Matt Hougan, chief investment officer of Bitwise Asset Management. Photographer: Jordan Vonderhaar/Bloomberg
© 2022 Bloomberg Finance LP
Matt Hougan is the chief investment officer for Bitwise Asset Management, a provider of cryptocurrency index funds. On January 11, Bitwise launched its spot bitcoin ETF, the Bitwise Bitcoin ETF (BITB). It currently sits fifth in the “Cointucky Derby” with over $2 billion in assets under management. On March 28th, the firm filed S-1 and 19-b4 forms with the Securities and Exchange Commission (SEC) to list a spot Ethereum ETF.
A veteran of the crypto investment space, Hougan and I discuss his reaction to BITB’s and the other spot ETFs’ lightning-fast start and whether they will continue post-halving. We also touch on several other topics, such as how institutions think about an Ethereum ETF, what is happening in the world of NFTs, and which under-the-radar projects are catching his eye.
Excerpted from Forbes CryptoAsset and Blockchain Advisor. Subscribe now to leading insights into how to navigate the crypto market.
Forbes: Bitwise’s Bitcoin ETF has over $2 billion in assets under management. Are you seeing any interesting flows or trends?
Matt Hougan: The flows have vastly exceeded my expectations. I spent 15 years in the ETF industry as CEO of ETF.com. I watched 5,000 ETFs launch. These [spot bitcoin ETFs] are the fastest growing ETFs of all time by a large fraction. I believe the fastest growing ETF prior to these was the Nasdaq 100 ETF (QQQM), which went from zero to $5 billion in one year. These ETFs have pulled in net $10-plus billion in under two months, and that’s incorporating the outflows from GBTC. So they far exceeded my expectations as a class, and I’ve been very pleased that Bitwise has gotten escape velocity.
Compared to BlackRock we are a small asset manager; we manage more than $3 billion, which is a lot in crypto, but very small in the traditional world. But it’s been nice to see that we’ve pulled in billions of dollars—that there are investors who want to allocate to an ETF that’s run by crypto specialists, that donates money to core developers, that is crypto native. That clearly may not be the dominant way people are allocating, but it’s a lane that a substantial number of people are allocating.
In terms of who is allocating, with ETFs it’s hard to know exactly. They buy the ETF through their brokerage account or they trade it online, and as an issuer you don’t know the same way you would with a mutual fund until the 13F reports come out at the end of the quarter or you send tax forms. I can tell you anecdotally the groups that we know are buying it: retail investors; independent financial advisors—what many people call RIAs (registered investment advisors), which are distinct from a Morgan Stanley advisor, which are called wirehouse advisors; so people who run their own shop and can make their own decisions are buying it; hedge funds; venture capital funds; family offices; and we at Bitwise had our first corporate begin allocating to BITB last week.
What’s surprising in that mix? Probably a few things among the advisors who are buying it—they’re buying it in a larger allocation than I expected. Historically they used to buy a 1% sleeve and 2½% of the portfolio appears to be the more common allocation. I’ve certainly been surprised by the adoption from hedge funds and VCs and corporates—that was not a group I expected to come in as fast, but it’s happening.
Forbes: Do you have any sense of the percentage breakdown between RIAs and individual retail investors versus the more algo type trader?
Hougan: It’s really hard to say at this point. I do know that every day we have advisors who manage hundreds of millions of dollars buying our funds because we have a distribution team that talks to them and they tell them that they bought our funds. I was recently at a dinner with a bunch of advisors and 7 of the 10 people had bought our funds.
Forbes: What are these conversations like?
Hougan: There are things that the conversations are no longer like, which I find interesting. There’s no longer much discussion about whether it is a Ponzi scheme or for criminal use. There’s no longer much discussion of environmental impact or whether the government ban bitcoin or tether. Many of the classic items have disappeared. What remains is how do you differentiate from BlackRock? How does BITB differ from IBIT (iShares’ bitcoin ETF)—that’s usually the fund people pick. Some advisors still are wrestling with why bitcoin has fundamental value. That’s the most hard-hitting question. Interestingly very few advisors ask about price. I find that fascinating because from my perspective, you would think advisors are worried that they’re late—that bitcoin is already trading at $72,000 and they’ve missed the boat.
Forbes: Do advisors think they missed their shot?
Hougan: I would have expected that and, of course, I don’t think they have. I think bitcoin is 10% penetrated into the gold market and there are much bigger markets for it to go after. But I would have expected that question; we have talking points and slides to cover that question and provide context, and I’m not getting it at all. I think what that speaks to is maybe a recognition that this just happened, and we have years to go. What I’m taking from these conversations is that many advisors were looking at bitcoin rise from zero to $50,000 and wondering which of two trajectories it was going to go on. Either it was going to trace a parabola back to zero or it was going to accelerate upwards to a lot. Michael Saylor has an old saying that bitcoin’s either worth zero or a million dollars. That bitcoin at $72,000 makes no sense. It’s not big enough to matter. It’s not small enough to be irrelevant. I’m intuiting that advisors feel the same. Now that it’s no longer tracing this parabola to zero, they think the upside is significant. They know that most institutional money hasn’t come into the market yet.
Forbes: SEC Chairman Gary Gensler’s statements right before bitcoin ETFs started trading were pretty harsh. Do you get questions or concerns that if advisors allocate, they might be upsetting the most powerful securities regulator in the country?
Hougan: That’s a great question, but no. I think that statement was so clearly sour grapes that people dismissed it. In the end, having BlackRock in the market quiets that down a great deal. When you have Larry Fink on CNBC saying good things about bitcoin and when they have $10 billion in the market, I think a lot of those regulatory concerns go away.
Forbes: We are less than a month from the bitcoin halving. Are you getting any sense of RIAs trying to get in before that occurs?
Hougan: I think they’re asking about the halving because it’s such an obvious next catalyst. Many of them want to get in ahead of it. I’d also add that many of them right now are looking at bitcoin miners, which have performed terribly, and are wondering if there is a unique opportunity in that space.
Forbes: How do you see this demand surge coinciding with the halving’s supply reduction?
Hougan: The demand surge right now is more important than the halving. The halving will remove $10 billion in annual supply. The ETFs pulled in $10 billion in net new flows in the first two months. So at this pace, the ETFs are the more important thing, but of course, we don’t know if that ETF demand will continue, whereas we do know the halving will occur. There’s such a demand versus new supply imbalance. The ETFs are buying, let’s say 8,000 to 10,000 bitcoin every day, and the miners are producing 900, soon to be 450. So as long as that is true, as long as there’s a 10 to one difference there, the price has to go up until long-term holders agree to sell.
It is just simple economics. Where do long-term holders agree to sell? They obviously agreed to sell at all-time highs because we bounced along at all-time highs for a while, and I think there’s a clear behavioral explanation. A lot of people were waiting for all-time highs and then they were willing to sell. Now we’re through all-time highs. If we stay through all-time highs, I think it may be as simple as thinking about the next behavioral cliff, and the next behavioral cliff to me is a $100,000 bitcoin. I suspect there are a lot of people who want to sell at $100,000 bitcoin. Whether demand can exceed the supply that will come on market at a $100,000 bitcoin, I don’t know. And after a $100,000 bitcoin, where would the price settle out? I think that’s impossible to say, but I do think there is, not a guarantee by any means, but a relatively clear path up to the $100,000 level because I think this ETF demand will be sustained. We don’t even have the wirehouses, institutional consultants or pensions investing yet. I think that’s all going to happen. So I think this time it may come down to something as simple as thinking about the behavioral landscape of the market.
Forbes: Are you having any conversations about ether spot ETFs? Editor’s note, Bitwise filed for a spot ether ETF on 3/28.
Hougan: We’re very interested in ether spot ETFs. We intend to be a player in that space and a big player. I think the market’s consensus that it will happen in May is possible, but unlikely. I feel very confident we’ll get an ether ETF. It’s hard to get financial advisors to think about Ethereum right now. We just went through the Dencun upgrade, which in my mind opens the world to a Cambrian explosion of incredible applications and is a massive deal, and it hasn’t come up once in conversations over the past week, and I’ve been on the road all week. It’s just hard to get people to focus past bitcoin at this point from professional investors.
We’re a research-driven filing firm. With the bitcoin ETFs, we sent in 400 pages of academic research. That’s how we do it; that’s our MO. We’re conducting research in the Ethereum space, and I will say that the data looks good, so we intend to get there and file. We just haven’t gotten to it yet. Make no mistake, we think eventually investors, advisors, even those that are coming into BITB, will want exposure to more of the crypto market. We think that’s a natural pathway that crypto investors have followed for 15 years. They start with bitcoin and then they want exposure to other things. I think Ethereum will be very attractive. I think the ether ETFs will be more successful if they launch in 12 months than if they launch in May. I know that sounds goofy, but I think TradFi is still digesting bitcoin and if you give TradFi time to get comfortable with bitcoin and crypto, they will be ready for the next thing. But if you shove it down their throat in May, I’m not sure they will be. Part of me hopes that it’s December or something like that because I think that would be better for the market.
Forbes: I know that the ether futures ETFs haven’t remotely seen the level of uptake that BITO has. Is there anything else you think is worth sharing about that and how that might fit into this whole calculus?
Hougan: I do think they launched a nadir of interest in the market and that influenced that, but I think that’s instructive. TradFi is just wrapping its head around the fact that bitcoin isn’t used to buy coffee and is still interesting. It’s a step to go from that to thinking it’s interesting that it’s a complete blockchain where you can build applications on it and it has a unique burn mechanism. I think we need time to digest. I think the Ethereum futures ETFs are a proof point in that. But another proof point is the conversations that I’m having every day. They’ll be successful if they launch in May; they’ll attract hundreds of millions of dollars or a billion dollars. But I think if they launch in December, they’ll be even more successful.
Forbes: I want to go a little bit further into ether. What do you think about the differing value propositions of ether versus optimism versus arbitrum versus stark, especially post-Dencun? How should investors think about it if they want to get full exposure to the Ethereum world?
Hougan: I will give how I think about it as an investor, which is that I have extraordinary confidence that the Ethereum ecosystem will grow. That’s the end of my confidence barrier. I know a lot about Layer 2 solutions and about fee tiering and about burn mechanisms, but I have a hard time imagining what the future will be like three years from now when there are a hundred popular real world decentralized applications that people are using and where the economics will flow. So the best way to approach that would be to own them all, which would be a great product for what it’s worth. I’m somewhere between embarrassed and excited with the fact that Bitwise doesn’t have one, because I do think that would be a great product. I think anyone who tells you they know exactly where the value will accrue or even who will be the winner amongst the Layer 2s, is just wrong.
Forbes: What is your read on the NFT market right now? One of the things I’ve noticed is that the Pudgy Penguins floor price surpassed Bored Apes, which is an interesting inflection point given how big Bored Apes are in popular culture.
Hougan: I think there are two things going on in NFTs that make them interesting. One is you can think of them as a derivative of crypto wealth. They’re typically a late-stage derivative of crypto wealth in the cycle. People build up wealth with the rise of bitcoin, ether and other crypto natives and then they look for ways to use that wealth. One of the ways they do it is investing in social symbolism or community objects. I think NFTs benefit from that, and they’ve been doing well. I mean, the fund [Bitwise Blue-Chip NFT Index Fund] is up 13% in the last month, more than 30% this year. That goes against the narrative that NFTs are dead.
Forbes: But the fund is down from where it started.
Hougan: It’s down 52%. But I think NFTs are a late-stage crypto cycle investment. I expect wealth to flow into NFTs. The second thing that’s happening is the projects are getting better at thinking about their intellectual property. I think one of the reasons Pudgy Penguin has been doing well is because they are thinking about how to extend their IP through toys that are sold in Walmart, and other applications. I think the NFT industry is growing up, which is neat, and I think it belies the idea that it’s dead. I think it’ll do well this cycle. We’ve closed a few funds over the years, but we haven’t closed this one because we think it has a place, particularly in late-stage markets, and we think it’ll attract interest there.
Forbes: I want to talk about your equity products, BWEB and BITQ. What’s the difference between the two?
Hougan: BITQ is a way to get direct crypto exposure. It’s mostly miners and Coinbase and MicroStrategy, etc. BWEB has more companies that are ancillary building on blockchain.
Forbes: We talked about miners a little bit earlier. How are you approaching the mining space? Are there any expectations to rebalance or rejig your portfolios, either BWEB or BITQ before or after because of this halving?
Hougan: We talked about this binary outcome for bitcoin, it either gets bigger or it goes to zero. I think the same thing is true historically around miners and the halving. If you look at the revenue of publicly traded miners in the year after the previous halving, it went up substantially because the rise in price and the fact that some people dropped out of the space allowed them to be more profitable. I think the same thing is happening here. Price going up, etc. What you have to worry about as an investor is will the miners survive? Are they overleveraged? Is their average cost of mine too high? If they can survive, then I think you should be biased to assume that they’ll do well, particularly outside of the publicly traded miners, I don’t necessarily believe that private mining firms are extremely well capitalized and not levered, etc. So I suspect there’ll be some entities in the mining space that don’t make it when the revenue gets cut in half, but I think if you make it, I think they’re going to do well. I think the stocks have been unfairly punished. Amongst the publicly traded miners, most of them have pretty clean balance sheets and relatively low cost of mine.
I think for most of them, their cost to mine is well below $40,000 and for many of them it’s below $25,000. And you can double that and still be profitable. Our strategies are index-based that allow the market caps to determine what gets included. So we’re not going to actively rebalance, but if I were advising an investor, I would say just look at the balance sheet, see if they’re overleveraged, and look at their average cost to mine and double it and see if they’re still profitable. If yes, I think it’s a pretty good opportunity. You look at something like Riot, it’s down 25%. Bitcoin’s up 75% this year. It’s a 100% spread this year. It’s not going to disappear. So I think there’s some attractive opportunities in that space.
Forbes: What are your thoughts on MicroStrategy? I’ve spoken with Michael Sailor, and he talks about how the stock is a way to get a levered exposure to bitcoin and that there are no fees to own MicroStrategy compared to other things. I’m surprised at how much money is going into this stock when now there are perhaps easier, more clear-cut alternatives. What are your thoughts on MSTR?
Hougan: I love MicroStrategy. We own a lot of it in BITQ. I think it might be our top holding. Obviously Michael Saylor has done a great deal. It’s fun to watch him raise convertible bonds while the ETFs take inflows. It’s his way of taking inflows into MicroStrategy. Obviously there’s demand. I forget what the interest rate was, but it was absurdly low for an asset that Moody’s, I’m sure, would rate as extraordinarily risky. So it tells you that there’s huge pent-up demand. I think investors can do well investing in MicroStrategy. I would say the risk, particularly with the high short interest in the stock, is that you can see moments where it trades to really high premiums to the bitcoin that it holds. I think that’s probably not a great time to buy. And you can equally see moments where it doesn’t. Then I think Michael Saylor’s commentary about it being a levered play on bitcoin is reasonable, but there is some extra volatility in MicroStrategy shares that makes it more complex. It’s not like a GBTC situation, but it makes it more complex, and you have to be aware of those premiums before you buy.
Forbes: Are there any other unappreciated ideas or projects you have an eye on that you think my readers should pay attention to?
Hougan: I think the market is way underestimating the importance of Dencun and what it means to the Ethereum ecosystem. I think by a factor of 10 or 20 or 30. I don’t mean that in terms of a price multiple. I mean that I think it’s really hard to overstate the fact that three years ago you were paying $5 to do a transaction and now it’s zero. It’s sub-penny. When you think about the businesses you can build if it takes $5 to do something versus the businesses you can build if it takes less than a penny to do something, it’s not like twice as many–it’s a thousand times as many. It’s the internet at like 52K and the wheedling noise versus 5G. It is a complete game changer, and I think the market hasn’t recognized that.
Outside of that, what are some smaller cap projects that we love? Many of them have run up so much that you have to be cautious. We think Render is really interesting. We also think Immutable is a pretty interesting project in terms of what it’s doing to the gaming ecosystem. I think it’s highly likely that we will see a large number of very successful crypto games emerge that are actually very playable. I think Immutable X is the way to play that trend. I also think it’s a really great team. (We don’t own either Render or Immutable.)
Forbes: Anything else you would like to add?
Hougan: The big thing I’d like to emphasize is I think we’re still early. I’m about to speak at the Barron’s top independent advisor summit. For the past two years, I’ve spoken at the pre-conference. Now I’m speaking on the main stage, which tells you something about bitcoin. These are the hundred largest independent advisors in the room, and I doubt that most of them have exposure. I bet when I come back a year from now, most of them will.
Forbes: Thank you.
