Bitwise CIO: Digital Asset Adoption is Reminiscent of 2000s ETF Growth

There’s a lot of new interest rushing into crypto these days, but anyone still skeptical can take some comfort in lessons from Matt Hougan’s ETF days. Hougan is the chief investment officer at Bitwise Asset Management, which tracks an index of […]


Matt Hougan, Chief investment officer, Bitwise; Source: Bitwise


There’s a lot of new interest rushing into crypto these days, but anyone still skeptical can take some comfort in lessons from Matt Hougan’s ETF days.

Hougan is the chief investment officer at Bitwise Asset Management, which tracks an index of the 10 largest cryptoassets, including bitcoin, ethereum and litecoin. He’s also an authority on ETFs, having covered their rise in the early 2000s – before they got their reputation for providing some degree of safety to investors — and he sees the crypto industry evolving in the same way.

“The difference is that crypto is 10 times more interesting than ETFs, and depending on how it plays out, potentially 10 times more important,” he said.

For starters, the conversations are becoming more focused.

“Three years ago conversations were mostly with young people kicking the tires and the questions weren’t very sophisticated, Hougan said. “Now it’s rare to have a conversation that isn’t serious. We’re on the cusp of a significant acceleration in interest.”

New Institutional Interest 

Bitwise recently asked 1,000 financial advisors in a survey what they think the price of bitcoin will be in five years. Half of them indicated they think the price will go up; 15 percent said they think the price will at least triple to more than $100,000, compared to 4 percent the year before. (And the percentage of advisors expecting bitcoin’s price to fall to zero fell to 4 percent from 8 percent last year and 14 percent in 2018.)

But the number of advisors allocating to cryptocurrencies in client portfolios was only 9 percent according to the same survey, showing a massive disconnect. Despite the rush of new institutional interest, bitcoin still has its skeptics who won’t accept it.

Hougan said there are still massive risks in crypto; that regulators could crack down on it, that technological risk could be adopted into the code of any major crypto asset. There’s also “massive” volatility in the space, and the valuation techniques that exist today aren’t very robust. They’re being developed and researched, but many people won’t become comfortable with crypto until they can clearly and accurately value it.

“People have tried hard over the years to develop quantifiable metrics for creating short-term price targets in bitcoin and other crypto assets, like the stock-to-flow ratio,” Hougan said. “Unfortunately, these measures are built on shoddy foundations and don’t hold up to real analytical scrutiny.”

Still, the number of advisors allocating to crypto rose almost 50 percent in 2020 to 9.4 percent. And the study found 17 percent of advisors plan to either “definitely” or “probably” allocate to crypto this year, which would bring the number of advisors allocating to about 25 percent if they all actually do. 

“This is a conservative bunch of people who manage money for a living and exist to not lose their clients’ money, and they’re they’re rapidly coming around to the crypto market,” Hougan said. “This is going to be one of the most important markets for crypto in the years ahead.”

Early Days

Hougan knows from experience how important it is to be involved in markets that are growing quickly, but where the level of understanding and information — and the appreciation for it — is low, he said. 

He’s seen this transition before, of a new and misunderstood asset becoming a mainstream one. Before he ever learned about bitcoin, Hougan worked at, a website born in 2001 and dedicated to providing news, analysis and education on the then-scary world of exchange-traded funds. Today, ETFs represent a $7 trillion market and are the foundation of most people’s portfolios. “It’s like the mother’s milk of investing,” Hougan said.

“The industry morphed from index funds into ETFs, and ETFs grew from something that people were skeptical about,” he recalled. “They were regularly called ‘weapons of mass destruction.’ There were Congressional hearings where they’d drag representatives of the industry in to talk about whether ETFs were destroying American entrepreneurialism.”

It’s a lot like the early years of cryptocurrency. Bitcoin was born in 2008 but came to mainstream attention for the first time around 2013, when bitcoin-related headlines were dominated by stories about the online black market Silk Road that would have you believed bitcoin is just for criminals operating on an unregulated market; the $470 million of bitcoin that vanished from the then dominant crypto exchange Mt. Gox; and the hunt for bitcoin’s elusive creator, Satoshi Nakamoto.

“It’s so hard to move from there to reality, that people arrive much too late,” Hougan said. In reality, he added, the price of bitcoin “went up 300 percent last year, 100 percent the year before, multiple thousands percent across the last three years, has no correlation to other assets, has had a huge impact on lots of people’s portfolio, has existed for 12 years, trades billions of dollars on regulated markets and is custodied by Fidelity.”

“If you evaluate it as it exists today, and try to recognize that their mind may be anchored on the ghosts of bitcoin past, you’re going to end up fairly bullish,” he said.

Hougan joined as a freelance reporter in 2004, when there were two people working there and it was still called IndexUniverse. The company raised venture capital in 2008 from Credit Suisse, grew to more than 60 employees, bought the URL and changed its name. Hougan became the CEO in 2015, when he left the business through its sale over the next year. In 2018, he joined Bitwise. 

“I thought, ‘This index strategy is the way most investors should allocate to crypto, and this would be a tremendously exciting business industry to get involved with,’” he recalled.

Domino Effect 

Last week Bitwise reported more than $500 million assets under management in the fourth quarter of 2020, up from $100 million in AUM as of Oct. 28.  

In his life before Bitwise, Hougan gave ETF 101 presentations “a couple thousand times,” almost weekly, in webinars and conferences, to help people understand the core underpinnings of ETFs. The concept was new and challenged the paradigms of the time. He also co-authored the CFA Institute’s monograph on ETFs.

Today ETFs are the primary way people invest in the market, he said, and are almost universally heralded for driving down the costs of investing and helping millions of people save and invest better. 

Now he’s helping investors understand the fundamentals of bitcoin, and unsurprisingly, he’s observing similar behavioral patterns.

“There’s a trigger moment where people leap over the chasm from disbelief into grudging belief,” he said. “Once they do it’s a domino, 80 or 90 percent of them get all the way to recognizing the potential for what this is.”

Investing Too Much

There’s a lot of positive energy and momentum in crypto today. Still, Hougan spends time worrying that people invest “too much” in crypto.

Bitcoin’s volatility can lead to bad behavioral outcomes, he said. The history of crypto has multiple examples of very large and fast rising bull market periods in excess followed by significant pullbacks. 

“The future of crypto is one of becoming a true institutional asset existing in a regulated world, so I’m worried about that kind of bull market excess,” he said.

Most investors should have a small allocation to crypto in their portfolios, but those who may have invested more should think about selling some and rebalancing down, he said. 

Bitwise studies show the allocation in most portfolios is between point one and five percent, he said, adding that our clients typically have “low single digit percentages” invested in crypto.

“It’s like cayenne pepper,” Hougan said. “A little bit goes a long way.”


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