BITW vs BITB

If you own BITW, should you sell it for BITB?

Ric Edelman: It's Friday, February 2nd, you know, I run into so many people who are telling me that their kids in their 20s, fresh out of college, embarking on their new careers, are looking around to buy a home. Really? Are you sure you want to buy a home? I mean, think about it. Back in the old days, you didn't buy a house until you were in your 30s or 40s, and you lived in that house your entire life. You died owning that house. Today, people talk about starter homes. They plan on buying a small place that they'll flip in a few years for a big profit, and use those profits to buy their next bigger home once they're married with children. Is this notion really the right trend for the future?  

Everybody assumes that home ownership is the key to wealth, but is it really? I mean, homeowners have to deal with property taxes and insurance. You have to deal with maintenance and repairs. Which one of you is going to stay home when the plumber has to show up? I mean, it's just fraught with hassle. Go try to sell your house. It typically takes months to do this, depending on the real estate market, and you incur tens of thousands of dollars in expenses associated with doing it.

Are you sure that home ownership is the key to wealth? Maybe renting is a better choice. Not just now, because prices and interest rates are high. I mean, renting forever. This is a very common practice in New York City, for example, where millions of people, including very wealthy people, never own their homes they rent. 

Increasingly, this is an idea that's catching on, and in the future, we just might be a nation of renters rather than homeowners. The real estate industry sees this trend, and in fact, they're helping to create it. Think about it. What kind of a house could your kids who are in their 20s or 30s afford to buy right now? They could either get something small that's in an urban area near where you live, likely, or further away, 10, 20, 30 miles away, which forces them to have a big, long commute either to work or to see you.  

Or they could instead move into a high rise that features granite countertops in the kitchen, 12-foot ceilings, high end appliances with an entire building that offers a yoga studio, a spa, a dog park, pickleball courts, and a restaurant that offers room service. There are hundreds of rental developments like this that are popping up all across the country. You get no headaches. All luxury. Plumbing problem? Management team takes care of it and you have no lawn to mow.  

There's one real estate operation that manages 50,000 apartment units in 30 cities, and 25% of their residents earn $200,000 a year, four times as many people with $1 million in income now rent instead of own, compared to 20 years ago, according to the Census Bureau. There's one big apartment building in Tampa that's got a rooftop pool, a dry-cleaning pickup service, a concierge that books your restaurant reservations and gets you tickets to concerts and sporting events. You've got entire subdivisions now filled with renters, not owners. You get to live in the house you want and decorate it as you like. There are more than 500 of these entire subdivisions under construction. They're going to provide housing for 85,000 individuals and families.  

So think about lifestyle and think about the future. Are you sure that owning the home of your dreams is important compared to merely living in it? 

As a financial advisor, you need to help your clients realize that maybe, just maybe, they ought to have a different viewpoint in mind when it comes to buying and owning a home and encouraging their children about whether they should be homeowners or not as well.

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Exclusive Interview: Matt Hougan, Chief Investment Officer of Bitwise 

BITW vs BITB: If you own BITW, should you sell it for BITB? 

Ric Edelman: Well, all the excitement so far this year has been surrounding the new spot bitcoin ETFs. We've been doing a series of interviews here on The Truth About Your Future, as you know, interviewing the sponsors of these new ETFs. And we've already had a conversation with Matt Hougan. I asked him to come back. Matt, how are you?  

Matt Hougan: Thanks for having me back, Ric. I'm doing well.  

Ric Edelman: And the reason I asked Matt to come back, he's the chief investment officer of Bitwise Asset Management. As you probably know, if you've been listening to this podcast for any length of time, Matt is one of the leading experts in crypto and also of the ETF world. Matt was one of the founding members and the head of Inside ETFs and ETFs.com, way back 20 years ago when nobody knew what an ETF was, and frankly, nobody believed that they would ever survive. And now here they are, the most popular investment vehicle in the country. So Matt is very deep in the financial services industry. He's extremely deep in the ETF world. And he's now made a huge career leap ten years ago into the crypto space. So he's a huge expert in crypto. And now we have the spot bitcoin ETF. So we've got the merging finally, Matt, of bitcoin and ETFs. And here we are. So you have to be really, really excited about all that. 

Matt Hougan: Really excited. This was part of the reason I made the leap into crypto, because I knew ETFs would be a big milestone and a big opportunity in that space. And that's what we've seen. Yeah, but it's been wonderful. It's like going to a party with your college friends and your work friends, seeing them collide. But it's been fantastic.  

Ric Edelman: And I just had an interview last week. You heard it, I'm sure, with SEC Commissioner Hester Peirce where she and I went back in the “way back machine” over the past decade lamenting how long it took for these ETFs to come to be her steadfast support and encouragement to her fellow commissioners. And she is excited as well, not because she's arguing for the investment thesis. That's not her role as a regulator, but the argument for investor choice, which has befuddled her for so many years that why wasn't the SEC allowing these to happen? Now? Here they are. But that's not why. Matt, I've asked you to come back here on the program today because we did a thorough deep dive into Bitwise's new spot bitcoin ETF, BITB. 

By the way, if you missed that interview that I did with Matt a few weeks ago, we've got the link to it in the show notes. So you can watch that interview and I encourage you to do so. There are two topics I want to delve into with you, Matt, regarding your new ETF that we didn't get into before. One of them is a new recent announcement that Bitwise has made, which was not known to us when we did our first conversation, but we're going to talk about a BITW. And so those of you who own the Bitwise Ten Crypto Index Fund, that's what we're going to talk about with Matt today, because I've gotten just so many questions from our audience on that topic, and that's why Matt's agreed to come back and chat with us now. But before we get to that, I just want to bring up two points about your new BITB, the Bitwise bitcoin ETF. First, I'm kind of impressed with you, Matt and Hunter Horsley, your CEO and your entire team at Bitwise, because there are 11 of these new ETFs, not just one. And of these 11 sponsors, most of them are not what we call crypto native firms. Most of them are major Wall Street financial services companies. We're talking the likes of BlackRock, Invesco, Franklin Templeton, VanEck, WisdomTree; I'm probably missing somebody.  

Matt Hougan: There are a number of them, right. 

Ric Edelman: And yet when we look at the asset flows that have gone into these 11 ETFs since their debut on January 10th, first of all, collectively these represent the most successful ETF launch in history with billions and billions of dollars. I think we're north of $5 billion now in assets, remarkably fast rate reflecting investor demand. But the data point that I've really noted is that Bitwise is one of the most popular choices, even against some of these huge century-old companies that are managing trillions of dollars in assets. Bitwise a crypto native, tiny little company, let's face it, in comparison, that's only been around what, 7 or 8 years is beating the big boys. What do you attribute that to?  

Matt Hougan: Thank you for that, Ric. We're excited by the strong reception BITB has received. I think it's because investors are smart. You and I have talked about this before in specialist areas of the market. Many financial advisors and financial professionals want to work with a specialist who focuses on that market. 24/7, 365 who's seen previous ups and downs, who knows how to trade the underlying asset. And I think that specialist expertise and the ability to back it up with research that help advisors answer questions about bitcoin, I think that's resonated. You know, look, it certainly helps that we had the lowest expense ratio out of the gate on launch day at just 20 basis points. It certainly helps that we've been more crypto native, I think, than many issuers. We've donate a portion of the profits to Bitcoin open-source developers, as I'm sure we'll discuss. We're doing proof-of-reserves by showing the bitcoin address that actually holds the bitcoin. So users can verify that what we say is there is actually there. But I think it comes down to that specialist expertise in specialist areas of the market. Many investors want to work with specialists who are expert in that space, who didn't launch their first bitcoin fund two weeks ago, who've been running the largest crypto index fund in the world for seven years. And that's been Bitwise. So we've been really pleased with the reception. We intend to be a strong player in this market, not just today, not just tomorrow, but for the next 10 or 20 years.  

Ric Edelman: You just raised a point there. The second issue I wanted to ask you about, Bitwise has now become the very first of these 11 bitcoin ETF sponsors to publicly show your crypto wallet, your public key. We have to remember that one of the big benefits, one of the key features of crypto, is its transparency that anybody with an internet connection can see who owns what and what's going on, where the assets are. And you have now published your public key. And so anybody can see exactly how many bitcoins your fund holds. And does it, in fact match the number of dollars that investors have contributed? Because that's a big question people have always asked, are you holding as much crypto as you're supposed to? You know, we rely on auditors, but our auditors are secretive and they're also usually 6 or 9 months in arrears. You're showing this data in real time on the blockchain that anybody can look at.  

Matt Hougan: That's right. You know, trust but verify. Look, the beautiful thing about this, there's a lot that the crypto ecosystem can learn from traditional finance. We brought the low fees of ETFs into crypto. And that's a great example of how there are things from traditional finance that are great, but there are things that are native to crypto and DeFi that are strictly better than what the traditional financial ecosystem is. And one of them is this: you can prove as an individual that Bitwise holds exactly the number of bitcoins that we say on our website without relying on out-of-date auditors. Of course we have that to. The fund is audited by KPMG. Bank of New York is the administrator. We follow all those check marks, but you can prove it to yourself with the click of a button. Look, gold ETFs have been around for what, 20 years? People have always wondered; how do I know that the gold is there and they've tried various things. They have auditors, they take pictures of the vault. But until you can see it yourself, some people will have questions in their back of their mind. This is just a way that crypto and DeFi is natively better than traditional finance, and we were really excited to be the first. I hope we're not the last ETF issuer to do this. I hope this is a new standard for the industry.  

Ric Edelman: There's no question it will be. They're all going to have to do this. They'll want to do this. There's not really any significant downside to doing this. Your leadership I think speaks volumes about your depth in this space of knowledge. But it raises a question, the fact that you have now published the wallet and the public key. It's a wallet. And some argue that you should maintain the crypto in multiple wallets as just an additional hedge against the risk of cybersecurity threats, hacking and such like that. What's your view of that?  

Matt Hougan: Yeah, we've been managing crypto assets for seven years, working with regulated third-party custodians that use state of the art technology on how to manage this. And this is industry best practice, this idea of distributing wallets. Well, I think it may appeal on some theoretical level, but it doesn't increase your actual security. This is industry best standard used by the best firms around the world. We're excited to do that here. And of course, we monitor the custody ecosystem every day and will always stay on the cutting edge of the best possible security, as we have for seven years, managing north of $1 billion of assets safely for professional investors through bull and bear markets alike.  

Ric Edelman: Yeah, I think the notion of adding multiple wallets might appear to offer diversification or what have you. In fact, all it does is increase your administrative hassles and headaches and management challenges. And I'm not sure it really matters a whole lot. I remember, an unrelated conversation, just talking about custody generally. This was a conversation I had with a fund manager in the stock market, and we were talking about custody in the same way. And he said, I don't have to maintain different brokerage accounts to manage my stock portfolio. I just have one account and I watch it like a hawk.  

Matt Hougan: Exactly. Well put.  

Ric Edelman: The argument of diversification doesn't always work. My dad used to tell the story. His one of his favorites about my mom. It was in the 1950s and they were flying. It was her first time. My mom was in an airplane and they had two little boys. I wasn't yet born and my mom was terribly worried, like, everybody was in the 1950s, fear of flying. And she was, of course, particularly worried about her children and what happens if something happens to us. And so she said to my dad, look, I'm really nervous about this. Tell you what, you sit in the back of the plane, I'll sit in the front; as though that's going to solve the problem if the plane goes down. So we need to have a level head about ourselves as to what really works in our effort to create cyber safety and cybersecurity. I'm not sure creating multiple wallets is the answer.  

Matt Hougan: I love that analogy. No, that's exactly right. These are time-tested strategies that have been used by the largest investors in the world for many years now, and we're applying them into ETFs.  

Ric Edelman: So let's shift the conversation to BITW, the Bitwise Ten Crypto Index fund. This is one of the most popularly owned crypto investments in the country. You and I have talked about BITW for years, including on this podcast, very, very often. I personally own the fund and have had since its inception. And first give us a basic review of what BITW is, and then we'll get into the details of how it impact is today in light of these new ETFs.  

Matt Hougan: Yeah, this is our flagship fund. It's the fund we've been running for seven years. It's the largest single holding in my personal crypto portfolio. So I love this fund. The promise BITW makes is it's designed to track the Bitwise Ten Crypto Index, which holds the ten largest assets rebalanced monthly while screening out assets with unusual risks. So if you want to make the bet that crypto will be more important in the future than it is today, but you don't know how it will be divided amongst bitcoin, Ethereum, Solana, what new asset will emerge? But you want to make sure you don't own FTX's token or the Luna stablecoin or BNB, etc., you can hold this index fund and it will take care of that for you. And it's been doing it, as I mentioned for seven years, the largest crypto index fund in the world. It has avoided those assets that have blown up like Luna and Dogecoin, etc. So an incredible track record, a great tool for investors who want to make a diversified bet on crypto, as opposed to concentrating on any single fund. And we spend more time thinking about managing and monitoring this fund than we do on anything else. So it is our flagship and it's a huge part of our portfolio.  

Ric Edelman: Now this fund is cap weighted, meaning the bigger the coin's market share relative to the entire crypto universe, the more of it the fund will own. So the fund is right now I'm presuming around 50% bitcoin, around 20% Ethereum. That about right?  

Matt Hougan: That sounds about right. Yeah, maybe a little bit more bitcoin. But yeah, that's about right.  

Ric Edelman: So about 75% of the assets are those two. And then the other 25% are the other eight.  

Matt Hougan: That's right. And again, the promise is peace of mind. If crypto is a small part of your portfolio, do you have the ability to monitor it every day? To think about, well, is Solana really back from the dead? Is Cosmos emerging? What about Avalanche? What about these new blockchains like Aptos and NEAR? Have they graduated? What about Layer 2 tokens like, you know, all those questions? You don't want to have to worry about that. You just want to know that you own the largest assets in the market, the level at which the market is valuing them at all times. So you always have the winners. That's what this fund promises to do.  

Ric Edelman: Now, there's a fundamental feature about this fund that is similar to all the other funds of its type that we want to make sure people understand. We've talked about this very often. I've written an article about this at our website. In fact, I've got a link to it in the show notes, so you can easily go read it. It has to do with the fact that these are organized under SEC rules as something that's called a grantor trust. These are not ETFs. They are not mutual funds. They're not closed end funds. They are under a different category of SEC registration called a grantor trust. And these trusts operate in a little bit different way than I think most people are familiar with. That has something called a premium or discount feature. So talk about all of that and help people understand this.  

Matt Hougan: Yeah that's right. Unlike ETFs which tend to trade close to their net asset value and have a mechanism that allows them to do this, the only way you can have this fund and have it easily accessible through a ticker,  they have to be these OTCQX traded trusts, as you mentioned, and they can trade at premiums and discounts. Net asset value BITW is traded at premiums of multiple hundreds of percent back in the days. And it's traded as discounts I think into the 60s. It's now trading in a discount in and around the 40% range. We intend to convert this fund to an ETF when that is allowed by the SEC, and we work at pushing that forward all the time. It's not currently allowed, and we don't know when or if it will be allowed that would resolve this premium and discount. But until then, the underlying strategy is tracking that index. And the ticker can trade above or below fair market value. And that can vary over time.  

Ric Edelman: And the reason for this is that you don't determine the price of the shares. Those prices are determined in the open marketplace, the over-the-counter marketplace. You can buy this fund in any ordinary brokerage account. Schwab, for example. So you have a Schwab account. You can buy BITW, that's its ticker symbol, and you buy it just like you buy any other stock or mutual fund or ETF. But with ETFs and mutual funds, where the fund sponsor is ensuring that the price pretty much tracks the value of the assets, this is more like a stock, meaning IBM doesn't determine the price of IBM stock. The open marketplace does buyers and sellers. So if buyers and sellers are willing to agree on a price that has nothing to do with the actual value of the assets, that's going to be what you see trading. And that's what happens with this fund. As Matt has said, last time we looked, it's around a 40% discount. In other words, you can buy BITW today and you will buy bitcoin, for example, for 40% less than the actual price of bitcoin. Now, this is considered a heck of an arbitrage play by investors who believe that you will succeed in one day making this an ETF, because if you do, that discount will theoretically vanish and all of a sudden you paid $0.60 for something that's worth a dollar. The $0.60 is now a dollar, that's independent of the price of bitcoin. So some people argue that this is one heck of an arbitrage play. You have to decide for yourself if you think that this fund will eventually become an ETF, and are you willing to gamble on that premise. So that's one thing you really need to understand. The premium discount feature of investments such as BITW. One of the questions that I've been getting very frequently, Matt, from our audience, who are big fans of Bitwise and fans of this investment; have been purchasing it. They have been asking a couple of the questions you seemingly just answered. Number one is BITW an ETF? Is it going to be an ETF?  

Matt Hougan: It's not an ETF. As mentioned it's an OTCQX-traded trust. And we've stated our intent to convert it to an ETF as soon as the SEC allows that. But we don't know when or if that will be. So we're working on it, but we don't know.  

Ric Edelman: And therefore the related question that I get often is if I own BITW, should I sell it and move that money into BITB? In other words, go from the top ten index, which is not an ETF, to the spot bitcoin ETF. Should I do that?  

Matt Hougan: Well, it’s up to every investor. There are pros and cons of each structure. The index fund holds a diversified index, and the challenge that you take on is it can trade at premiums or discounts. Some people see that as an opportunity as you mentioned. It's currently trading at a significant discount. Some people like that. Some people see that as an added risk that it's not right for them. For those people, you have BITB, which is an ETF which trades at or near its net asset value throughout the day, and it only holds bitcoin. Bitwise offers, you know, close to 20 funds. At this point. We intend to be the crypto asset manager specialist for financial advisors, family offices and other professionals. And so we have different products that fit different needs, and it's up to each individual to make that decision. 

Ric Edelman: So we need to keep in mind that the good news about the spot bitcoin ETF is that it is an ETF. And it is bitcoin, which is the number one coin that has most people's attention. But it's only bitcoin. It's a single asset ETF. BITW is a far more diversified portfolio of ten coins where bitcoin is only half the fund rather than the entire fund. So you do have to balance out the two. And also keep in mind that if you own BITW in a taxable account and you sell it to move over to BITB, you're going to create a tax liability for yourself. So you need to balance out whether it's worth doing that. You may conclude that it is, you know you're going to pay the tax sooner or later you're going to sell the fund sooner or later, so who cares? Or you may conclude that there's no reason to incur a tax when you can continue to defer it. This is why there's no real substitute for talking with a financial advisor who can help look at your overall personal situation and guide you for what is in your best interest. But those are the fundamental differences. Is there anything else, Matt, that comes to mind? These are the two basic questions I've been getting from investors. Are there any others that you've been fielding from advisors or investors about the differences between BITW and BITB?  

Matt Hougan: Those are the primary ones. We are committed to both products, obviously as an index fund that requires oversight and it's not an ETF, BITW has a higher expense ratio than BITB, but again, this is just comes down to what each individual investor is trying to achieve. And our goal at Bitwise is to provide the best possible products to solve that question. So we're happy to discuss this with anyone who has questions. Reach out to Bitwise and we love to answer those questions and help you understand and evaluate and compare all the various products that we have. 

Ric Edelman: And the link, by the way, to Bitwise's website is in your show notes, so you can easily click a link and go directly to Matt and his colleagues. Unlike most other crypto native companies, you have a very robust customer service and wholesaling network around the country, 20 or 30 professionals, and that's all they do is work with advisors and investors. 

Matt Hougan: That's exactly right. We're built to serve the financial advisor market, the family office, the professional market. And so we have those resources available. You can find them on our website. You can find your contact in your area of the country with their email or phone address and reach out directly. Or you can contact us generically. But we love answering those questions. That's what we're built to do. We started this chat talking about why many people were choosing a specialist in this space. Part of it is you have that support to answer questions, and it's one of the things that we love most at Bitwise.  

Ric Edelman: You mentioned that BITW is your largest personal holding of crypto. I'm assuming you bought a bunch of BITB, the new spot bitcoin ETF as well.  

Matt Hougan: I love our funds Ric. This is how I invest in crypto, through Bitwise’s own funds. So you know I eat my own cooking.  

Ric Edelman: And I'll echo Matt's comments. I have owned BITW for years. As I've mentioned, I think I bought it when the fund first launched and have added periodically over the years. I also now own BITB, I am not selling, or at least I should say as of this broadcast, I have no intention to sell either of those holdings rather than adding to them. So take that for what it's worth. That doesn't constitute advice or recommendation, but something for you to talk about with your own financial advisor. Matt Hougan, the CIO Chief Investment Officer of Bitwise Asset Management. Always a pleasure to have you on the podcast. We'll talk again before too long.  

Matt Hougan: Thanks so much, Ric.  

Ric Edelman: On Monday's podcast, I'm going to tell you why you really can stop saving for college. Have a great weekend.  

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