Bitwise Asset Management’s CIO weighs in on digital assets’ volatility, return potential, valuation, and what role they can play in a diversified portfolio, as well as why some TradFi holdouts are still skeptical about crypto.
Our guest on the podcast today is Matt Hougan, one of the world’s leading experts on crypto, exchange-traded funds, and financial technology. He’s the chief investment officer for Bitwise Asset Management, which offers several cryptocurrency-related funds and ETFs. He was previously chief executive officer of ETF.com and Inside ETFs. Hougan is co-author of A Comprehensive Guide to Exchange-Traded Funds and “Cryptoassets: The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment Professionals” for the CFA Institute’s Research Foundation. He graduated from Bowdoin College with a BA in philosophy.
Background
A Comprehensive Guide to Exchange-Traded Funds (ETFs), by Matt Hougan
“Cryptoassets: The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment Professionals,” by Matt Hougan and David Lawant, CFA Research Foundation Briefs, January 2021.
The Beginning of Cryptocurrency
“The Bitcoin White Paper Is Now Officially 15 Years Old,” by Pete Rizzo, Forbes.com, Oct. 31, 2023.
“Bitcoin: A Peer-to-Peer Electronic Cash System,” by Satoshi Nakamoto
Crypto Scandals
“What Was the Silk Road Online? History and Closure by the FBI,” by the Investopedia Team, Investopedia.com, June 29, 2024.
“What Was Mt. Gox? Definition, History, Collapse, and Future,” by the Investopedia Team, Investopedia.com, April 23, 2024.
“FTX Crash Is Eerily Similar to the Bernie Madoff Scandal, ex-regulator Sheila Blair Says,” by Matt Egan, cnn.com, Nov. 15, 2022.
Crypto Performance
“Crypto Market Review (Q2 2024),” by Matt Hougan, Juan Leon, Ryan Rasmussen, Alyssa Choo, Gayatri Choudhury, and Mallika Kolar, bitwiseinvestments.com, July 9, 2024.
“Ether ETF Is One Step Away From Approval as Price of Bitcoin, Ethereum, BNB, XRP, Solana, Cardano, Shiba Inu, and Dogecoin Turn Mixed,” by Dan Runkevicius, forbes.com, June 26, 2024.
“What Financial Advisors Don’t Know About Bitcoin ETFs,” Big Picture in Practice podcast, Morningstar.com, June 6, 2024.
“BlackRock’s $20 Billion ETF Is Now the World’s Largest Bitcoin Fund,” by Katie Greifeld and Sidhartha Shukla, Bloomberg.com, May 29, 2024.
“Bitcoin’s Role in a Traditional Portfolio,” by Matt Hougan and Gayatri Choudhury, bitwiseinvestments.com, Aug. 28, 2023.
“The 60/30/10 Portfolio: How to Build a Diversified Crypto Sleeve,” by Matt Hougan, bitwiseinvestments.com, July 22, 2024.
“Five Things to Expect by the Next Halving in 2028,” by Matt Hougan, bitwiseinvestments.com, April 23, 2024.
“The Crypto Market Sell-Off: What Happened and Where We Go From Here,” by Matt Hougan, bitwiseinvestments.com, Aug. 5, 2024.
“Ethereum ETPs and the Path to a New All-Time High,” by Matt Hougan, bitwiseinvestments.com, July 15, 2024.
Other
“Bitcoin Price Surges Above $30,500; But Warren Buffett Still Thinks It’s a Gamble,” by Harrison Miller, investors.com, April 13, 2023.
“SEC Approves Spot Ether ETFs,” by Kyle Torpey, Investopedia.com, July 23, 2024.
“What Is Tokenization?” by Matt Hougan, bitwiseinvestments.com, April 17, 2025.
Amy Arnott: Hi, and welcome to The Long View. I’m Amy Arnott, portfolio strategist for Morningstar.
Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.
Arnott: Our guest on the podcast today is Matt Hougan, one of the world’s leading experts on crypto, exchange-traded funds, and financial technology. He’s the chief investment officer for Bitwise Asset Management, which offers several cryptocurrency-related funds and ETFs. He was previously chief executive officer of ETF.com and Inside ETFs. Hougan is co-author of A Comprehensive Guide to Exchange-Traded Funds and Cryptoassets: The Guide to Bitcoin, Blockchain, and Cryptocurrency for Investment Professionals for the CFA Institute’s Research Foundation. He graduated from Bowdoin College with a BA in philosophy.
Matt, welcome to The Long View.
Matt Hougan: Thanks for having me. I’m so excited to be here.
Arnott: Well, it’s great to have you. We’d like to start out by talking a little bit about your background. When did you start learning about cryptocurrency and were you always positive about it as an investment asset?
Hougan: It’s a great question. It really goes all the way back almost to the beginning of bitcoin in 2009, 2010. At the time, I was at a company called ETF.com. I ended up being the CEO of that company. We had a lot of young analysts on the team who were very excited about this new thing called bitcoin. I actually remember having an hourlong meeting the day that bitcoin crossed $1. I have to admit, at that meeting, when I could have easily gone off and bought 100 or 1,000 bitcoin, I was very skeptical of this new thing. The turning point for me really came in 2013 and 2014 after the Winklevoss twins filed for bitcoin ETF. We were running the largest ETF conference at the time, and I had them down to speak. Their lawyer, who is a close friend of mine, Kathleen Moriarty, the first lawyer on the first ETF ever, took me aside and said, “Matt, this bitcoin thing is not a joke. It’s a very real idea and you should spend some time seriously thinking about it.” From that moment on, which again was in late 2013, I started taking it seriously. Eventually, when I sold ETF.com and looked around for the next big thing to do, crypto seemed like it. It’s been a great run ever since.
Benz: What were the resources that you steeped yourself in to get familiar with the asset class and to feel more comfortable recommending it and talking about it?
Hougan: Yeah, there really were terrible resources, is part of the answer.
Arnott: There was the white paper.
Hougan: That’s right. The good thing about crypto back then was that the community was so small that you could have direct one-on-one conversations with people who were really steeped in the space and had been for years. There were a few books on the topic, a few talks on the topic, but really it was more a first-principles analysis of what this thing is and how it worked and therefore what it might mean for society. I really don’t think it was until 2017, 2018, 2019 that you started to see high-quality resources published on crypto in general, bitcoin specifically. So, it was a lot of first-principles thinking—actually understanding how the technology worked, reading the original white papers, and thinking about what that might mean for the long term.
Arnott: And did you go to some of the bitcoin conferences back in the early days with some of the bigger players and thinkers in this space?
Hougan: No, I wish that I had. I was pretty busy on the ETF.com front at the time. ETFs were booming. It was really more first-principles thinking. It actually reminded me a lot of when I first got connected with ETFs. You all might remember that people were very skeptical of ETFs. There wasn’t a lot of high-quality material around ETFs. They were labeled weapons of mass destruction by the Financial Times. And I dug into the underlying of how ETFs worked and understood at a core level the efficiencies they could bring. The same thing was true here. So, I wasn’t much in the crypto community because I was so focused on my day job. But I did do some underlying reading and thought about the technology at that base layer. And I think once you do and you really understand how it works, there’s a sense of inevitability about its role in the world and how that may play out over years. So that was really what drew me in.
Benz: How about resources today? If I’m a crypto novice or even a skeptic and I haven’t really spent much time trying to understand this universe, are there any go-to books or other resources that you would send me to to understand a little better what’s going on here?
Hougan: I feel uncomfortable doing this, but I’m going to toot my own horn here. Along with a friend, David Lewant, in 2019, I wrote the first-ever guide to bitcoin and crypto for financial professionals for the CFA Institute Research Foundation. And I think that piece still stands up well today. It’s about 64 pages. It talks about the fundamentals of crypto. The reason I like it is it had to run a gauntlet at the CFA Institute Research Foundation of people who liked crypto and people who hated crypto. And as a result, I think it treads that line between what’s good about this new technology and what’s bad about this new technology. I think it’s a good place to start because one thing that plagues the crypto universe is that depending on who you talk to, it’s either the greatest thing since sliced bread and is going to cure all the world’s evils or it’s rat poison squared, as Warren Buffett said, and a tulip bulb and going to zero. And of course, the reality is somewhere in the middle. And what I really like about that document is because of the editorial inputs and having to run through a wall of skeptics, it has a nice balance between pro and con. And fortunately, it’s free. So, if you Google “CFA Institute guide to crypto,” you should be able to download it. And I think it’s a good starting point.
Arnott: Definitely. I’ve read through it a couple times and it’s definitely a very helpful guide to just getting a handle on the whole crypto landscape. I think, if you talk to the average crypto skeptic, they would say, when you say the word “cryptocurrency,” they immediately start talking about fraud, scams, bankruptcies, criminal activity. I’ve heard the argument that the fact that there’s total transparency about these things makes crypto look worse than it actually is. Do you agree with that argument that, these things happen, but the actual frequency of crypto-related crime is not as high as people might think?
Hougan: That’s an interesting argument. I think there is some truth to that. To me, the big reason that people connect crypto and crime in their mind is actually psychological anchoring. I think for many of us, our first interaction with crypto was probably a negative news headline. It was probably Silk Road, which is a famous criminal enterprise where people bought things with bitcoin that was shut down by the Department of Justice in 2013, or it was Mt. Gox, which collapsed, or maybe it was FTX, which was a Bernie Madoff-level traditional financial scam that was in the headlines. But many people’s first encounter is so sharply negative that they anchor on crypto on the far side of reality. And if someone is starting from there, it’s really hard to move them over to a more rational view. You can give them statistics that the percent of crypto used in criminal activity is lower than it is for cash. You can cite them, the Department of Justice, saying bitcoin is no longer a substantially good tool for criminals to use because it’s too easy to trace. But it’s hard to overcome that psychological bias of the first time we heard about this thing.
I think one of the advantages I had, one of the reasons I was open-minded to this, was my first interactions with bitcoin were positive. It was smart people telling me to pay attention to this thing, that it’s more serious than perhaps I was giving it credit for. And those preceded some of those bad actor events. So, I think that’s a big piece of it. And why so many people have a hard time overcoming that skepticism and taking what I think is a rational view of this space, which is it’s not primarily criminal activity. There’s very little fraud, and so on. That’s what the data suggests. Not that there’s none, but that it’s relatively small. So, I think that’s a major driver.
Benz: One thing that comes to mind though is that Amy and I recently had a conversation with someone who does fraud prevention. She writes about fraud prevention and works on it among older adults for AARP. The conversation was about investment fraud. And we asked her where the main issues are. And she was like crypto, crypto, crypto. And I think the point was really scams under the heading of crypto is the issue. But I’m wondering if you can share any sort of tips for people who are concerned about this and want to make sure that they aren’t somehow being defrauded if they are interested in crypto. Are there any red flags that they should be aware of?
Hougan: Yeah. And this is a real problem. In part because the returns in crypto are so high and so volatile that you get these fraudsters promising people high returns. And it’s so tempting that I think a lot of people fall into those traps. So, I do think there are a number of ways to protect yourself. One is that crypto is a place where large, established brands and reputations really matter. So, I would not go with a small upstart or any entity. I wouldn’t interact with any entity that’s domiciled offshore. It’s a space where you really want to use blue-chip companies and interact with them directly. Firms like Coinbase as an example, we now have very reputable names like BlackRock and Fidelity, and of course, Bitwise, that have been in the space for many years and established reputations. That is one good way to go. And two is to just have your normal worries up if someone promises triple-digit returns with no risk. Those just don’t exist in the world. Crypto has historically delivered very high returns, but it also has extraordinary volatility and extraordinary risk. And if you get an offer that doesn’t mention both of those things, then you should run away from it. No one has to invest in crypto, so don’t feel forced into it. And if you do, use a reputable well-established provider.
Arnott: Speaking of volatility, we wanted to dig into some of the performance characteristics of bitcoin and other cryptocurrencies a bit more. Bitcoin, which is the oldest and most established cryptocurrency, has had annualized returns of about 60% over the past 10 years through the end of June. You mentioned that triple-digit returns aren’t sustainable, but do you think even at like a 60% annualized number is that sustainable, or do you think that type of performance will moderate going forward?
Hougan: That’s a great question. I think something like bitcoin is going after a very large addressable market. If you think of bitcoin, many people describe it as digital gold. Digital gold is a $15 trillion market. Bitcoin is $1 trillion, $1.5 trillion asset. So, you could argue to yourself that it could 10x or more just to get level with gold. And I think it could eventually get there. I don’t think we’re necessarily in store for the same kind of returns we’ve seen historically. Bitcoin started at a very low level. There’s a huge amount of skepticism and that’s changed. Right now, BlackRock is in the space. Now it’s very institutionally accepted. So, it’s been derisked to some degree and therefore you’d expect the returns to be lower. But I do still think the asset has a long way to run over the long term. And you could get years with multiple hundreds of percent returns. It’s certainly possible. But you’ll also see significant volatility. I think that’s the important thing. There is still really a lot of room to run. It is still early, but that opportunity is paired with volatility and risk. That’s the core message for people.
Benz: Matt, you’ve referenced BlackRock a couple of times and that certainly was the launch of the BlackRock ETF was a pivotal event in crypto’s history. I’m wondering if you can talk about what you think was the turning point for institutional acceptance of cryptocurrency and what do you think led to more institutional interest in digital assets?
Hougan: I will say that I think we’re still early in institutional adoption of crypto. I think most institutions are still at zero. A few are now sticking their feet in, and it is growing rapidly. I would really point to the ETF as the biggest single turning point. At Bitwise, we’ve been working with institutional investors since our founding in 2017. And what they’ve told us historically is the number-one thing that keeps them from investing in crypto is a lack of regulatory clarity in the space. I think one of the things that the ETF did was bring some regulatory clarity to the space. And I think that’s part of the reason you’ve seen mainstream institutions start to move into this market. But I also will give a lot of credit to large traditional players, like Fidelity and BlackRock, many of which were previously skeptical of the space but spent time studying it and came to realize that it has a role to play in society and so it shifted their stance. But I do think the ETF and emerging regulatory clarity is probably the key piece that has made it OK for institutions to find this asset class interesting.
Arnott: Despite the ETF launches and some institutions dipping their toes into the space, there are also some high-profile investors like Goldman Sachs and Vanguard, Warren Buffett, and so on, who are still very negative about Bitcoin. Is that a case of TradFi being resistant to change or just not understanding the potential or do you think there are other factors going on?
Hougan: I think there are really two factors there. So, the biggest one is TradFi being resistant to change and being unwilling to underwrite this new technology and asset. And again, it reminds me a lot of ETFs. Vanguard was very skeptical of ETFs as an example, and now it’s one of their largest business lines. And we’ve seen that time and time again. It’s hard for people to get their hands and their heads around new things. And I think that’s a big piece of it. The other piece of it that you see Warren Buffett and Vanguard really struggling with is understanding how an asset that doesn’t have cash flow can have value. That’s what Buffett has said is his primary criticism of bitcoin. It’s the same criticism he levels at gold, which is how does this asset that doesn’t have any cash flow have trillions of dollars in value? I think there’s a very good answer to that. I’d say Vanguard will eventually realize that answer, but to date they haven’t. And I think that’s a hurdle that they have to overcome.
Benz: Going back to this narrative of bitcoin as digital gold. Gold has traditionally performed very well as a safe haven during periods of market crisis. But bitcoin hasn’t shared that characteristic. So, can you talk about that, whether you think that that comparison is a reasonable starting point for thinking about the potential role of crypto in a portfolio?
Hougan: Absolutely. I think when you talk about bitcoin as potentially being digital gold, what you’re saying is it has fundamental characteristics in common with gold that are important to society. And those fundamental characteristics are it’s a nonsovereign store of wealth with believable scarcity that people around the world use to park value in it. And I think bitcoin really does offer that. It’s not controlled by any government. It’s a fixed auditory policy. It’s accepted in hundreds of countries around the world. And I really do think it fits that characteristic of digital gold. And what you would therefore expect is that as it matures as an asset, it should be a way to avoid or step out of the risks of monetary inflation that impact other assets. And I think from that perspective, bitcoin has done a great job. Since the start of covid, the US dollar has lost 25% of its value. Bitcoin is up 600% or 700% since then.
So, it’s done a good job of shielding you from the inflation that afflicted us in the post-covid era. It’s not yet playing the exact same role as gold. Gold is often, many people believe a short-term flight to quality asset when people have a panic moment in the market. They may buy US short-term Treasuries or they may buy gold. Bitcoin still has a lot of risk associated with it. So, it’s not a natural place to go hide in the very short term. But I do think it’s playing that long-term diversifying role in a portfolio and that long-term inflation hedge. That’s what I see in the data. And I think as it matures, it will become more goldlike in nature. But that’s a process that will take 10, 20, maybe more years.
Arnott: You mentioned crypto playing a diversifying role in portfolios and it has definitely done that to date. It’s historically had very low correlations with traditional asset classes. But we have seen correlations trend a bit higher in recent years. I think if you look at the most recent 12-month period, it’s about 0.36 versus equities. Do you think those correlation trends will continue to move higher?
Hougan: Mostly no. Maybe incrementally higher versus history. And the reason it would be incrementally higher is becoming part of the financial firmament and it’s attracting more regular flows from professional investors than it did in the past. And therefore, it has a little bit more similarity with traditional capital assets. But if you step back, why does it have low correlations, historically? The reason is that the drivers of bitcoin are fundamentally different than the drivers of stocks and bonds. Stocks are driven by economic growth, by taxation rates, by technological breakthroughs, by geopolitical developments. Bitcoin is driven by education, by advances in regulation, by worries about monetary inflation. These are simply fundamentally different drivers. And as a result, I think the natural state is for bitcoin to be very lowly correlated with stocks and bonds because it’s driven by different things. And that really does make it a really valuable asset from a portfolio construction process. It’s both noncorrelated and very volatile and liquid. And those are three wonderful characteristics to put together from a portfolio construction perspective. It really makes it value add historically in terms of increasing your risk-adjusted returns.
Benz: How about the volatility for the major cryptocurrencies like bitcoin and ether? Do you think that volatility will eventually decline as they move more into the mainstream?
Hougan: Yeah, absolutely. And we are already seeing that. I know bitcoin seems extraordinarily volatile today, but it’s probably half as volatile as it was, let’s say, 10 years ago. As bitcoin and other cryptocurrencies derisk, in other words, as the big existential-style risks are removed from this asset class, which I think is happening at a very rapid rate, you would expect that volatility to decline. That is what we’ve seen over any multiyear period. And I think we’ll continue to see that. It’s never going to be like short-term bonds. But I do think you’re going to see volatility continue to decline. And even at the point where it is now, it’s not that much more volatile, at least bitcoin isn’t. Then let’s say the largest tech stocks in the S&P 500. So yes, I think volatility is on a one-way path downward, even though it’s still relatively high compared with other assets.
Arnott: You mentioned some of the performance characteristics making bitcoin and other cryptocurrencies really valuable from a portfolio perspective. And, if you look historically, it seems like if you test different allocations, the more crypto you’d had, the better your portfolio would have done, even on a risk-adjusted basis, because the returns have been so high and skewed to the upside. So how should investors think about the appropriate size for a cryptocurrency allocation within a portfolio?
Hougan: Yeah, that’s right. Well, I think the answer is unless you have extraordinary conviction. And I would put myself in the camp of extraordinary conviction. So, my personal portfolio has a much higher weight than this. But for investors who don’t have extraordinary conviction, I think there’s a magic dividing line around 5% of the portfolio. As you mentioned, if you put it into a portfolio optimizer, it will want more and more crypto, because the historical returns are just so high that it boosts the risk-adjusted returns all the way up. But something funny happens at around 5% on a historical basis, which is that crypto becomes the primary driver of the maximum drawdown of the portfolio. The maximum drawdown, of course, is the biggest fall from a peak to a trough in what your total portfolio value is. And to me, that’s a really important statistic, because that’s the statistic that investors feel in their gut. And that’s the statistics that makes investors panic. And actually, the single biggest risk in crypto is not technological or regulatory or anything like that. It’s behavioral. It’s investors panicking when the inevitable volatility comes. And 5% puts you into the risky camp, where all of a sudden bitcoin is dictating the volatility of your overall portfolio. You don’t want to do that. I think of it a little bit like hot sauce. Hot sauce is great when you’re eating and makes food taste better. But if you put too much in it, it can be painful for people. So, I think if people keep that sort of framework in mind, they’ll end up in a relatively good place.
Arnott: So, it’s a condiment, not a main dish.
Hougan: That’s right.
Benz: You mentioned risk-adjusted returns. And I’m wondering if you can talk about whether you think the Sharpe ratio makes sense as a metric for bitcoin?
Hougan: I think you could look more at the Sortino if you were being specific to exclude upside volatility. And bitcoin has a great deal of upside volatility. But I think it’s reasonable, particularly when you look at the overall portfolio context. The challenge with just looking at bitcoin idiosyncratically is it has a relatively short track record. So, you don’t want to be tempted into putting too much into it. But I think if you look at it within a portfolio context, I think looking at its impact on the Sharpe ratio of the overall portfolio or the Sortino ratio, if you want to be more specific, I think that’s a relatively good way of understanding its impact.
Arnott: So, if I’m an investor who holds cryptocurrency, should I be viewing it in the context of my regular portfolio alongside traditional asset classes like stocks and bonds? Or given the volatility and the potential upside, do you think people should hold it off to the side as a separate portfolio or more speculative asset?
Hougan: Well, I think the answer comes down to whether you think it has a risk of going to zero. So, if you think it has a risk of going to zero, it’s a good idea to side pocket it and just consider it a speculative bet that may have a great long-term impact on your portfolio. But if you can gain conviction that it’s not going to zero, then adding it to your traditional portfolio transforms it into this incredible asset. And the reason that’s the case is because if you add it to your traditional portfolio alongside stocks and bonds, then you can rebalance your portfolio and that’s what lets you capture the noncorrelated benefits of bitcoin. Of course, as you guys know, if you add noncorrelated assets to a portfolio, but don’t rebalance, it doesn’t actually influence your long-term return pattern very much.
It just smudges it out into gray. It’s only when you add noncorrelated assets and then rebalance that you’re really able to harvest the volatility. That’s where you get what you see when you do historical analysis of bitcoin, which is if you add it to a portfolio, you dramatically increase the returns historically without significantly increasing the volatility of the overall portfolio. I think if investors can get their head around the idea that crypto is not going away—it may go up and down, but it’s not going away—and therefore add it to a traditional portfolio and rebalance that portfolio. It’s arguably, at least on a historical basis, one of the best sorts of portfolio enhancement assets that has ever existed. So, I like it within the traditional portfolio context, but I understand some people like to side-pocket and just let it ride, and I think that’s fine, too.
Benz: To follow up on the rebalancing question, what kinds of threshold should people use? How should they determine when to rebalance?
Hougan: We looked at this and the net result of our study was it didn’t really matter. We looked at monthly rebalancing. We looked at quarterly rebalancing. We looked at annual rebalancing. We looked at tolerance-based rebalancing, where let’s say you decided you want a 1% allocation, and you rebalance if it gets to 2%. Broadly speaking, it doesn’t matter. What I would say is the data suggests just do what you were already doing. Bitcoin, if you strip away all the baggage that surrounds this asset class and Silk Road and BlackRock and this and that, all the psychological baggage, it’s just another asset. And if you put it into a portfolio context and treat it as another asset and rebalance just like you did with other assets, historically, that’s led to great results. That’s not a guarantee it will in the future, but historically, it’s led to great results.
Arnott: I wanted to circle back to the valuation question. You’ve written about various approaches to valuation like the total addressable market, the monetary equation of exchange, Metcalf’s law or the network size, cost of production, scarcity value, and so on. Is there one of these that you think is the most compelling or useful?
Hougan: It’s a great question. The area of research around crypto valuation is a very emerging area and there are a lot of good approaches and maybe some approaches I’m skeptical of. The one that I use the most is just that total addressable market question, which is, we know there’s only 21 million bitcoin. How large is the market that bitcoin is going after? Is it the size of the gold market, which is, let’s say, $15 trillion? Could it penetrate the offshore wealth market, which is another $20 trillion? Could it play a role in international payments? That’s another multitrillion-dollar market. If you add up those markets, you can aggregate up to markets that are $10 trillion, $20 trillion, $30 trillion, $40 trillion. Then from there, it’s easy to see what bitcoin could be if it captures that full marketplace. Then you have to discount back the likelihood of it doing that and the cost of capital. When I do that, I arrive at a relatively high price target, but I find that one to be the most compelling approach. I think it ties into what drives the value of bitcoin, which is it provides the service, which is the ability to store wealth in the digital format without a bank. You can’t pay a fee for that service. To access that service, you have to buy the asset. To me, that means when you’re thinking about the valuation of the asset, think about the addressable market. If it captures that market, this is going to be an incredible investment. If it doesn’t, then it won’t be.
Benz: I wanted to switch back to discuss the bitcoin ETFs. Spot bitcoin ETFs now have about $49 billion in assets as of early July, which is up from about $28 billion when Grayscale Bitcoin Trust was the only fundlike investment option. Has investor interest from individuals and advisors been in line with what you would have expected?
Hougan: It’s been way higher than I’ve expected. I knew the bitcoin ETFs would be popular because we were talking to financial professionals about bitcoin, they had told us time and again that they wanted access in an ETF wrapper, but the level of demand has just been off the charts. As you mentioned, I’ve seen $15 billion of net inflows into these ETFs in the first six months on the market. To put that in context, before bitcoin ETFs, the fastest-growing ETF of all time gathered $5 billion in its first year. These ETFs covering this relatively small asset class have already 3x the historical year-one inflow record for ETFs. It’s simply been off the charts. From one perspective, it’s maybe not surprising. People love ETFs and bitcoin is the best-performing asset in history to this point. That’s a remarkable combination, but I think the scale and speed and growth of these have exceeded almost everyone’s expectations. It’s been pretty phenomenal to see.
Arnott: There’s also been a lot of buzz about the spot ether ETFs that are waiting SEC approval, so there are I think eight in line, including one from Bitwise. Could you give us a quick summary of the investment case for ether?
Hougan: Absolutely. Maybe I’ll just take a detour to explain why bitcoin and ether are different, and then that will drive to the valuation case of ethereum. Every crypto asset is two things: It’s an asset and an underlying blockchain. The bitcoin asset and the bitcoin blockchain, the ethereum asset and the ethereum blockchain. Those blockchains are just pieces of software. Like any piece of software, they can be optimized to be really good at one thing or another. Salesforce is a piece of software that helps us track sales leads and Microsoft Word is a piece of software that helps us edit Word documents. Different blockchains can be as different as Salesforce and Microsoft, and indeed they are. In this case, bitcoin as a software is a really simple piece of software. All you can do with bitcoin is send bitcoin or receive bitcoin or hold bitcoin or do a few very simple if-then statements. It can move money around the world almost instantly, which is incredible, but it can’t jump and sing and dance. Ethereum is like bitcoin in that it can move financial assets around the world instantly, but it can be programmed to do anything. It can be programmed to act like the New York Stock Exchange or programmed to act like your local banker or programmed to act like the Federal Reserve in terms of issuing dollars and money market like-instruments on a blockchain. So, you can program ethereum to do anything.
The reason they have different use cases is because those design decisions make them better at certain things. Bitcoin simplicity makes it the most secure blockchain in the world. And if you’re designing digital gold, all you care about is security and decentralization. So, its software is perfect for the digital gold and monetary use cases. Ethereum is not as secure or as decentralized as bitcoin, but it provides this new platform that we can use to reinvent how finance works. So as an example of that, there are these digital dollars printed on blockchains like money market funds and traditional finance. And that’s a $160 billion market today that I think will go to $1 trillion or plus, because it allows anyone around the world to access US dollars in a safe, secure format. That’s an incredible use. And that kind of use is built on ethereum.
Another example we talk about tokenization, which is the idea that our traditional financial system is incredibly slow. Stocks settle in a day. They used to settle in two days. Bank wires can take multiple days. What if we could tokenize that on the blockchain and instead of stocks settling in a day, they could settle in a second. Those sorts of tokenization exercises are all being built on ethereum. So, the economic case, the reason to invest in ethereum is you think that blockchain technologies could reinvent how money moves around the world, how finance is conducted around the world. All of that is being built on the ethereum blockchain. The case for bitcoin is this case for digital gold. I think most investors are just going to buy them both. I think most investors are going to treat this like any other asset class where you don’t buy one stock, you don’t buy one bond, you don’t buy one commodity, you buy a basket. I think most investors are just going to get exposure to both bitcoin and ethereum, but they are very different. I know a lot of people lump them together. They are extremely different assets and extremely different use cases.
Arnott: It seems like from what I understand, the bitcoin blockchain is fairly simple and basic, whereas the ethereum technology might have much more potential.
Hougan: That’s exactly right. And the bitcoin blockchain doesn’t change very much. Again, if you’re worried about security, you’re not going to upgrade your software every few months. The ethereum blockchain changes dynamically—massive technological upgrades every year. It is a very different, exciting, complex ecosystem. Ethereum as an asset also has cash flowlike characteristics. When you use this blockchain, you pay fees in ethereum. So, the ethereum blockchain is generating billions of dollars of revenue. They really are very distinct offerings. I expect their correlations to fall over time, so there’s actually going to be a correlation benefit to holding both of them in a portfolio. And, they are both really exciting.
Arnott: So, if you’re buying bitcoin and ether through an ETF, does that run somewhat counter to the whole idea of decentralization that has been so important to cryptocurrency? If you’re buying an ETF, is it no longer a trustless system and you have to have trust in the asset manager and the custodian?
Hougan: I think that’s true to a degree. And there is a smidgen of irony in the idea of taking this trustless decentralized asset and wrapping it up in a traditional financial wrapper. But the reality is that doing that doesn’t change anything fundamentally about the bitcoin network. The bitcoin network is still fully decentralized. It still allows you to custody your assets without relying on any institution if you want. And there are many people who value bitcoin’s core self-sovereignty values. That’s what’s really important with them. The ETF doesn’t interfere with that. But there are other people who just value the use case of bitcoin as a nonsovereign store of value as a way to protect yourself against monetary inflation and want to make that investment. And for them ETFs are a great wrapper. I think the analogy here indeed is to gold.
People love gold because you don’t need to rely on a government to assure gold’s value. And there are lots of people out there who hold gold bars and gold coins. But at the same time, many people want to own gold in their portfolio, and they use an ETF to do that. And there’s actually a really fun statistic about gold that I think we’re going to see in bitcoin, which is when the gold ETFs launched, many people raised these same concerns. And you said you’re financializing gold. But actually, what happened after the gold ETF launched, is billions of dollars flowed into the ETFs and sales of gold bars and coins to individual investors rose at the same time. And the reason for that is more people accepted gold as an investment. Some people wanted to do it in an ETF. Some people wanted to do it the old-fashioned way. And actually, both of those votes rose over time. I think we’re going to see the same thing in bitcoin. But the bitcoin ETFs are opening up bitcoin to hundreds of millions and possibly billions of people over time. They’re bringing bitcoin into the mainstream. They’re bringing more people into the bitcoin ecosystem. Some of them are going to want to buy these ETFs. But I suspect that you’ll see a rise in the number of individuals who are buying bitcoin the traditional way and self-sovereignly holding their assets at the same time. So, I actually think it’s additive to the ecosystem, even if I recognize that there is this superficial irony to it, which we have to admit is there.
Benz: It looks like about eight of 10 of the bitcoin ETFs use Coinbase as a custodian. Do you think there’s any risk there?
Hougan: I don’t think there’s any meaningful risk there. Custody is a fairly commoditized service in the crypto industry. It’s important you have a high-quality, regulated custodian with insurance in place. Coinbase certainly fits that model. I think you’ll see this custodian mix diversify over time as the space matures. So, I don’t think there’s any meaningful risk there. Every custody setup is individual, and it’s not like Coinbase is holding all of the ETFs together in one vault. They have individual custody relationships with each entity. Often actually those custodial relationships have multiple wallets. So even Bitwise’s ETF with Coinbase, the bitcoin is fractured into multiple wallets. So, from one perspective, it looks like one big thing, but it’s not like there’s a hole in the ground with everyone’s bitcoin commingled. It’s individualized and segregated and we feel really confident about Coinbase as a custodian.
Arnott: I wanted to zoom out and talk about some other parts of the crypto landscape. Are there any other cryptocurrencies besides bitcoin and ether that you think are worth investing in? Or is it a case of winner takes all for the first movers?
Hougan: The third-largest asset, solana, is really interesting. I think if you look at bitcoin and think about bitcoin as the leading monetary asset in crypto and as digital gold, it has a nearly unassailable lead in that space. The network effects are so large, the security effects are so large, it’s really hard to imagine another coin challenging bitcoin to be the digital gold of the crypto world. When you look at ethereum and it’s this technological platform enabling tokenization and stable coins, that’s more like a traditional technology space. And we know that in the early days of technological developments, leaders don’t always win. Sometimes they do. Sometimes you’re Apple and sometimes you’re Amazon, but sometimes you’re MySpace.
And the third asset, the third-largest asset in crypto is an asset called solana, which is a challenger to ethereum. It’s faster and cheaper, easier to use and more centralized than ethereum. And I think it offers an interesting design space. I’m enough of a Vanguardian Bogelite to value indexing and diversification as a core value. And I think solana would be a great thing for investors to add to portfolios as a hedge in case it wins the battle with ETH. The challenge for that is, well, it looks likely that we may get an ethereum ETF; we’re a long way from a solana ETF. There are other assets as well. Bitwise’s first product, our flagship product, is the world’s first crypto index fund. And we built that as an offering for investors because this is a new, nascent and fast-developing space. I had a Betamax growing up as a kid—that didn’t work out that well. I used to have a Blackberry and even though I still miss the keyboard, we don’t use those anymore. So, I do think there’s a case to be made for just indexing this space. But if I were to pick a third asset beyond bitcoin and ethereum, I think solana has a real community, a real shot at mattering in the world.
Benz: You referenced the number of small players that may not fare as well. So, if you look at the data on CoinMarketCap.com, there are more than a thousand cryptocurrencies that have little to no trading volume. Why is there such a high failure rate?
Hougan: It’s like any startup. Any startup world, you have a few winners and a few people who do OK and then a huge number of failures. And that’s particularly true in any space where there is a strong network effect. If you look at the social media space, there are a few giants and then a few midsized players. And then history is littered with startup failures in the social media space because it’s hard to gain the traction to vault into the big leads and overcome their network effects. The same thing is true in crypto. It’s trivially easy to start a new crypto project and launch it into the world. And I love the entrepreneurs who are trying to innovate the space and come up with new ideas. And every once in a while, one of them hits. Solana, which I just mentioned, was a startup idea that had a new technological design that was unlikely to succeed. But they tapped into something important. They captured a community and look at them now. They’re the third-largest asset. They’re worth billions of dollars. There’s a huge number of developers and users. They’ve made it to the big leagues. But behind solana, there are another, 100 that failed. That’s just a natural part of any startup economy.
The difference here is that investors can access these startups in their earliest phases. We can’t typically access pre-seed software startups in the traditional world. But in crypto, you can access pre-seed-stage startups and you can see them trade and be valued on an intraday basis. And so, we see the failures. These failures exist in any startup ecosystem. They’re a natural part of the space. Just like most investors don’t invest in pre-seed startups, most investors shouldn’t invest in micro-cap crypto assets because it’s incredibly hard to find the one that will win. And the failure rate is high, and the fraud level is high. Most investors should focus on the large caps, just like they do in their traditional equity space. It’s actually no different.
Arnott: And alongside legitimate cryptocurrencies that are startups but end up failing, you also have the proliferation of meme coins, things like Dogecoin, Shiba Inu, Dog in a Cat’s world, probably hundreds of others. Do those meme coins just feed into the narrative that cryptocurrency is a joke or a Ponzi scheme that doesn’t have an underlying value?
Hougan: Yes. Absolutely. I think they speak of something interesting in society, which is the importance of online communities, the power of those communities. And they speak to something interesting about crypto, which is that they allow online communities to coalesce around financial assets and interact in a financial way. But yeah, mostly they’re a distraction. Crypto is a really important technology and do really amazing things. If you think about it from a 30,000-foot level, on the ethereum or bitcoin blockchain, I can move $1 billion and have it settle in a few seconds anywhere around the world. It can move money faster than JPMorgan, even though there are no employees of bitcoin and no employees of ethereum. It can move money faster than the fastest financial institutions in the world. That’s incredible. It’s an incredible breakthrough. It does amazing things. And so, yeah, these goofball meme coins distract from that. They create a casino atmosphere. They go up and they go down. And that’s really, to one extent, it’s unfortunate. Most investors should just ignore that and focus on these large account assets. That’s where the real technological breakthroughs are.
Benz: You referenced the ability to move money around using bitcoin. But do you think there’s still a valid use case for bitcoin as a medium of exchange and store of value? To date, it’s been too volatile to fill those roles.
Hougan: Well, I would argue that it’s done a great job as a store of value. I mentioned earlier that the value of the dollar has fallen 25% since covid and bitcoin is up hundreds of percent. I think it’s done a pretty good job of that. It’s not a medium of exchange right now. I do think there is a world where it has that use case in the future. If you think society is moving to a multipolar world, and we do see countries around the world trying to move away from settling international transactions with dollars. We see Russia, pushing ruble-based transactions. We see China wanting to settle transactions in yuan. We see the Middle East moving away from the petrodollar. I can imagine a world where international transactions want to take place over a nonpolitical currency where two countries can’t agree to use dollar-based rails, or yuan-based rails, or euro-based rails. And they just want to opt out and use a neutral rail. Bitcoin is really the only viable neutral rail that could fill that role. So, I wouldn’t write off its use as a medium of exchange long term. If it continues on this trajectory of moving from an obscure asset only owned by cipher punks and people on the edges of society to today, an emerging mainstream asset where BlackRock is building a huge business in it to tomorrow where it’s used for international transactions between two entities that want a neutral currency as opposed to a political currency. I think that’s a believable story. Are we there yet today? Of course not. But I can imagine us getting there in the future. We seem to be on a track that would lead us in that direction. And I don’t think the market is properly accounting for the fact that, that’s to my mind a real possibility of where this could go.
Arnott: So maybe we can squeeze in one more question here. What do you think are the biggest risks or obstacles to more widespread adoption of cryptocurrencies as an investment asset?
Hougan: I think the biggest risks are either behavioral or regulatory. The biggest risks are all human. I see a very few concerns about the technology of bitcoin or the technology of ether or the technology of solana. These have been working for years and decades. They’re incredible technologies. What I worry about is people mucking it up. So, could we see negative regulation that slows down the adoption of bitcoin and crypto? We absolutely could see that. The thing I would say, though, is there’s a flip side to that, which is if we see positive regulation that comes to support crypto’s role in the mainstream of finance and the mainstream of society, there’s an equal and opposite upside to that equation. But the biggest risks in crypto are the human risks from regulators mucking this up or investors acting on their worst behavioral impulses and chasing crypto when it goes up or selling crypto when it goes down, instead of adding it to a portfolio from a traditional asset-allocation perspective in a small amount and rebalancing it over time.
Arnott: Well, Matt, thank you so much for being here with us today. This whole field is large and complex area with a lot of moving parts. So, it’s been great to get your perspective and insights.
Hougan: Thanks for having me. I’ve really enjoyed it.
Benz: Thanks so much, Matt.
Arnott: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcast.
You could follow me on social media @Amy Arnott on LinkedIn.
Benz: and @Christine_Benz on X or Christine Benz on LinkedIn.
Arnott: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.
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