Exclusive Interview: Matt Hougan of Bitwise Asset Management

Get Matt’s take on the recent bitcoin pullback, the collapse of Luna, and more

Ric: I know you want to know what is going on in the world of crypto. Well, I'm not going to answer the question for you. Instead, I'm going to invite one of the world's leading experts on crypto to help us delve into that question for us. Matt Hougan is CIO, the Chief Investment Officer of Bitwise Asset Management, a frequent friend of ours here on this program. He's not only one of the world's leading experts on crypto, but also on ETFs and financial technology. Matt, great to have you back on the program.

Matt Hougan: Thanks for having me, Ric. Really excited to be here.

Ric: So we have obviously been in an environment over the past six months where many of us are referring to it as a crypto winter. You know, most folks are very well experienced in the world of the stock market. We've gone through the crash of 87. We remember the .com bubble. We remember 9/11, 2007 and 2008 credit crisis. We remember, of course, the calamity at the beginning of the pandemic with the stock market crashing 35%. People in the stock market are used to all that and they know if they sit tight, wait long enough, it'll recover. But most folks don't have a similar level of experience in crypto. The average individual who owns Bitcoin has owned it for less than a year and a half, so they're scared, wondering why is Bitcoin down 50% or more? What does this mean? Are people right to be worried, Matt?

Time to sit tight and maintain a disciplined portfolio

Matt: Well, I love the question. I love the framing, Ric. The reality is, just like the stock market, crypto has lived through multiple significant pullbacks. In fact, it's lived through seven 70% pullbacks over its 13 year history enroute to being the best performing asset class of all time. So this is a normal experience. This cycle happens over and over again, just like it does in the stock market. And just like the right thing to do for stock investors is to sit tight and maintain a disciplined portfolio, the same is true in crypto. People who panic at moments like this are the people who suffer and people who evaluate the situation ask themselves if anything fundamental has changed and then take a calm, reasoned approach to the market are the ones who do well.

Ric: Now, if it's true that half of the people who own Bitcoin bought it in the past year, year and a half, that means they bought it at much higher prices than Bitcoin has been at lately. Help people understand the right way to be thinking about this new innovative asset class called Digital Assets.

Matt: The way I think about it is the crypto assets and blockchains enable the ability for money to move over the Internet, the ability to program money like software, the ability to have digital property rights. These are going to transform how money and finance works not over the next six months, but over the next 10 and 20 years, going to fundamentally reshape the financial economy. What that means is an investor is that if you're going to allocate to this space, you need to be thinking about three, five and 10 years. If you're buying crypto, hoping to make money over the next week, good luck. I have no advice for you. If you're allocating for the next 10 years, I think it is a solid position to be in.

Explaining the role of stablecoins, and why Terra and Luna failed

Ric: People are also noticing in the news the story of Terra and Luna; Stablecoins that dropped all the way to zero. Help us make sense of all this.

Matt: Most of what we talk about, Ric, when we're allocating the space, is investing in crypto assets that are backed by blockchain technology that allows us to do new things with money, as we mentioned. And those, I think, are very exciting investments. Stablecoins were created for a very specific reason. Let's say you're investing in Bitcoin, but you want to rotate out of the market for a minute so you can sell your Bitcoin and hold a stablecoin and you wouldn't have to move your money out of the crypto economy into the banking economy because that takes multiple days and their high fees. It's a way of parking money. The important thing about Stablecoins is that you can design them in two ways. One way is to design them like a money market fund. In other words, for every digital dollar, there's a short-term treasury that represents that digital dollar. Those kind of stablecoins have been around for nearly a decade and they've worked perfectly well. The other way is to do what Terra and Luna did, which is to try to use some very fancy math to create what's called an algorithmic stablecoin, which is backed by nothing. What do you think is going to happen? It certainly doesn't say anything about assets like Bitcoin and Ethereum, which fulfill an entirely different function in the economy.

Ric: Yeah, I share your view. When people were asking me what my reaction was to the collapse of Luna, I said, I'm not surprised it collapsed. I'm surprised it took so long for it to collapse.

Matt: I fully agree. And these are the kinds of things we do at Bitwise in our indexes and in our index funds as an example. Luna was at one point, one of the 10 largest crypto assets. But we never added it to the Bitwise 10 index of the 10 largest assets or the Bitwise 10 Index Fund, because we recognized that this risk existed. We had seen this movie before, and we knew it didn't end well. So you do have to, in any new innovative area, do your homework to separate the high quality stuff from the stuff that is likely to fail.

Ric: And that's a really important point for people to recognize, is that in the world of crypto, it is totally new, totally different, unlike any other asset class you have any experience in. You can in fact rely on experts who have figured this out, who spend their 8 hours a day in the workplace focusing on this subject so that you don't have to. You do the very same thing with your stocks. You don't buy individual stocks. You use stock funds. You do the same thing with your entire investment portfolio. So I'm kind of mystified why people so often figure that they've got to start buying individual crypto coins at an exchange or what have you. Using a fund such as that offered by Bitwise (I'm an investor in the fund), is simply an easier way to delegate to professionals. I think the outcome is more likely to be better than us trying to figure it out on our own. How much money is the fund now managing?

Matt: We manage well over $1 Billion in assets and that Bitwise 10 index fund is the majority of that. So it's a substantial fund. It's been on the market for four years. We've lived through a bear market in 2018. We've managed through multiple things that have happened in the crypto market. So I appreciate it. It is a level where expertise can pay off and we try to provide that expertise at Bitwise.

Entering the mainstream: Bitcoin is coming to your Fidelity 401(k)

Ric: Let me mention the Fidelity News. They have announced that they're going to allow the employees who work at companies that use the Fidelity 401(k) to buy Bitcoin inside that 401(k) plan. This is big news because Fidelity is the nation's largest 401(k) provider, 23,000 employers representing over 20 million workers with a total of nearly $3 trillion in assets under management. And now all of those people at all those companies are going to be able to buy bitcoin in their 401(k). What's your view of that news?

Matt: Well, I think there's two big takeaways from that news, Ric. The first one is that despite the volatility we see in prices, the progress in the crypto ecosystem is sort of monotonically up and to the right. This is an example of Bitcoin and crypto continuing to go more and more into the mainstream, and that is a story that doesn't have any volatility to it. It just keeps going. Every day we push more and more into the mainstream. We make it easier and easier for investors to allocate. So that's one big piece of the news. The other big piece of the news is what does it mean to the crypto markets? And of course, the answer there is any time you allow more people to easily invest in the crypto market, it brings people into the market. You and I have talked about this eventually if we get a Bitcoin ETF, that will bring more people into the market. Crypto moving into 401(k)s brings more people into the market. So it's an exciting moment for the crypto economy when you think about those employees, particularly the younger employees, maybe at tech-focused companies who want to allocate to crypto every month in their 401(k), it's going to bring new money into the market. It's just a net positive and another sign that we're marching in the right direction.

Ric: Yeah, I share your view completely. And for an awful lot of Americans, the only place they save is in a 401(k), meaning if you couldn't buy bitcoin inside it, you'd never have the opportunity to buy Bitcoin. And the fact that they are investing on a regular basis with every paycheck over the course of their entire careers suggests that it's a wonderful opportunity to take advantage of dollar cost averaging using a volatile asset as, instead of being a negative aspect, it's now one of the biggest features that makes a lot of sense for 401(k) savings and a tax deferred environment, often with an employer match. So I think you're right, this is going to help democratize the accessibility of crypto for millions of American workers. It's really very exciting. Tied to that is the notion that crypto is really for young people. The attitude, as you pointed out, that this is a long-term investment strategy. Don't try to get rich quick. And if it's for young investors, does that mean it's only for young investors? In fact, one outfit is now letting parents open custodial accounts for their children in crypto. Can you be too young? Or conversely, can you be too old to invest in crypto?

Matt: No, I don't think so. It does make sense for younger investors who have long-time horizons. Bitwise has investors of all ages. As long as you have a time horizon that's looking out a few years and size your allocation correctly, we're not talking about 50% of your portfolio in Bitcoin. I think the average Bitwise client has about 2.5% of their portfolio in crypto. You and I have talked about 1% allocations to crypto. It is a little bit goes a long way.

Ric: So you're back on the road at conferences. So tell us, what are you hearing lately at all of these events?

Matt: Yeah, I'll say the level of engagement is higher than it's ever been before. You know, last week I was at a pensions and endowment conference. And a few years ago, if you were at that conference and you asked people how many owned crypto in their personal portfolio, it would have been crickets in the room, Ric. When I did that this year, you saw maybe 30% of the people in the room raise their hands. You're seeing progress. The other thing I'll add from that, I've done two conferences in the last week. In both cases, my breakout on crypto was the fullest room. Professional investors are very, very eager to learn about it. Everyone now realizes that crypto is not going away, that they have to address it on a professional level.

Ric: So I'm going to ask you to do something. This is a challenge for you, Matt. I want you to describe blockchain for us, but I want you to do it in six words.

Matt: In six words... I will go with four words: money over the Internet. You know, one thing we talk about, Ric, the Internet has disrupted so many slices of our economy. It's disrupted the Postal Service, video streaming, it's disrupted retail, it's disrupted media, it's disrupted advertising. It hasn't disrupted finance. Money is the slowest moving thing in today's society. Property rights are still recorded on deeds. We're still paying title insurance. The right way to think about blockchain technology is, the technology that will finally allow the Internet to really disrupt the financial markets. And the exciting thing about that, Ric, is finance and money is the largest market that the Internet's ever gone after. That's why there's so much excitement. That's why there's so much venture capital activity. That's why there's so much talent. That's why the regulators are paying attention, because the Internet's going after money and finance, and that's the biggest market it's ever gone after.

Ric: Well, I'm really impressed that you're able to define blockchain in four words - money over the Internet. And the fact that you're able to do that demonstrates that this really isn't as complicated as a lot of people try to make it out to be. There are a lot of different ways investors can buy crypto. One is buying crypto stocks. Tell us what a crypto stock is and how you can help them do that at Bitwise.

Investing in the crypto economy with the Bitwise Crypto Innovators 30 Index (BITQ) 

Matt: Crypto stock is a company like Coinbase that provides brokerage services that helps individuals access crypto. It's a Bitcoin mining company that builds a warehouse of Bitcoin miners, and it's a bank like Silvergate that provides services to crypto companies. So these crypto companies allow you to gain exposure to what's going on in the crypto economy, but in a vehicle that has profits and revenues and earnings. Bitwise created an index called the Bitwise Crypto Innovators 30 Index (BITQ), which holds 30 highly targeted names in the crypto economy. These are pure play companies that only focus on supporting the crypto economy. It's the only ETF with crypto in its name, and it's just a way to gain exposure to crypto if you don't feel comfortable buying the Bitcoin or Ethereum or other crypto assets directly.

Ric: Why would anybody want to own anything other than Bitcoin and Ethereum? I mean, those two alone are what, 80% or so of the market? Why would anybody want to own some of the others and give us an idea of what those might be?

Matt: Sure, Bitcoin and Ethereum are the dominating giants, but there are new crypto assets. Solana is an example of a crypto asset that's like Ethereum. It can process more transactions than Ethereum. It's a way to process transactions on Ethereum that are cheaper, that are faster, and then Bitcoin and Ethereum are likely to be big players. But there are other players as well that are going to challenge them. And what we do in the Bitwise 10 is we hold the 10 largest. So you have exposure to the most interesting crypto assets no matter how the market develops.

Ric: While many people are expressing curiosity or interest in crypto, they have not yet invested, and they often raise a couple of common questions. They're fearful that crypto is going to zero and they're afraid of losing money, or they say the price is already peaked. "It's already made so much money over the last decade," "it's too late to invest". How do you respond to both of those concerns?

The value of a 1% asset allocation in crypto

Matt: Well, I definitely don't think it's too late, Ric. The reality is most professional investors haven't put a dollar into crypto yet. And until I'm at that pension conference and everyone in the room raises their hand and says they have an allocation to crypto, it's still early. In fact, I would say we're still maybe in the first inning. If you're listening to this conversation, you are early in getting education on crypto. You are ahead of your friends and peers, so it's not too early at all. Remember, this is the largest market the Internet's ever gone after. It's all finance and money. This is a $50, $100 trillion market that it's tackling. So it's still very early. The question of whether crypto goes to zero, you say this better than anyone else. One way to approach that is just to make a small allocation, 1% of your portfolio. If crypto goes to zero, you'll lose 1% of your wealth. And that will be unfortunate. But it won't fundamentally set you back on your pathway to retirement and your other financial goals. The stock market moves multiple percent in a given day, so likely your wealth is fluctuating by a percent or more. Just get into the game and hold it for the long-term is one way to understand that. Now I don't think crypto is going to zero. I think there's huge fundamental value. There are real revenues there, real users. But even if I'm wrong in that worst case scenario, as long as you've sized your portfolio allocation appropriately, you won't be fundamentally harmed on your pathway to where you're going.

Ric: That's Matt Hougan, the Chief Investment Officer of Bitwise Asset Management. Matt, if somebody wanted to reach out to Bitwise, how would they do that?

Matt: You can go to our website, BitwiseInvestments.com. You can sign up for our email conversation. Of course, Ric, crypto is not for everyone. There are significant risks in this market, but we would love to have conversations to provide materials for you if you're interested in learning about more.

Ric: Matt and I actually had a conversation for almost a half hour. If you would like to listen or watch or even read about the entire conversation, just visit us at TheTruthAYF.com. Matt, thanks so much.

Matt Hougan: Thanks, Ric.