Crypto ETF skepticism echoes past fears of ETFs themselves: Bitwise CIO

Old financial news headlines once bandied about descriptions of ETFs as “financial weapons of mass destruction” that threatened to annihilate the very fabric of American capitalism, Matt Hougan says.

“There were congressional hearings, literally about ETFs destroying American entrepreneurialism and ending the American dream,” the Bitwise CIO says.

Before the advent of ETFs, Hougan explains on the Empire podcast (Spotify/Apple), people mostly invested through mutual funds, allowing them access to the market just once a day.

This created a “shared collective experience of taxation,” Hougan explains. If an individual sold their mutual funds, all the remaining investors effectively paid taxes on the sale.

“This is a ridiculous idea, but this was the best technology they could develop in 1920.” Nothing improved upon it until the 1990’s, he says, when the ETF was created.

Disrupting the establishment

Problematically, many massive companies had flourished from the enormous successes of mutual funds and traditional bonds trading — “and an ETF threatened all that,” Hougan says. In response to the perceived danger, visions of a “liquidity doom loop” that would implode the broader economy reverberated across financial media channels for years.

Hougan explains that the establishment deeply feared the new financial mechanism for two reasons. “One,” he says, “it was so disruptive because it was going to slash margins and profits and prices.”

“Two, because it was new and people didn’t know exactly how it would turn out.”

People remained skeptical about ETFs, not just for a year or two, but for more than 20 years, Hougan says. Headlines as recent as 2018 echoed the same fearful message of disaster wrought upon hapless Americans by the menacing financial instruments.

The chief investment officer of Bitwise sees the same behavior taking place in Congress today with the crypto industry. “We see congresspeople asking ridiculous questions and talking about Bitcom and mispronouncing names. All of that is a replay to me of what we saw.”

Fortunately, it turns out that the financial doomsdayers of yesteryear were wrong. “An ETF is an evolution in financial technology,” Hougan explains. Fast forward to today and ETFs are now “the mother’s milk of investing,” he says. “It’s how literally almost every American gets access to the market today.”

“It’s a $7 trillion industry. No one questions it. Every major company has come on board. I think we’re going to go through the same journey on crypto.”

Skepticism and fear regarding the crypto industry is beginning to turn, Hougan says, with larger institutions like BlackRock and Invesco getting involved. “In two or three years, there’ll be no more congressional hearings. People will be just talking about how much more efficient this made the market.”

“History always repeats — and it’s repeating with crypto.”

The market has reached a point where it’s now ready for a spot bitcoin ETF, Hougan says. “You can surveil the CME bitcoin futures market. Firms like BlackRock are looking for surveillance sharing agreements with Coinbase.”

“This market is just much more institutional than it was in 2013 or honestly, even when we started pushing for a spot bitcoin ETF,” he says, “which was back in 2018 and 2019.”

“The market has come a long way and I think those manipulation concerns are now solved,” he says.

“We’ll see if the [US Securities and Exchange Commission] agrees in the coming months.”

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