On The Brink with Castle Island - Matt Hougan (Bitwise) on the prospects for a Bitcoin ETF in 2021 (EP.160)

Episode Date: December 21, 2020

Matt Hougan, the Chief Investment Officer at Bitwise Asset management joins the show. In this episode we discuss: Bitwise's new OTC trust product "BITW" The state of play for cryptoasset adoption in the RIA channel The evolving thesis for Bitcoin and other cryptoassets Prospects for a Bitcoin ETF in 2021 To learn more visit Bitwise Asset Management and follow Matt on Twitter. Sponsor notes: Withum is a forward-thinking, technology-driven advisory and accounting firm committed to helping our clients be more profitable, efficient and productive in today's complex business environment. Our Digital Currency group is proud to partner with members of the cryptocurrency community. Get to know us at withum.com/crypto.

This episode is brought to you by Witham. Witham is a nationally ranked public accounting firm providing advisory tax and audit services to businesses on a local and global scale. More on Witham and their fast-growing crypto asset practice later in the episode. Today on the podcast, I sat down with Matt Hogan, the chief investment officer of Bitwise asset management management, a company building crypto asset investment products focused on the RIA channel. They're also a portfolio company of Castle Island Ventures.

Matt has a rich history in the financial services world, having, previously been the CEO of ETF.com and inside ETFs. And I really don't think there's anyone in the industry who's more versed at the intersection of public blockchains, investment products, and the RIA channel. So it's great to catch up with Matt, have him back on the podcast. We talked about Bitwise's recent OTC Trust product launch. We talked about the state of institutional adoption. And we also talked about the prospects for a Bitcoin ETF in 2021. This one was a lot of fun. So without further ado, here's my conversation with Matt Hogan. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated.

The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin. Bitcoin. Matt, so thanks so much for joining the podcast today.

Thanks for having me on. I'm excited. So we've had you on the podcast before for a quick hit, but I'm excited to do a full-blown episode with you. For those who maybe didn't listen to the first episode, could you give us a background on yourself and the path that led you to Bitwise? I came out of the ETF industry. I was the CEO of ETF.com, built the first ETF rating system, wrote the CFA's guide to

ETFs, built the largest ETF conference, did that for 15. years from a period where people thought ETFs were weapons of mass destruction to the point today where their mother's milk and the foundation of most people's portfolios. After I sold that business and didn't earn out, I looked around for the next great disruptive financial technology where I thought people were underestimating it, where people didn't understand it, where the quality of information wasn't great. And crypto was the natural place. It's a once-in-a-generation technological breakthrough. I still think the level of understanding and appreciating. is too low. And I happened to find Bitwise, which had created the first crypto index fund. I'm

obviously a big fan of indexing. That approach appealed to me the ability to talk to financial advisors, which was the target market for Bitwise appealed to me and the team appealed to me too. So I've been in this for three years and excited about where we are and where we're going. That's awesome. What was it about crypto that originally made you excited? Was there kind of a rabbit hole moment around a particular asset or what made you kind of predisposed to even being interested in this? In 2013, when the Winklevoss twins first filed their Bitcoin ETF, we had them down to speak at our conference. And I thought it was ridiculous. I invited them down because there were these big celebrity names. I thought people in the audience would enjoy it. I thought it was

ridiculous. But here's the thing that got me. They were working with some lawyers that I deeply respected, including Kathleen Moriarty, who was the lawyer on the very first ETF, the SPY, S&P 500. ETF. She goes by the moniker, Spider Woman. I'd known Kathleen for years. And she sat me down and said, this wasn't a joke. This isn't a media spectacle. This is serious. And you need to pay attention to it. And so from that moment, 2013 on, I paid attention to it. I'll add one more thing. One of the things we did at ETF.com was hire a bunch of analysts to cover the ETF space. We put them through the CFA program. One of the first analysts we hired was Spencer Bogart, whose general partner at Block chain capital. It was actually the person that introduced me to Bitwise. And he was obviously

excited about crypto. He covered it on our morning call. So it was very much a topic of conversation. And then followed it for the years, dug into a certain degree, but always felt there was something really interesting and exciting there. And so when I had a chance to pick my head up after selling ETF.com and look around and read a little, the more I did, the more interested I got, and I'm sure glad I made that choice. It's funny you mentioned Spencer. A lot of people in traditional financial services got interested in Bitcoin after reading some of Spencer's reports when he was at Needham. Him and I think it was Gil Luria were kind of the first two people that were actually covering this seriously from that perspective. Yeah, it was unbelievable. I remember

on our morning call, the very first day he brought it up was the day that we reached parity with the dollar, which is amazing to think now that we're trading at all time highs, 20,000 times that level. But I remember him discussing it. We had like a five minute discussion of it and we all moved on. I think if all the people around that table had listened a little more carefully, we would be very happy today. Certainly. So tell us a little bit about Bitwise and the stare of the business today and some of the products that are out there. Sure. Bitwise was created in 2017 to create the first crypto index fund. We really exist in an interesting and I would argue unexplored or underappreciated part of the crypto market, which is focusing on financial advisors. So much of crypto is focused on retail investors with apps like Coinbase and Cracken and those ways of accessing crypto. So much of crypto is focused on institutional investors, whether that's the regulated futures market or venture capital firms or addressing crypto. We're focused on the middle, which is financial advisors. And here's the thing about that middle, Matt.

It's huge. Financial advisors control about $15 trillion of wealth. They control about the same amount of money as institutional investors. But people don't understand that. And so we built a company that's designed to serve those investors. And that comes through in a couple different ways. It comes through in the products we choose. These are people who are more used to buying index funds than they are buying individual stocks.

They want to make a bet on markets and not try to pick and choose winners. So from the start, from the get go with the world's first and largest crypto index fund, we were serving that market. But it goes beyond there. We have research that's written to the financial advisor level in January. I'm co-author of the CFA Institute's first report on crypto and Bitcoin. It's about a 60-page paper. We're trying to professionalize the research and data around crypto in a way that advisors can

understand. And then finally, we have a sales distribution for six people who came out of the ETF industry who do thousands of calls to financial advisors, hundreds of meetings, pre-COVID, ask me, where is the future of crypto being built? And I said, it's being built at Morton's stakeholders in 10-person advisor lunches because this is the next wave of capital that's coming into market. That's where we came from. Where we are today, very exciting moment. Like many crypto asset managers, we started out providing private placements to accredited investors. And that's what we did for our first three years, built our assets to over $100 million. Last Wednesday, trading began

on our crypto index fund on OTCQX in the same format that GBTC and other gray scale products trade using the ticker BITW and the market reception has been great. So we've entered this new phase where there's public access to our products. That introduces new risks, which I'm sure we'll get into, but also opens up the market in some very interesting ways. Well, I definitely want to talk about the BITW product because I think that, especially on a day like today where we're hitting all-time highs, there's a lot to talk about there. But you mentioned the RIA, channel, and that's one that I want to talk a little bit about. So I've had a frustration really with a lot of advisors that are in the network of people that I know, so to speak. So in my mind,

there's kind of two things going on here. One is just RIA is having a thesis and an ability to understand what's going on here and to properly advise their clients. Some of my frustration is around people that I know that have advisors that are just not getting any information about crypto from their advisors. I guess secondarily, there's a pointer at just around how do you actually implement a strategy and how do you operationalize a thesis? But maybe talking first just around having an opinion, what is the unifying kind of thesis and opinion of the advisors that are actually active in this channel? Like, why do they care about crypto assets? Is it all about Bitcoin? Is it all about Ethereum? What is the unifying reason to care? I think there are a couple.

It's mostly about serving your clients. So originally it was bubbling up from the bottom. It was clients talking to their advisors and saying, how do I get access to crypto and the advisor trying to figure it out. Now we have a couple more pushes coming. So on the one hand, you have the rising concern about inflation and different ways to hedge yourself against inflation. Honestly, that was a fringe idea two years ago. And it's really come aggressively mainstream faster than I could have anticipated. And so you're getting some push from advisors who are looking for that exposure. But I think the real change that's happened in the last few years, Matt, is the thing people don't understand about financial advisors is the thing they worry about most

is getting fired by their clients. They will do anything to not put their clients in an asset that falls. What did Bitcoin fall? 75% in 2018 because that gets you fired. And it's extremely hard for these advisors to find clients. And so the shift that's happening, the mental shift that's bringing these advisors in is it used to be extremely risky to have exposure to crypto, to have an opinion about crypto. It's now getting risky not to have an opinion about crypto because so many people are asking mass mutual is investing in Bitcoin. It's become required table stakes to have an opinion on crypto. And so that's why we're seeing really a sea change in advisor attitudes to the space. The second part of that is around operationalizing this. And of course, as an RIA,

you'd want to get paid on whatever you're putting your customers into. So maybe talk about a little bit about some of the infrastructure challenges that have existed over the years and how you guys have thought about addressing them. That's one of the biggest learnings at Bitwise over the last three years. When we started out this process, we looked around at products like GBTC and we thought financial advisors would rather have access to a product they can buy and sell at its net asset value, at its fair value, rather than dealing with the variable premiums of GBTC. Why would you pay a premium for something when you could get it at your net asset value?

And what we found after talking with financial advisors is, hey, that sounds great, but if it doesn't fit into my workflow, if it doesn't flow through my custodian, if it doesn't show up on client reports, if I can't therefore charge a fee on it, it's no good. A financial advisor who wanted to work with Bitwise in the past, who had 100 clients, would have had to send us 100 different wires to allocate to our product across all their clients. No advisor's going to do that for an allocation that's two and a half percent of their portfolio. They need something that's simple and streamlined. People often talk to me about, because Bitwise is pretty well known for pushing for a Bitcoin ETF, and people ask,

why do we need a Bitcoin ETF? You can buy Bitcoin through this channel, through that channel, you can open up a PayPal account, you can buy it through Square. And what they don't understand is the Bitcoin ETF is designed to serve the financial advisor audience because it fits into their workflow because they can make an allocation across all their clients with the push of a button. What we're seeing with BITW and what grayscale offers in GBTC and ETH and other products is that it just comes with the wrinkle of these variable premiums that can be really significant. But that practical aspect is really important. I'll add just one more thought.

People often think of financial advisors as sort of these quants sitting in front of a screen of computers thinking about how to build the world's perfect, most optimized ideal portfolio. And that's not reality. The studies show that the average financial advisor spends 8% of their time thinking about portfolio construction and the other 92% of their time dealing with clients, which is actually what they should be doing. They should be controlling their behavior, helping them make smart decisions, thinking about their broad finance, 8% of their time thinking about portfolio allocation.

crypto is maybe 2 to 5% of their portfolio. You can do the math. At best, they're spending a few minutes on this. They need it to be very easy to understand and easy to implement. That's one of the reasons we pushed for brokerage level access to BITW, and it's a reason we continue to push and will continue to push for a Bitcoin ETF. And talk a little bit about just the way that product works right now with the OTC Trust, and why is there a structural premium right now with that product?

Why does it exist like that? Sure, it's a great question. Let's start with an ETF, because that's what's something people are familiar with. An ETF is designed to trade close to its net asset value. In other words, if it holds $100 of Bitcoin, let's say it's a Bitcoin ETF, it should trade for $100 a share. If there's a lot of demand for the ETF and the price trades to $101, a slight premium above its net asset value, what happens is a group of institutional market makers come in and they create new shares of that ETF. so there are more shares available. That balances out the price and the premium disappears. And they can do this on a daily basis. The thing about these products, BITW and GBTC and ETH,

they exist under something called Rule 144 of the Securities Act of 1934. That's an exemption that allows for the public quotation of prices for private placements. And the wrinkle with that is if someone wants to create new shares of the Bitwise 10 Crypto, index fund. They can come to Bitwise and do it if they're accredited investors, but those shares have to season for 12 months before they can be sold on the public market. And so what we're seeing right now, our shares are trading at a significant premium. There is significantly more demand in the brokerage channel for shares of BITW than there are shares available. That's why it's trading at a premium. The reason it doesn't collapse on an intraday basis is because new shares that are getting created

today won't be available for sale for 12 months. So there is this lag between creation and availability. And so if there's more demand, shares can trade it to premium. Of course, importantly, if there is less demand, shares could trade it to discount. These premiums can and have been volatile and I think will continue to be volatile in the future. And I guess one of the things that's driving some of that premium is just it's impossible. I shouldn't say impossible, but it's just very difficult to hold exposure to crypto in a tax-advantaged account without one of these products. That's absolutely right. And in any account, look, I'm a relatively sophisticated crypto investor. I have access to lots of people in the crypto ecosystem, lots of ways of buying access.

I've owned the gray scale products in the past because it's so easy. Most of us have most of our wealth in brokerage accounts. Even if you want to take the time to allocate it into a private placement, you have to transfer it, there's a process, it's a pain, there's paperwork. There's real value in ease of access and ease of use. So I'm not surprised that there's a premium for these products. Now, premiums can get overblown, but you're absolutely right. It makes it much easier to hold in tax advantaged accounts. Honestly, it makes it much easier to hold in all accounts. We're on a one-way train from 2010 when it was virtually impossible to buy Bitcoin or crypto, where you had to have a computer science,

background or he had to be a cypherpunk to a future where it's push button easy. And we're not all the way there yet. This is just an interim step onto that ultimate goal, which I think is the ETF, where it will be as easy to buy Bitcoin as it is to buy Apple stock. And we're getting there every day. If you're a regular listener of this show, you know that we take accounting and auditing pretty seriously. And that might seem a little bit strange in an industry that prides itself on the removal of intermediaries. But we think when it comes to digital assets, trust relationships with counterparties like custodians and brokerages is critically important. Witham is a top 25 ranked accounting tax and advisory firm. They have a digital currency and

blockchain group that's working with some of the highest profile companies in the industry on things like tax advisory, financial statements, token sales, stable coin audits, and much, much more. To contact their team, go over to witham.com slash crypto. That's WITHUM.com slash crypto and get in touch with someone on their team. And so let's talk about. talk about the ETF a little bit because if I'm a regulator here and I'm seeing the just the premiums on the Bitwise product as well as the grayscale product, seeing things like the micro strategy convertible note come out and just shows you the insatiable demand to hold exposure to this asset class in that retail channel. You could make a really compelling argument,

I think, that they're harming retail by not approving an ETF that actually allows this to trade it closer to Nav. So where do we stand? Maybe talk a little bit about the path that Bitwise has been on, the denial of the ETF, I guess that was a little bit over a year ago and sort of what the facts and circumstances are on the ground right now that would lead you to be optimistic. I think if you back up to 2013, when I had the Winklevoss twins speak at my conference, they filed a great application. But the Bitcoin market, I would say, was not anywhere near ready for an ETF at that point. There weren't well-established regulated custodians. There was no audit trail on crypto funds. There were spreads in the market that were a mile

wide, there was no regulated market for crypto. Most of those concerns have gone away over the past few years. We now have fidelity, custody, Bitcoin. They're insured by Lloyds of London and others. The arbitrage opportunities in the Bitcoin market have gone away. Bitcoin often tried a penny wide on a $20,000 handle, which is literally the tightest financial market for any product in the world. So we've gone a long way. A lot of the concerns have disappeared. The lingering concern is around market manipulation in the underlying market and the ability to surveil that market. So if you think about ETFs, in equity ETFs, if you have an S&P 500 ETF, it's easy to surveil market manipulation in the New York Stock Exchange because that's a well-established

process. For commodity ETFs, it's often been the case that there's been another regulated market that people can surveil. So the gold ETF, the London gold market is not a regulated market, but there's a Comex Gold futures market that trades $30 billion a day or something. And so that's given regulators comfort. The reason we're getting closer to optimism in the Bitcoin market is because the nature of the underlying market is improving and the CME Bitcoin futures market is now really significant. The U.S. spot Bitcoin market is increasingly a regulated market and increasingly an orderly market

and the CME Bitcoin futures market now trades two X the amount of the largest U.S. spot Bitcoin market on a day-in-day-out basis. It's often 2x coin base, sometimes 3x coin base. Some days, it's the most liquid Bitcoin market in the world. So we're getting closer to a regulated market. I think an important thing for people to understand as they sort of think about the SEC's calculus. And I give them a lot of credit for the work they've done. You can't approach this from a de novo perspective. Like if I were coming to you today with this new asset you never heard about and I was like, Matt, it trades a billion dollars on a regulated futures market at penny wide spreads and it's a beautiful thing, would you approve it? You'd probably say it

sounds right. You have to think of it more from a Bayesian perspective. They're coming at it anchored from a time when the crypto markets were a mess, when spreads were a mile wide, when a lot of it was on the dark market, when there was no regulated futures market. And so we're having to recalibate expectations and to maybe overcompensate. But I think that's fine. I think if we can get to the point and we will get there where they are convinced and people can put their stamp on Bitcoin as a well-developed market, I think that'll be a good day. It's been fine to be cautious. And do you talking a little bit just around the functioning of the market, so there's been some enforcement actions against unregulated venues over the past year. And there's certainly

there's less volume on some of those venues than there was a year ago. Does that factor into the view on how you would appraise this market? It definitely factors into the view on how out of appraised this market. It also factors into my sort of bullish thesis for Bitcoin. I mean, we had a conversation the day it happened. The day the DOJ suit came out against Bitmex and nothing happened, like the market rallied. I knew we were in a new era, a new bull market. It absolutely helps. I mean, you and I know that Bitmex was a destabilizing force for Bitcoin prices. And whether it was manipulation or not is not something to go into a pine on, but it was not helpful for an orderly market. So as those get squeezed,

and the market moves to a better, more regulated structure, I think we're all better off. Look, one of the big trades, one of the big drivers of Bitcoin prices, and there's a big part of crypto that doesn't like this, is the move of crypto from an unregulated past to a regulated future. And that has negative philosophical implications for some, but it means there's a whole new wall of investors that can come into this market. And that's been, to me, one of the primary drivers of price. And it's one of the things that's getting us closer to a Bitcoin ETF.

One of the things that I'd love to get your take on is just what threshold we need to get to as a market around trade surveillance. I mean, does this apply to the spot market exchanges that need to put some sort of agreement sharing in place between each other? Is it just the futures market that they're looking at? Do you have a sense of specifically what the SEC would want to see there? I can't say exactly what the SEC wants to say. I can say what's written in their disapproval orders,

which is you need one of two things. Either you need to prove that the market is not susceptible to manipulation, which is an extraordinary standard that I don't think can be met for any market, not just Bitcoin, for any market. Or you need to prove that there is a regulated market of significant size that can be surveilled. Now, that could be the underlying spot market. It could be the CME Bitcoin futures market. It doesn't have to be both.

But you have to demonstrate that it's of significant. in size. And Bitwise has been working hard on this. We've met with the SEC multiple times over the past year. We have multiple people on the team that do nothing but research on this very fact and continue to push the ball forward. I do think we're getting closer. I think you'll see action in 2021. And how are other jurisdictions treating this? I know that we have exchange traded products in other countries already. That's exactly right. So there's a well-developed ETF or ETP market in Switzerland. There's ETS in Sweden. There's a new ETP in Germany.

That's now $190 million. It's growing very quickly from a group called Han ETFs. So other jurisdictions are ahead of us is the short answer. We're playing catch up. We're more conservative. But there are other places that are waiting to follow in our footsteps as well. And do you think this is the type of thing that once we get an ETF, will we see mutual funds start to hold Bitcoin? What do you think the future of just wrapped products looks like for this asset class?

Oh, I think we're going to see a dramatic expansion. Look, there's a giant push at every level from the bottom up for investors looking for access. I think we'll see structured products on Bitcoin in 2021 and the U.S. and in other jurisdictions. I think we'll see mutual funds trying to move into the space. I think we'll see ETFs. I think we'll see more strategies like momentum-based strategies wrapped into these products. 2021, one of the themes of 2021 is going to be the dawn of sort of structured products and access to Bitcoin at major wirehouses and through major banks. I think that's a dam that's going to break in a major way in the next 12 months. I remember back in 2014, I was doing a lot of lunch and learn sessions on Bitcoin at Fidelity going around to different groups and talking about

it. And we had a slide or two in a deck that was talking about some of the high profile people that were bullish on it and had a concrete thesis. And I remember Bill Miller had bought some personally and a couple of his funds back then. But now it's just totally different. You have Paul Tudor Jones coming in. You have these people that are putting their clients' money into Bitcoin, not just their personal money. So maybe just talk a little bit around some of the validation

around allocators who've gotten active over the past year or two. Oh, man, it's everyone. It used to be, we used to celebrate one person, as you were saying, Bill Miller. Now it's one person a day. It's Paul Tudor Jones. It's Sandruck and Miller. It's Ray Dalio getting closer. it's Mass Mutual buying $100 million in its general fund. Mass Mutual, one of the most conservative

insurers in the world, formed at a time when Miller Fillmore was the president of the United States owns Bitcoin in its general fund. I remember when we did sort of cartwheels when the Fairfax police made a small allocation through Mark Yusko's group as a breakthrough, but that's nothing compared to this. The thing we're seeing at Bitwise, which you spoke to, is two things, actually. So often in the past few years, we would see financial advisors who are interested make a personal allocation to test the waters. We're now past that. They're now making allocations across not just one or two clients, but across all of

their clients or systematic allocations to the space. The other change, one of the things we say a bit wise, is two and a half percent is the new 1%. We often saw people making 1% allocations. Rick Edelman sort of advanced this idea that anyone can lose 1% of their portfolio in Bitcoin. So why not just do that? But we're increasingly seeing two and a half or five percent allocations. Alliance Bernstein came out with a report saying people should put one to 10 percent of their portfolio. 10 percent is huge. We don't even talk about that at Bitwise. But there's Alliance

Bernstein being more bullish than Bitwise on the allocation to crypto. So you're seeing it across the board. Again, I think it's just going to be commonplace in 2021. I think people are going to want some allocation to crypto in most or many portfolios. And two of the things that really caught me off guard, I'd say this year that happened a lot faster than I would have thought would happen would be companies like micro strategy and Square putting Bitcoin on the balance sheet as a treasury asset and then the mass mutual one that you mentioned. So insurance general funds actually getting active.

So what's your outlook on those two categories actually being a kind of a base for additional capital flowing into this market? I think it's really significant. I think the mass mutual one is more significant because the. the corporate ones were still driven by sort of idiosyncratic personal opinions. But I do think it's important. Look, it's always easier to go from one to 100 than zero to one. I will say, I actually didn't think much when Microstrategie made its allocation.

It felt to me originally like sort of an overstock example of one isolated CEO with a strong opinion and control of his company forcing an allocation. But my phone lit up the next day. My phone lit up with next day with people who advise corporate treasuries who said, ah, now that we have a proof of concept, we can take this to the board. We've been interested, but we didn't have a high profile public proof of concept, and now we can do it. And it's important to note there's not that much Bitcoin.

Micro Strategy bought 20 basis points or something of all the Bitcoin that exists. I mean, you don't need very many of these people to make the leap for it to have a significant impact. And the mass mutual thing is bigger because insurers are, A, one of the low. largest pools of capital in the world. B, the allocation was extremely small. It was like 0.04% of of their portfolio. So if you think of them getting to a 1% allocation, which I think they eventually will, that's a meaningful inflow right there. And finally, it's such a conservative group. It's some of the most conservative capital in the world. These were people who were slow to adopt ETFs if I want to go back to my former life because they were risky and didn't understand them.

And now you have them allocating to Bitcoin. I think it's just a gain changer. I think we're We're going to see a flood of those people move into the market in the next year. You would have to think the career risk of someone who's working on the inside of one of these insurance companies just went down an awful lot by seeing this mass mutual action. It's unbelievable. And that was a trend we saw last year. The average age of people attending our meetings went up significantly in the past year. It used to be 27-year-olds.

And now it's people like me with gray hair. I agree the career risk has gone down substantially. And also, it's really important to remember you now have this newfound urgent. because of the normalization of concerns about inflation, people are really looking for a solution. They see Bitcoin and crypto not as a risky asset, but an asset that is actually providing a hedge against an important risk that's otherwise very difficult to hedge against. So that's an important shift as well that's changing the risk calculus at these investment committees.

I know that Bitwise has a Bitcoin product. It also has obviously the top 10 crypto index fund. how do you stay up on the emerging assets that are maybe threatening to pop into that top 10? How do you describe them in the context of Bitcoin comparing and contrasting? Obviously, some of these assets are trying to do very different things other than non-sovereign money. That's exactly right. The short answer from an investment perspective is the index reconstitutes on a monthly basis. So it always holds the top 10 assets.

The way I think about the index strategy, and maybe this will answer your question, is whatever happens in crypto, it should be well positioned. So if it turns out that Bitcoin is the only thing that matters and that it's a multi-trillion dollar market and everything else goes to zero, over time, the index will become not just 75% Bitcoin as it is today, but 100% Bitcoin. If it turns out, as you said, that there's more to crypto than non-sovereign money, which is what I believe, I think there is more to crypto. I think programmable money is a real use case. I think rapid transaction settlement is a real use case. I think there are other use cases bubbling out. The index will reflect that. So it wins no matter what, which is why it's a market cap weighted index and why it's an

uncapped market cap weighted index so that it can reallocate in that sense. I do think one of the big themes in 2021 that we're going to see is people starting to look to diversify their crypto-asic exposure. I think people are going to hear words like there's more to crypto than Bitcoin. Now that Bitcoin is anchored as a sort of normalized asset in the institutional set. Now that we have the CME launching Ethereum futures, I think people are going to start to look at what else there is and what else this blockchain and public crypto asset technology can do. And how deep do you get in those conversations when you're speaking to prospective investors? Are they getting down into the weeds of actually understanding what other networks are doing

and how the computer science works? Or is it more thesis driven around I want an inflation hedge or I want some experience? to something that would disrupt a tech monopoly or something like that. That's a great question. We do like to get into some first principles about the different sort of systematic breakthroughs that crypto provides. So we do talk about the difference between Bitcoin and Ethereum. We do talk about Bitcoin as a limited programming language and Ethereum as a turn complete

programming language. I want people to understand that crypto is a major once-in-a-generation technological breakthrough with significant applications. Because I think it makes it more robust. One of the biggest challenges we run into still to this day is people saying Bitcoin or crypto has no fundamental underlying value. And I think the way to overcome that is to teach people that this concept of public blockchains introduces major new primitives into the world.

It introduces digital property rights into the world. It introduces digital scarcity into the world. It introduces programmable money into the world. the world. It introduces rapid settlement into the world. And we're living in this age where the financial technology world is still decades behind. So we do get into all that at a super official level. I think they're investors who that skims right over. But generally I've found if you can give people a slightly bigger foundational understanding of something, it's less likely that they'll forfeit it when markets get volatile. So we try to help them understand that this, again,

a major once-in-a-generation technological breakthrough with significant implications so that they get a more foundational, strong footing in why they're allocating to crypto. That makes a lot of sense. I think one of the under-discussed stories of this year, and probably we'll continue into next year, has just been the inactivity of some of the core financial plumbing companies as it pertains to this ecosystem. So think about some of the big prime brokerages and custodians. that are not in this space, and then compare that to the rapid, rapid growth of companies like

Fidelity Digital Assets and BlockFi and Genesis and I dig, who of course facilitated the mass mutual transaction and who's just growing like crazy. What's it going to take to get some of these industry incumbents, these global custodian banks to actually wake up and see this opportunity? Well, I think they're doing it now, but they're going to be slow to get there and it may be too late. I make the ETF analogy. It is not the case that the largest mutual fund providers are the largest providers of ETFs. It was upstarts and folks people hadn't heard of. I mean, Vanguard, yes, but also BlackRock, which was Barclay's global investors, which was Wells Fargo NICO, some obscure U.S. Japanese hybrid company that had this thesis and stuck to it that is now part of the largest

asset manager in the world and the most successful financial story over the last two decades. So companies like Fidelity that were brave enough to step ahead of the reputational risk, brave enough in part, I think, because it's a family-owned business. Like Vanek, another example of a traditional company that was early to this market, I think they're going to be rewarded. I think it's going to be hard for these other companies to catch up. Now, will they try? Of course. Are we going to see major banks roll out custody exposure? Of course. Are they going to roll out structured products, of course? But I think the first movers are going to have a meaningful advantage that will extend for a long period of time. And I think they may dominate the space in the foreseeable future.

I think you're right. And I think if you think about just the infrastructure that's getting built around custody and trade execution, these are extensible networks. So if you think about the context of stable coins being built on top of Ethereum, they think about other types of real-world assets that could be represented on public blockchains, these are extensible networks and the infrastructure that's getting built to hold Bitcoin and Ethereum. Who knows, two, three years from now, that could be other types of assets that we're not even thinking about that are not public and permissionless necessarily, but that could be huge revenue drivers for some of these financial intermediaries. Couldn't agree more. And in ways that we can't predict, in the ways that people

aren't even talking about at this point, even inside crypto, there are huge breakthroughs that people in crypto aren't even really discussing a lot. I think Web 3 could become a new theme in 2021, 2022. So I absolutely agree. And I think, again, these companies that were ahead of the game will be rewarded I'm not worried about the barbarians at the gate storming this market. If they do, I think a lot of it will be through acquisition, which is going to be a theme for sure. And so maybe just closing out here, looking into 2021, would love to get your take on just predictions for the regulatory landscape and your outlook for some of these traditional, quote, unquote, companies entering.

What do you see on the horizon here? I think it's going to be a flood of positive news, honestly. I know there are people worried right now about regulatory overreach, particularly with the exiting. Trump administration or people who are worried about what a new SEC chair coming in may do to slow down the space. I think those ideas are mistaken. I think we're on a one-way path, again, from an unregulated small crypto industry to a well-regulated, large crypto industry. I think we're going to see that as a major breakthrough. I think we're going to see CBDCs come to the fore. China is going to push that. the ECB is going to push that and the Fed is going to be forced to follow along for fear of falling

behind from a competitive perspective. And I think we're going to see at least one major wirehouse help their registered reps allocate to crypto through some sort of product, whether it's a structured product or a partnered product. And we're going to see major banks roll out crypto custody across the board. There's just too much money to be made. I think it's going to be such a significant year and it's going to be everywhere. It's going to be everyone. people already started having these conversations six months ago, and they accelerated when PayPal

came out, right, a $250 billion company embracing crypto in a large way. And now that we're trading at new all-time highs, those conversations are going to reach a feverish pitch as we reach the end of the year. And so I think you're going to see a rush of announcements in early 2021 that will make 2020 look quaint. Well, I hope you're right. I think it's been really interesting that we are, as you say, hitting these all-time highs amid some just really bad rumors coming out of Treasury that there'll be some enforcement around self-custody and things like that, things that we obviously hope to not see. But this is also happening against the backdrop of potentially a new stimulus bill. And there's just a lot of things that could be very positive for Bitcoin and other crypto assets.

That's absolutely right. Also at a time when it's becoming increasingly important that the crypto blockchain space is an important part of the economic future of the world. And so I don't think regulators will want to harm that. I think there's too much risk of it porting overseas. I think there's too much belief that this is a fundamental breakthrough. I think you're going to see regulation. And of course, there'll be stumbles and of course there'll be overreaches. But generally, it's going to push us onto a bigger and broader path. So fingers crossed that that turns out to be true. I think that's exactly right on the regulatory front. I mean, I think the comparison here is the

commercial web. And I think some of these crackdowns that are being rumored around self-custod. to me would be the equivalent of in 1995, 1996, the government saying you can only access the internet through AOL and other Walt Gardens. And we're not going to allow web browsers. It would just be crazy. And that innovation would have happened elsewhere. And we would have had this dramatic growth happening outside of the United States if that had been the tax.

So hopefully the regulators can understand that. Absolutely. And I think they will. Well, Matt, this has been great. Where can we send people to learn more about bitwise and what you're working on? Come over to bitwiseinvestments.com. There's a lot of information there. There's information about the fund, including its market price and its net asset value. There's resources that you can evaluate. So bitwiseinvestments.com or follow me on Twitter, Matt, underscore Hogan. Well, we're super excited and happy to be investors. So thanks again for coming on the podcast, Matt.

Thanks for having me. This was great. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. Visit castle island. vc. To listen to all of our podcast episodes, please go to on the brink dashpodcast.com or just click on the tab in our website. Thanks for listening.