Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: How should retail investors responsibly think about crypto? Are you
Speaker 2: crypto curious? Are you interested in owning maybe some Bitcoin
Speaker 2: or ethereum or some other crypto coins? How should ordinary
Speaker 2: investors interested in the cryptocurrency space get exposure to that asset.
Speaker 2: I'm Barry Rideltson on today's edition of At the Money.
Speaker 2: We're going to discuss how retail investors can responsibly invest
Speaker 2: in crypto. To help us unpack all of this and
Speaker 2: what it means for your portfolio, let's bring in Matt Hogan.
Speaker 2: He is the chief investment officer at bit Wise Asset Management.
Speaker 2: The firm manages over ten billion dollars in client assets
Speaker 2: in crypto. Let's start with just the basics, Matt. For
Speaker 2: the longest time, it's been challenging and difficult to own crypto.
Speaker 2: There were wallets and coins and crazy passwords, lots of
Speaker 2: hacks and other problems. Tell us about what's going on
Speaker 2: in the world of actually owning cryptocurrencies.
Speaker 3: Oh, it's great to be here, Barry. It's getting a
Speaker 3: lot easier to own crypto. You know, in the past,
Speaker 3: this was a new disruptive market. It was challenging. You
Speaker 3: had to write down your secret password and not lose it.
Speaker 3: There are all these terrible stories about people losing passwords
Speaker 3: that are now you know, would have gotten them one
Speaker 3: hundred million.
Speaker 4: Dollars or whatever.
Speaker 3: But this is just like any other technology. You and
Speaker 3: I remember when the Internet was hard to use. I
Speaker 3: remember looking up websites in a book, which I know
Speaker 3: sounds absolutely insane.
Speaker 4: But technology has advanced.
Speaker 3: It's now easy to get high quality access and secure
Speaker 3: access to crypto if you use the right tools.
Speaker 2: Huh really interesting. So it sounds like the wild West
Speaker 2: of crypto has been tamed a little bit. There certainly
Speaker 2: has been a push by well known financial institutions into
Speaker 2: the space. You can own crypto coins and ETFs, you
Speaker 2: can own them and closed end funds. What are some
Speaker 2: of the advantages and disadvantages of the various ways and
Speaker 2: methodologies of owning this.
Speaker 3: Yeah, I have to say I'm a huge fan of
Speaker 3: the ETFs. You know, obviously we offer them, so I'm
Speaker 3: talking my book, but broadly speaking, the ETFs came out
Speaker 3: in January of this year, and they let you own
Speaker 3: crypto at such low cost and with such institutional quality
Speaker 3: custody and trading. Retail investors today can get the same
Speaker 3: sort of setup that the largest institutions in the world
Speaker 3: were getting crypto a year or two ago. So these
Speaker 3: ETFs make it easy to buy exposure to bitcoin in
Speaker 3: a brokerage account and know that the crypto is being
Speaker 3: or the bitcoin is being held by an institutional regulated
Speaker 3: custodian with insurance in place, with all the bells and whistles,
Speaker 3: but they don't have to worry about it. Five years ago,
Speaker 3: you had to worry about that personally. The ETFs have
Speaker 3: sort of taken that complexity away and made it cheap
Speaker 3: and safe to own it.
Speaker 2: And you're really a fascinating person to talk to about
Speaker 2: this because you come from the ETF side of the industry.
Speaker 2: You spent how many years twenty years working on atfs.
Speaker 2: Tell us a little bit about your background and what
Speaker 2: led you into the crypto side to come up with
Speaker 2: ways to put coins in ETFs.
Speaker 3: Yeah, absolutely, you know, fifteen twenty years in the ETF industry,
Speaker 3: the CEO of ETF dot com. There are actually so
Speaker 3: many parallels between ETFs and crypto. I know ETFs today
Speaker 3: are the apple pie of investing, everyone's favorite tool, but
Speaker 3: twenty years ago, they were considered risky and disruptive and
Speaker 3: hard to access. The Financial Times called them weapons of
Speaker 3: mass destruction. There were congressional hearings Berry about ETF's destroying
Speaker 3: the American dream, if you can believe it. But ETFs
Speaker 3: had this core advantage, which were they were lower costs,
Speaker 3: they were more tax efficient, they were easier to use,
Speaker 3: and over time the world woke up to the reality.
Speaker 3: The same thing's happening in crypto. You can see it
Speaker 3: before your eyes. A few years ago Larry Fink called
Speaker 3: bitcoin an index of money laundering. Today he's talking about
Speaker 3: it transforming the world of currency. And he holds more
Speaker 3: Bitcoin than almost anyone else, So it's going in that direction.
Speaker 3: And absolutely you're seeing these two worlds come together where
Speaker 3: this new financial innovation of crypto is now being packaged
Speaker 3: in this beautiful package of an ETF and making it
Speaker 3: easy for every investor to access. It's a beautiful thing.
Speaker 2: And I wanted to talk a little bit about the
Speaker 2: safety aspect and the institutionalzation. None of the coins are regulated.
Speaker 2: It very much has been the wild West. But you're
Speaker 2: not a crypto exchange, you're a fund manager, you're a
Speaker 2: financial manager, who is the regulatory authority that supervises bit wise.
Speaker 3: Yeah, all of them, with all the letters, all the
Speaker 3: letters very you know, we're regulated by the SEC because
Speaker 3: even though the crypto assets aren't, the funds that we offer,
Speaker 3: the ETFs that we offer are regulated and passed through
Speaker 3: the SEC. Of course, also the CFTC for products that
Speaker 3: hold futures contracts. FINRA, which is another regulator, has oversight
Speaker 3: over broker dealers, and so our distribution team sits under that.
Speaker 3: All our materials are reviewed.
Speaker 4: By FINRA, the NFA.
Speaker 3: It's an alphabet soup of regulators. But it's a good
Speaker 3: thing for investors because one thing that is true about
Speaker 3: crypto is in the early wild wild West days when
Speaker 3: you had offshore exchanges doing shady things, people lost money.
Speaker 3: A great thing that has happened is that has moved
Speaker 3: into these regulated formats like ETF. So you do have
Speaker 3: some protections from the SEC, the CFTC, BINRA, the NFA
Speaker 3: and others, and of course bitwy sits within those protections
Speaker 3: as an RAA.
Speaker 2: That's really interesting. So you're a regulated entity. Where do
Speaker 2: the ETFs and various funds get custodied? How are they held?
Speaker 2: Who does the administrative reporting. I mean, I think of
Speaker 2: these as complex questions for a coin, but really they're
Speaker 2: kind of running the mill questions for an sec regulated
Speaker 2: entity like bitwise.
Speaker 3: It looks exactly like or very similar to any other
Speaker 3: ETF manager. So the crypto acids are held in a
Speaker 3: regulated qualified custodian. In the case of our Bitcoin ETF,
Speaker 3: it's coin based custody, which is the largest crypto custodian
Speaker 3: in the world. The funds are audited by Big four
Speaker 3: auditors in our case it's KPMG. They're administered by firms
Speaker 3: like Bank of New York. If you looked at the
Speaker 3: sort of stack of participants, it would look just like
Speaker 3: you know, a traditional equity ATF and that's what it
Speaker 3: should do, right.
Speaker 4: These are trusted rails that.
Speaker 3: Have been proven over years, and we've just applied them
Speaker 3: to crypto to give the similar protections to crypto investors.
Speaker 2: So the one thing that I find kind of amusing
Speaker 2: and ironic is the whole defying nonsense. The decentralized finance
Speaker 2: turns out to have been a narrative that kind of
Speaker 2: faded away because crypto, for all to talk about outside
Speaker 2: of the financial system, has been dragged, kicking and screaming
Speaker 2: right into the heart of the financial system.
Speaker 3: I admit that there is an irony there, but I
Speaker 3: actually think it's more of a continuum sort of. The
Speaker 3: core idea of DeFi is that the existing financial system
Speaker 3: is too slow, too intermediated.
Speaker 4: Too costly, and all of that is true. DeFi offers
Speaker 4: the potential to improve that.
Speaker 3: But of course the two systems have to come together,
Speaker 3: and you're seeing it. So you're seeing, you know, from
Speaker 3: the crypto side, the launch of ETFs moving into the
Speaker 3: traditional financial system. But you also have firms like Blackrock
Speaker 3: and Franklin Templeton issuing money market funds on public blockchains
Speaker 3: like ethereum, So you are seeing this coming together. I
Speaker 3: wouldn't write off DeFi one point zero very I think
Speaker 3: there'll be a DeFi two point zero that is much
Speaker 3: more significant.
Speaker 2: Really interesting. So let's talk about individuals who want to
Speaker 2: own crypto. What sort of strategies do they deploy? Is
Speaker 2: it bitcoin or bust or should they own bitcoin, ethereum
Speaker 2: and a bunch of other coins. Give us some investment strategies.
Speaker 3: Yeah, I mean, without telling anyone exactly what to do.
Speaker 3: I'm an index investor at heart. Right, this is a
Speaker 3: disruptive early market. You know, my family owned a betamax.
Speaker 3: I remember using a BlackBerry. It's hard to know exactly
Speaker 3: how this market will turn out in the future. So
Speaker 3: I think taking a diversified approach to this market is
Speaker 3: probably a sensible approach for many investors.
Speaker 4: There's certainly people who are.
Speaker 3: Bitcoin only, who only care about the monetary aspects of crypto,
Speaker 3: but in any disruptive technology, My history, you know, having
Speaker 3: grown up through the tech bubble, tells me that a
Speaker 3: diversified approach may be a good idea for many investors.
Speaker 2: Makes a lot of sense. Whenever I talk about stocks
Speaker 2: to an investor, I always warn them, hey, listen, you
Speaker 2: know you get a a ten to twenty percent pullback
Speaker 2: two out of every three years. Twenty percent comes along
Speaker 2: just about every third year. With crypto. I love the
Speaker 2: expression crypto winter, and we've had an number of them,
Speaker 2: when for a year or two, cryptocurrencies can be down,
Speaker 2: you know, fifty percent or worse. We've probably had three
Speaker 2: of them over the past you know, ten.
Speaker 4: Or so years.
Speaker 2: So how should investors prepare themselves for what seems to
Speaker 2: be an inevitable drawdown?
Speaker 3: Yeah, it's a really important question. People ask me all
Speaker 3: the time what the biggest risk in crypto? Is it regulatory?
Speaker 3: Is it technical? Is it quantum computing? It's none of
Speaker 3: those things. The biggest risk is behavioral risk by investors
Speaker 3: who either chase prices when they go up or sell
Speaker 3: when prices go down. This is an asset that has
Speaker 3: huge volatility. You're going to get thirty forty fifty percent
Speaker 3: drawdowns in the future. I feel confident about that. As
Speaker 3: you mentioned, we've seen those in the past and there's
Speaker 3: no reason to expect that will change for investors. What
Speaker 3: that means is two things. One, you need a long
Speaker 3: term discipline. If you're buying bitcoin for the next week,
Speaker 3: I have no idea where it's going. I'm optimistic over
Speaker 3: the next handful of years. And the second is you
Speaker 3: need to size your portfolio appropriately. Don't put in so
Speaker 3: much that if it pulls back fifty percent you're going
Speaker 3: to panic and sell, because that is the worst case scenario.
Speaker 3: You're better just sitting on the sidelines. Put in a
Speaker 3: small amount if you're going to invest, so you can
Speaker 3: handle that up and down and it won't overly impact
Speaker 3: what you're doing.
Speaker 4: Uh.
Speaker 2: Really kind of interesting. So you mentioned price. Bitcoin goes
Speaker 2: way up, it goes way down. Is there a way
Speaker 2: of looking at these from a fundamental perspective? How do
Speaker 2: we value coins other than whatever their last trade was?
Speaker 3: Yeah, it's unfortunately a little bit complex. Bitcoin's valuation technique
Speaker 3: is different from other crypto assets like ethereum. When you
Speaker 3: think about bitcoin, what I think bitcoin is trying to
Speaker 3: become is a digital version of gold, a way to
Speaker 3: store money outside of central banks in a digital format.
Speaker 3: And we have digital versions of everything. We have digital
Speaker 3: versions of newspapers, we have digital versions of ads. I
Speaker 3: think the world and younger generations on a digital version
Speaker 3: of gold. The reason I raise that is you can
Speaker 3: look at bitcoin today, it's a little under two trillion dollars.
Speaker 3: You can look at gold it's a little under twenty
Speaker 3: trillion dollars. Do you think it'll get half that market? Well,
Speaker 3: then you think bitcoin will five.
Speaker 4: X from here.
Speaker 3: Do you think it'll get that full market you're more
Speaker 3: optimistic or do you think it'll be less successful? That's
Speaker 3: absolutely the best way to value bitcoin. These other crypto
Speaker 3: assets like ethereum are different. They actually have cash flow
Speaker 3: like characteristics, so they behave a little bit more like stocks,
Speaker 3: they're more sort of fundamentally valued than bitcoin, which is
Speaker 3: this monetary asset, and so you have to think of
Speaker 3: the two different sets of assets a little differently.
Speaker 2: So you and I are both index guys. That's that's
Speaker 2: our background. If I'm an investor and I want to
Speaker 2: put two or three percent of my portfolio into coins,
Speaker 2: what do I do? Dohy tell us about some of
Speaker 2: the options that you guys have. Is it you know,
Speaker 2: should I be going for two X levered bitcoin or
Speaker 2: am I better off with Hey, here are the five
Speaker 2: biggest coins or ten biggest coins and own them all.
Speaker 3: Yeah, I wouldn't go two x levered bitcoin. Uh, you know,
Speaker 3: bitcoin is volatile enough. I think investors can make a choice.
Speaker 3: Within the ETF space. The only coins that we have
Speaker 3: access to are Bitcoin and ethereum. And the good news
Speaker 3: is there the two largest assets. They're the leaders in
Speaker 3: their spaces. So you can do worse than go two
Speaker 3: parts bitcoin in one part ether and have at least
Speaker 3: broad based exposure. If you want to be more diversified
Speaker 3: and take an index based approach. You know, we a
Speaker 3: bit wise have the largest crypto index fund. It's available
Speaker 3: in a rapper, but that rapper is more like a
Speaker 3: closed end fund, so it can trade it premiums and discounts,
Speaker 3: and you have to be aware that you have that
Speaker 3: extra layer of volatility. So either approach can make sense
Speaker 3: for the right investor, as long as you understand what
Speaker 3: you're getting into.
Speaker 2: So I want to not get too lost in the
Speaker 2: weeds on the technical issues, but I keep hearing about
Speaker 2: the HAVING that's coming up and what does that mean
Speaker 2: to what should lay people understand about this?
Speaker 3: Yeah, So if you think about bitcoin, when it was
Speaker 3: created way back in two thousand and eight, two thousand
Speaker 3: and nine, there were no bitcoin in existence, and we
Speaker 3: all know, or many of us know, that eventually there'll
Speaker 3: be twenty one million bitcoin. The way we get from
Speaker 3: zero to twenty one million is every day a little
Speaker 3: bit more bitcoin is issued. What the Having refers to
Speaker 3: Barry is that every four years the amount of bitcoin
Speaker 3: that's issued falls in half, and the last having was
Speaker 3: earlier this year, right, it dropped in half. What that
Speaker 3: means is there's less new supply coming into the market.
Speaker 3: In the end, bitcoin's price is set by supply and demand.
Speaker 3: You have all these people buying bitcoin through the ETF
Speaker 3: and other means and then you have supply and so
Speaker 3: applies either this newly developed bitcoin or existing people selling it.
Speaker 3: So what the having does is it reduces the amount
Speaker 3: of supply in the market. If I told you that
Speaker 3: the amount of oil coming out of the ground would
Speaker 3: fall in half tomorrow, you might be bullish on oil.
Speaker 3: The same sort of narrative is true in bitcoin. The
Speaker 3: amount of bitcoin coming out of the ground, if you will,
Speaker 3: falls in half every four years, and we're just sort
Speaker 3: of starting to feel the impact of the most recent having.
Speaker 2: Now, So all of these challenges, whether it's the limited
Speaker 2: amount of supply that having should be fairly well known
Speaker 2: by investors. None of these are surprise. It's not like
Speaker 2: an earning surprise. Hey, everybody who's a bitcoin investor understands these.
Speaker 2: So the question becomes, what are going to be the
Speaker 2: future drivers of bitcoin returns? Should we be thinking about
Speaker 2: bitcoin like a commodity? Like a currency? You know? You
Speaker 2: mentioned you know, just under two billion dollars trillion dollars
Speaker 2: in marketcap for bitcoin. That puts it somewhere between meta
Speaker 2: and alphabet, Facebook and Google. Do we think about this
Speaker 2: like a large tech company? How should we contextualize the
Speaker 2: coins themselves.
Speaker 3: Yeah, I mean I think of bitcoin specifically as a commodity.
Speaker 3: It's a commodity with scarce supply, and its price is
Speaker 3: set by supply and demand. One of the reasons I'm
Speaker 3: so optimistic about bitcoin right now is we have major
Speaker 3: new sources of demand. Institutional investors are just now buying bitcoin.
Speaker 3: There's talk of the US government acquiring one million bitcoin.
Speaker 3: Corporations are acquiring bitcoin. None of that was true in
Speaker 3: a major way a year ago or two years ago.
Speaker 3: And so you have all this new demand. But unlike
Speaker 3: other commodities, unlike gold, unlike oil, unlike copper, you can
Speaker 3: have all the demand in the world, you don't get
Speaker 3: any more supply. The supply is literally fixed, it's pre programmed.
Speaker 3: When you think about are you optimistic or pessimistic on bitcoin,
Speaker 3: I like to think about that supply demand dynamic, and
Speaker 3: from what I see, there's a lot more demand coming
Speaker 3: online and limited new supply coming online. That makes me optimistic.
Speaker 3: It's not a guarantee. We can see some of those
Speaker 3: things not materialize. We could see investors scared off.
Speaker 4: But I like the.
Speaker 3: Long term framing of it from that simple supply demand perspective.
Speaker 2: So to wrap up. Investors who are crypto curious can
Speaker 2: buy various coins today much more easily than it used
Speaker 2: to be. If you wanted to own any sort of coin,
Speaker 2: you could buy it in a closed end fund or
Speaker 2: even easier in an ETF. Be very aware that you
Speaker 2: have to position size appropriately. Hey, if you want to
Speaker 2: own a percent or three in your portfolio and your
Speaker 2: liquid net worth, the responsible way to do this is
Speaker 2: not through a leverage product, not in anything that's reflective
Speaker 2: of the old wild West ethos of crypto, but a
Speaker 2: traditionally TF You have a small position as you would
Speaker 2: for any particular company, and be aware of your own
Speaker 2: behavior when it comes to managing yourself around the volatility
Speaker 2: of bitcoin. I'm Barry Ridolts. You're listening to Bloomberg's At
Speaker 2: the Money.