Matt Hougan is the chief investment officer of Bitwise Asset Management, pioneer of the first cryptocurrency index fund and a leading provider of rules-based exposure to the cryptoasset space. He also co-authored the CFA Institute’s research foundation brief, Cryptoassets: The Guide to Bitcoin, Blockchain and Cryptocurrency for Investment Professionals. In this episode of Power Your Advice, Doug Heikkinen and Matt discuss the growth of the cryptoasset space, and why you can’t afford to ignore it.
- When an ordinary investor should consider cryptocurrency
- How crypto is currently regulated
- Basics of decentralized finance (DeFi)
- What a Bitcoin ETF would mean to the market
- What’s going on with NFTs
- What Matt sees coming next
Matt Hougan, Douglas Heikkinen
Douglas Heikkinen 00:04
Hello and welcome to the power your advice podcast. The power advice podcast is designed to bring financial advisors new ideas, why those ideas should be considered and how to implement them into your business. This podcast is brought to you by advisorpedia the best place for advisors to grow their minds and business. This is your host, Doug Heikkinen. . .
Matt Hougan 00:40
Hey, thanks for having me. Again, Doug. It's great to be here.
Douglas Heikkinen 00:43
When we last talked, you were at the base of this new mountain, the crypto mountain where would you say you're on that climb now?
Matt Hougan 00:52
We've made some progress we've ascended, but there's still miles to go look, crypto has come a long way since we last chatted when we last chatted there were still people who thought crypto was going away who talked about it as a tulip bulb phenomenon. Who who expected it to simply disappear. And I think we've moved past then over the last year we've seen significant institutional adoption. We've seen pension funds, endowments, insurance companies, corporations, hedge funds, all moving into the into crypto for the first time. But the thing about it is the reason I'm saying we're not on top of the mountain, is there is still a huge amount of ground to go. It is still extremely early in crypto. It's very exciting. But we have made a lot of progress.
Douglas Heikkinen 01:39
Would you say this part of the industry which is so new to so many unfolded in a positive direction?
Matt Hougan 01:45
Oh, it's been incredible. I mean, the the the positive growth of the industry has happened faster than I ever expected. I was very bullish when you and I got together a year and a half ago. But the progress that we've made has exceeded all of my expectations. Some of that progress has been in terms of the growth of the regulated crypto market. The CME Bitcoin futures market is now the largest Bitcoin market in the US. That's an incredible transition. Some of the growth in the number of institutional players moving into the market just in the past few weeks. We've seen Goldman Sachs, JP Morgan, Morgan Stanley all greenlight their investors to allocate into bitcoin and crypto. Some of it has been on the regulatory front Lord made enormous strides. You know, when you and I talked, there was a great deal of regulatory uncertainty around providing services to crypto companies and all that has been cleared out of the way. So it's been faster and more positive that even the most bullish people in the industry could have expected a year ago.
Douglas Heikkinen 02:49
So when should an ordinary investor consider a cryptocurrency? Or should they?
Matt Hougan 02:57
Ah, well,I think most investors should be considering and evaluating this space. This is no longer something you can ignore, right? crypto is now a $2 trillion market. It's appearing in the portfolio's of some of the most sophisticated investors in the world from the largest hedge funds to endowments to, to pensions. And every investor should consider it. It has wonderful portfolio characteristics. It has high potential returns and low correlations. It's not for everyone, though, it is still risky. It is still early, it is still volatile. It's best used as a small portion of your portfolio. But you shouldn't be, you know, covering your eyes and covering your mouth and covering your ears and pretending crypto doesn't exist. It's part of the capital markets now. Its role is expanding. it's here to stay. And it's appropriate for many investors.
Douglas Heikkinen 03:51
There's so many things going in so many different directions. When is it going to be reined in? Or is this the speeding train that's going to keep going in a bunch of different directions?
Matt Hougan 04:01
Whoo. That's a great question. It has been reined in. If we're talking about regulatory ring fencing and regulatory security. If you think about where kryptos started, it was this grassroots anarchic anti regulatory origin story. And and today, there's extensive regulation around crypto right AML KYC is ever present. crypto brokerages, the SEC, the CFTC the OCC, plenty of acronyms have a significant regulation in the crypto market. So I think it's just growth from here, right? crypto is more than just a new type of currency. A lot of people imagine it as this new type of currency and it is that it's a new global currency. But it's more than that. It's it's a technology that allows money to move over the internet. It's a technology that allows money to be programmed. And these are fundamental advances that aren't going The way I think it's just going to expand from here, will there be more regulation? Of course, there will be more regulation. In fact, the advent of more regulation has been part of what's been driving this bull market. But I do think it just expands from here. I don't think you're putting the genie back in the bottle.
Douglas Heikkinen 05:16
Many people and I use many people at the same time somebodies uses, they assume that we are close to the point of total saturation. Not true, right?
Matt Hougan 05:27
Not even close. We don't even have a US an ETF in the US, Doug, we are still exceptionally early. It's not clear to me if we're in the preseason, or if we've started a game and we're in inning one. But we're nowhere near saturation. The vast majority of Americans have no allocations to crypto. We did a survey of 1000 financial advisors in December just 6% of them were allocating to crypto and client accounts. Now that number is up from a year ago. But it just it still means that nine out of 10 investors of the advisors at the start of this year had no allocation to crypto in any client accounts. So we are beyond early. Maybe we're in the first inning, maybe but I'm not even sure it might still be batting practice.
Douglas Heikkinen 06:13
In my mind might be earlier that well, that goes along with what you'd like to say that crypto has more mindshare than market share.
Matt Hougan 06:20
That's exactly right. Yeah, it's it's incredible. You know, crypto, you take something like Bitcoin is a trillion dollars. That's amazing. That's fantastic. They're single companies that are larger than the entire cryptocurrency ecosystem. It's incredible to me that it occupies so much mindshare. It's on the front page of leading papers. We do webinars and we get 1000s of advisors on them. There's huge interest in it. I think that interest reflects what crypto could be. Right? It could be a five or 10 or more trillion dollar asset class. And I think people recognize that it has that potential and so they are interested in it. But a trillion dollars is a very small market. Again, there are large cap companies that are bigger than the entirety of the crypto market. So it is extremely early there is more mindshare than market share. And I think there's at least the potential not the guarantee, but the potential that that market share grows to match the mindshare and and and I think we're watching that play out right now.
Douglas Heikkinen 07:22
And there's things that we learn every day, like when you mentioned on our pre call, decentralized finance, which is using the ability to program money to disrupt traditional financial services, what the heck is going on there?
Matt Hougan 07:35
This is so incredible. If you think about crypto as moving money onto the internet, what can you do once money is on the internet? Well, you can program it, like you would program a computer. And if you think about a lot of the things that traditional financial services do, all they do is apply if then statements, if you think about what an escrow agent is, all they do is applied if then statement across a transaction, if you think about what a trust is, all it is is an if then statement with a time lock, you know, transfer this money to my child when they turn 26 years old. If you think about a loan, all it is is an evaluation of collateral times creditworthiness transfer the money to this new personal require payment. So much of what the financial industry does can be automated and programmed by software. And that's what decentralized finance is. And here's the amazing thing, Doug, this is not something that is 510 15 years in the future. This is not flying cars. It's not hoverboards. This is something that is here today, I'll give you one quick example. The largest decentralized finance crypto app is something called uniswap. The word uniswap has never appeared in The Wall Street Journal in Barron's in the Financial Times or in any other mainstream media publication. uniswap is a decentralized crypto exchange that's doing the same thing that Coinbase is, but rather than Coinbase has, you know, a couple 1000 employees. It's a centralized company, it's the leading brokerage in crypto uniswap is doing that all with software. The uniswap software is processing about $80 billion in volume a month. That's not quite as much as Coinbase. But it's within shooting distance. And it's doing it with no employees and it's generating hundreds of millions of dollars in fees. This decentralized finance market is the fastest growing market I've ever seen. It's still extremely early, it's still extremely risky, but it's extremely exciting. And if you want to phrase to conceptualize it in your mind, think of it as self driving banks. Finance is one of the last areas of the economy that hasn't been significantly disrupted by automation. Most of finance is still done by humans agreeing to agreements processing transactions, and they do need to be there in all instances, and decentralized finance is going to change that I think it's going to happen faster than almost anyone expects.
Douglas Heikkinen 10:10
Are you having just a blast learning about all this new stuff?
Matt Hougan 10:13
It's so fun. I mean, this is the primary reason that I left a 15 year career to move into this crypto market, I saw that there was a huge potential. And it was just so exciting to learn about the space. And here's the thing. A lot of people are skeptical about what's going on in the crypto market. Once you make the leap from skepticism to interest, and you start digging in and reading these white papers and seeing how this space is progressing. It's just infinitely interesting. There are huge numbers of smart people, smart venture capitalists and great ideas percolating in this space. Yeah, every day I wake up, it's an absolute joy to dig in.
Douglas Heikkinen 10:49
So if you're a financial advisor, and you're not interested in it, you better be because your clients are going to be right?
Matt Hougan 10:57
100% 100% you're going to get questions about crypto, there are more Coinbase customers than Charles Schwab customers, this is a massive phenomenon. It's only growing. And again, whether you want to allocate or not, you need to be educated on it, your clients are going to ask you and if you don't have good answers, doesn't matter if they're positive or negative. If we don't have good answers, they're gonna start looking for a new financial advisor. So it's important for every advisor out there to at least understand what crypto is understand what blockchain is, understand the opportunities and the risks. So you're ready for those client questions when they come.
Douglas Heikkinen 11:36
Let's marry where you were and where you are. What would a Bitcoin ETF mean to the market?
Matt Hougan 11:41
Oh, a Bitcoin ETF would be great. It would do a couple of big things. One, it would make it easy for financial advisors to allocate to crypto for clients. One of the big challenges advisors face is all the ways you can allocate to crypto today are somewhat imperfect, you can allocate through apps on your phone, you can allocate through private funds that don't fit into advisor workflows. Nothing fits into an advisor workflow like an ETF. So it makes it easy for advisors to gain access to the market. That is the best performing asset class in the world, and each of the last 135 and 10 years. So that would be great. And then the other thing that I'm really excited about is it would collapse the cost of accessing this market. You know me I come from a deep ETF background, I love low cost investing. I'm a Cost Matters hypothesis guy. And the costs are still too high in the crypto market. It's just the market is still developing, it's new, it's challenging, etc. an ETF would would be the single biggest factor in driving down the cost of accessing this space. And so I'm very excited for that more investors involved, lower costs, you know, greater regulatory certainty. I think all these things would be positive.
Douglas Heikkinen 12:59
Okay, NFT's. We're seeing some very strange things in the news. The Golden State Warriors just announced they'll create a digital championship ring. Silliness? Pandora's box? What the heck?
Matt Hougan 13:12
Yeah, silliness. But an example of something fundamentally disruptive. And I think generationally important. So let's start with the silliness is a digital championship ring silly. Of course it is, is the $69 million artwork that Sotheby's auction that's just a JPEG silly. Of course, it is. Right is buying an NBA top shot for $250,000. That's just a video of john Moran dunking on someone that you can watch on YouTube for free, silly. Of course it is. These are goofy things. However, they speak to something that is really, really important. The reason we're seeing this explosion of NF e NF T's today. And the reason we didn't see it five years, 10 years or 20 years ago, is that mature crypto enabled blockchains allow you to own digital goods, for the first time in history. In a literal sense, they create digital property rights, you got to think like a database is the first blockchain is the first database that's available everywhere that everyone agrees is true, but which no third party controls. And as a result, it enables you to own a digital good in the same way that you can own a Picasso on your wall or a honus Wagner baseball card. Nf T's are just the first expression of what you can do with digital property rights. And of course, they're a little bit Goofy, often, new disruptive technologies express themselves first in sort of games or silly things. And so I'm not surprised about that. But this core idea behind them the idea enabling them of digital property rights. Think about what digital property rights could mean in the future. It opens have such a large economic space, that it's really exciting. So it's both absolutely ridiculous in certain aspects and extraordinarily exciting at the same time, and you have to hold those two thoughts in your head simultaneously.
Douglas Heikkinen 15:17
So what's beyond the horizon? of d phi? NFT's? What are we going to hear about next?
Matt Hougan 15:27
Yeah, well, first of all, you haven't really heard about d phi, very much. So I think d phi is going to have a moment in the next 12 to 18 months. And it's going to be really, really interesting, significant, risky, exciting, all of those words packed together. As you peer beyond the curtain, I think the one of the next trends you'll start to hear percolating up is the idea of web 3.0. There's a lot of concern about the current iteration of how the internet works, and how data and privacy are held by companies like Facebook or, or Twitter, and how you as a user don't have control over your own self. In the current iteration of the internet. There's very early work going on in crypto on what's called web 3.0, which would flip that on its head, which would, which would allow you to retain your personal control of your data, sell it if you want, don't sell it if you don't want, and what sort of flip the power relationship between entities like Facebook and its users. And I think if you invite me back on, and in three or five years, that term web three will be will be pretty popular, and people will be pretty excited about it.
Douglas Heikkinen 16:38
Three to five years, Let's see there's two mountains, you're climbing, how many big mountains are there?
Matt Hougan 16:46
There's a, lot I mean, this this idea, the core idea behind crypto of decentralizing databases has enormous ramifications. And we're just at the sort of tipping point of that. We're just seeing the early, early applications. All of these trends take longer than people think to play out. Right? How long did it take for email to penetrate everything? How long did it take for us all to get on the World Wide Web? How long did it take all of us to transfer from traditional phones to either avoid phones or cell phones, these things play out over 510 15 years. And so that's going to be true with crypto as well. But it's a big breakthrough. The idea of putting money and other financial goods on the internet is a massive breakthrough. The idea of decentralized databases is a significant breakthrough. And so yeah, there's there's a whole whole mountain range in front of me, but it's exciting to wait in.
Douglas Heikkinen 17:41
How is bitwise participating in all this?
Matt Hougan 17:44
Great question. bitwise exists to help financial advisors and other financial professionals allocate to the crypto market. We're best known for having created the first crypto index fund kind of the s&p 500 of crypto. We also created the first defy index fund. And we provide those funds to advisors so they can help clients allocate into the space. The other things we're working on. We're working on a Bitcoin ETF and we do a great deal of education. I was fortunate enough to co author the CFA Institute's first ever publication on crypto called a guide to Bitcoin blockchain and cryptocurrencies for financial professionals. So whether it's providing education to advisors, or providing beta products to advisors that help them allocate to this space. That's what Bill Weiss is working on.
Douglas Heikkinen 18:34
That's great. Matt, we really appreciate you joining us today. Thanks so much for your time.
Matt Hougan 18:39
Thanks for having me.
Douglas Heikkinen 18:41
You can find out more about bitwise at bitwise investments.com. Please follow us for all the latest updates on Twitter, LinkedIn and Facebook all at advisor pedia. For everybody at the advisorpedia our producer Jakie Beard and the power advice podcast team. This is Doug Heikkinen
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