incredible deal. I do think if you're accessing this market, just like in most areas of the market, the ETF is one of the best deals going. And it's not just Bitwise's. Almost all the ETFs are extremely well run and low cost.

[00:09:49] Doug Heikkinen: So with all these new products coming out, the Spot ETF, the ETFs. So much information. There's more information on all kinds of social media. What due diligence should advisors be doing?

[00:10:02] Matt Hougan: Yeah, so you start with the basics of the ETF itself, which are expense ratio and total cost of ownership. So you look for a low expense ratio and low trading fees and tight trading to its nav, just like you would with any ETF. To some degree, that hasn't changed. The other thing I would look for is an ETF provider that can give you support after you buy the product if you're an advisor. Because the thing about crypto is it does elicit conversations. If you add crypto to a client portfolio, you're going to get a question about it six months, 12 months, 18 months from now, because it'll be the best, or worst performing thing in your portfolio. And so you want an asset manager that can be a partner to you to help you answer those questions, because you don't spend a hundred percent of your time focused on this. So I do think there's an advantage to a team that has resources that can help you answer questions.

Classic ETF due diligence plus crypto expertise is how I would approach it. Choosing an ETF.

[00:11:09] Doug Heikkinen: You have a great presentation called The Three Horsemen of Bitcoin Demand: ETFs, Corporations, and Governments. You discuss how each group is accelerating adoption. Which of these is currently having the biggest impact and what's next?

[00:11:23] Matt Hougan: It depends on the day. Just for context, people criticize Bitcoin because it's prices set by supply and demand. But that's actually the beauty of it. And the story is, the Bitcoin network produces 165,000 Bitcoin a year. That's it right now. Last year, ETFs bought 500,000, corporations bought 300,000, and governments own about half a million Bitcoin as well, and I think will start purchasing them soon.

Right now, in terms of the last three months, we've seen corporations actually be the leaders. There are a variety of reasons for that. It's not just MicroStrategy. There's about 75 publicly traded companies that are buying and holding Bitcoin on their balance sheet. And they're buying more than all the new supply. ETFs I think have a multi-year tailwind where we're going to see strong flows into ETFs for the next five to 10 years.

I say that because that's what we saw when Gold launched. It had a very successful year one. But year 2, 3, 4, 5, 6, 7, and eight were even more successful. That's just how ETFs work. So I think ETFs will be buying hundreds of thousands of Bitcoin this year. Governments is the wild card. If we see the US actually follow through on the White House Executive Order, which said they shall investigate ways to buy new Bitcoin.

If we see the US starting to buy 10,000, 20,000, 50,000 Bitcoin. I think that could set off a little bit of game theory around nations around the world, and governments could be the big driver. The reality is I think each of these three horsemen will buy more than a hundred percent of the new supply of Bitcoin this year. And that means that existing holders have to sell and often they only sell at higher prices.

So that's part of why I'm bullish on Bitcoin. You have these three massive drivers. And then a fixed supply. And when those two collide, you get the kind of returns that you've seen in Bitcoin over the last couple years.

[00:13:28] Doug Heikkinen: So with all these trends continuing to evolve, what's it going to mean for long-term price stability or growth?

And I think you've started to talk about that.

[00:13:36] Matt Hougan: My base case is very bullish. I think ultimately Bitcoin is going to be as big or bigger than gold. When I look at the world and I look at digital versions of physical goods, whether it's newspaper, or media, or entertainment, or retail shopping, telephony, video communication, the digital version is as big or bigger than the physical version in every category I can think of.

I don't know why it would be much different here. If that thesis is right, Bitcoin's gotta get to about a million dollars a coin. Now I don't know when it's going to get there. I don't know how long. I'm not saying I'm not guaranteeing it will get there, but I think that's the direction of travel.

I'm optimistic in the short term as well. Again, I think there's a, far more demand than new supply. And that tends to mean that prices have to go up so existing people are willing to sell. Bitwise has a prediction that Bitcoin will hit $200,000 this year. That's more than twice its price today.

So that's a very bold prediction. But, if the demand trends play out the way I think they will. And if, assuming the economy stabilizes, it could get there. Again, not a guarantee. It's a hugely volatile asset. It could also fall substantially. Even in big up years, Bitcoin has big down periods, but I am optimistic about where we're going.

[00:14:58] Doug Heikkinen: All right. Last one for you. What are the key metrics or milestones you hope to see that would signal Bitcoin's continued integration into mainstream portfolios?

[00:15:08] Matt Hougan: Yeah, I think we wanna see broader institutional adoption, which you can monitor by looking at the 13 F reports that come out each quarter.

You wanna see the share of institutional ownership of Bitcoin ETFs growing each quarter. The second would be governments actively buying Bitcoin. It could be the US or it could be other governments around the world. And the third, again, is those corporations continuing to stack Bitcoin on their balance sheet.

If we see each of those three things happen, We're moving in the right direction. I also love seeing liquidity increase in the Bitcoin ecosystem, whether that's through derivatives or Spot or ETFs. A more liquid macro asset is a more useful macro asset, and so that's another thing that I monitor closely.

[00:15:59] Doug Heikkinen: Matt, super stuff as always. The second mountaintop is in view. Thanks so much for joining us.

[00:16:05] Matt Hougan: Thanks for having me. Really enjoyed it.

[00:16:08] Doug Heikkinen: To learn more about Bitwise, please visit BitwiseInvestments.com. Please follow us for timely updates on X, LinkedIn, and Facebook, all @Advisorpedia. For everyone at Advisorpedia, our producer Tory Miller and the Power Your Advice Podcast team, this is Doug Heikkinen.