Conversation with Bitwise Executive: Why Cryptocurrency ETFs Matter?
Arrangement Compilation: Shenchao TechFlow
Bitwise is a cryptocurrency-focused investment firm that manages the worlds largest cryptocurrency index fund (OTCQX: BITW) and has a groundbreaking track record in Bitcoin, Ethereum, DeFi and cryptocurrency stock index products.
On October 26, Bitwise submitted its amendment to the Bitcoin ETF. The submission of this amendment is considered to be a response to the comments and concerns of the U.S. Securities and Exchange Commission (SEC). Some analysts pointed out that if Bitwises product is approved by the SEC, it will trade under the stock symbol $BITB.
On this episode of Empire, Jason and Santi take a deep dive into the world of ETFs with Bitwise CEO Hunter Horsley and CIO Matt Hougan. They will discuss early-stage ETF skepticism and misunderstandings, why the approval of a Bitcoin ETF could be transformative for cryptocurrency adoption and maturity, and the security and regulatory layers of ETFs.
Hosts: Jason Santi, Empire Podcast
Speaker: Hunter Horsley, Bitwise CEO; Matt Hougan, CIO
Podcast source:Empire Podcast
The development history of ETFs
Matt noted that when ETFs first started, they were viewed as financial “weapons of mass destruction.” Some people worry that ETFs may lead to an endless cycle of liquidity or destroy the bond market. There are even congressional hearings expressing concern that ETFs may destroy the entrepreneurial spirit in the United States and end the American dream.
Matt explains that ETFs are an evolution of financial technology. Before ETFs, people invested through mutual funds, which had been around for a hundred years. Mutual fund technology was state-of-the-art in 1920, but it wasnt until the early 1990s that people came up with the concept of ETFs. ETFs pose a threat to many traditional financial services companies, as well as traditional mutual funds and telephone-traded bonds.
Matt pointed out that people are worried about ETFs for two reasons: first, it may cut into the profits and prices of financial services companies; second, it is new and people do not know how it will develop.
Matt emphasized that peoples suspicion of ETFs is not short-lived, but has lasted for 20 years. Matt recalled seeing the crypto industry being questioned in front of Congress, which was very similar to what they saw in the early days of ETFs.
Matt said that after years of development, ETFs are now widely accepted and have become a mainstream method of investment, forming an industry worth $7 trillion, and almost every American can enter the market through ETFs. Matt believes that cryptocurrencies will go through a similar journey to ETFs and eventually become widely accepted.
SEC concerns about Bitcoin ETF
Jason pointed out that unlike traditional financial markets, the crypto market is a market that operates 24/7, 365 days. When we consider ETFs in the United States, although there are international participants, all transactions are in a more controlled environment. are settled in an environment where cryptocurrencies operate on a global scale, which may cause concern for the SEC.
Matt explained that the SEC has always been very concerned about market manipulation. In order to approve an ETF, the SEC wants to be able to monitor the market and detect market manipulation.
In the stock market, if someone is trying to manipulate the market, the SEC can ask the New York Stock Exchange or Nasdaq to find out the facts. In the crude oil market, if someone tries to manipulate crude oil prices, the SEC can see who is trading crude oil futures and prosecute. But in the cryptocurrency space, the challenge has long been that there is no clear agency or platform from which to ask for detailed information about these transactions.
Matt pointed out that the first application for a Bitcoin ETF was submitted on July 1, 2013. But if we look at the market honestly at that time, it was not a good fit for a Bitcoin ETF at the time. There were no institutional custodians, no trading firms in which to make markets, and the markets were more susceptible to manipulation. For the first 5-7 years, the reasons why the SEC rejected Bitcoin ETFs were sound.
Matt emphasized that compared with 2013, the market is more mature and institutionalized now. Now, you can monitor the CME Bitcoin futures market, and companies like Black Rock are pursuing surveillance-sharing agreements with Coinbase. Matt believes that these concerns about market manipulation have now been addressed and hopes to see if the SEC agrees with this view in the coming months.
Deep tide note: CME is the Chicago Mercantile Exchange, which is one of the largest financial derivatives exchanges in the world, providing trading in various financial products, including futures and options.
Gold ETF Analogy
Matt pointed out that before the launch of gold ETFs, gold was regarded as a non-mainstream asset. People would hoard gold bars and hide them under their mattresses. It was not the preferred asset of mainstream institutions.
Shenchao Note: Gold ETF is a financial product that uses gold as its underlying asset and tracks the price fluctuations of spot gold. It can be traded in the securities market.
However, the launch of gold ETFs has completely changed this phenomenon. Gold became more institutionalized and viewed as a stable, reliable asset. Matt mentioned that the price of gold has risen for 11 consecutive years, which is unprecedented in modern history. This rise is related to the launch of gold ETFs and subsequent large capital inflows. The launch of gold ETF has transformed gold from a marginalized asset to an asset widely accepted by mainstream institutions. Superannuation funds, mutual funds and other mainstream financial products are beginning to include gold as part of their investment portfolios.
Matt predicts that Bitcoin ETFs will have a similar impact on the crypto market. He believes that the launch of the Bitcoin ETF will mark a new era in the crypto market, and there will be a before ETF and after ETF market.
Matt mentioned that the launch of gold ETFs resulted in a large inflow of funds into the gold market, which did not affect other forms of gold investment, such as gold bars and gold jewelry. He believes that the launch of a Bitcoin ETF may also lead to a large inflow of funds into the crypto market without affecting other forms of Bitcoin investment. People underestimate the long-term impact of Bitcoin ETFs on the market. He predicted that in a few years, people will see the profound impact of Bitcoin ETFs on the market, which will completely change the face of the crypto market.
Hunter mentioned that many financial advisors are waiting for the approval of Bitcoin ETFs, and they believe that the launch of Bitcoin ETFs will be the most important development in the cryptocurrency industry for traditional investment experts. But they also express concerns about investing directly in Bitcoin or other cryptocurrencies because it would require them to manage private keys, wallets, and other technical details. These are things they are unfamiliar with or don’t want to deal with. They prefer simplicity. , familiar investment methods such as ETFs can be easily incorporated into clients portfolios and traded through traditional brokerage accounts.
Hunter emphasized that Bitcoin ETFs provide these financial advisors with a simple, safe way to invest in Bitcoin for their clients, without requiring them to directly handle the cryptocurrency or learn new technology. Hunter believes the launch of a Bitcoin ETF will bring more financial advisors and their clients into the crypto space.
The Reality of Cryptocurrency Investing
Matt describes the three main components of American wealth: self-directed retail investors, financial advisors, and institutional capital (such as pensions and endowments). The wealth distribution ratio of these three segments is approximately: 20% independent retail, 40% consultants and 40% institutions.
Matt noted that the growth of the crypto market from zero to a trillion dollars was primarily driven by autonomous retail investors, which is the smallest of the three segments. While this segment may not be fully penetrated yet, the other two segments are barely growing at all.
The launch of a cryptocurrency ETF would allow the other two segments (advisors and institutions) to gradually reach the level of autonomous retail investors. Because ETFs offer a simple, familiar way to invest in cryptocurrencies without having to deal directly with the technical details.
Although self-directed retail investors often receive media attention, they are actually the smallest segment of the market. Most of the money is in financial advisors and institutional capital, which is what ETFs serve.
Hunter emphasized that the challenge for financial advisors is to provide clients with a comprehensive portfolio while also staying current on the crypto market. They need to develop relationships with a range of partners to ensure they are always aware of the latest developments in the market.
Horsley believes Bitwise’s continued wholehearted focus on the cryptocurrency space makes it an ideal partner for financial advisors who can ensure their clients are always provided with the latest information in the crypto space.
Which companies would benefit if the ETF were approved?
Matt mentioned that many people predict that large companies will enter the cryptocurrency ETF field and win. This view is based on the successful experience of large companies in other financial fields.
Matt looked back at the early history of ETFs, when they were launched by a company called Barclays Global Investors. The company was later acquired by BlackRock. He emphasized that while large companies may enter the market, historically, true innovation and leadership often come from experts and pioneers in their fields.
Hunter pointed out that Bitwise, as a cryptocurrency-focused company, has deep industry knowledge and experience. This expertise and in-depth understanding of the market give Bitwise an advantage when competing with larger companies. Financial advisors consider several factors when choosing a partner, one of which is the firms expertise and experience, and Bitwises in-depth expertise would make it an ideal choice for financial advisors.
Both Matt and Hunter believe that although large companies may enter the cryptocurrency ETF market, there will still be a variety of products and services for investors to choose from. This diversity will provide investors with more choices and make the market healthier and more competitive.
Voting rights concerns for ETFs
Moderator Santi mentioned that some people criticize that the market has become too complacent due to the existence of ETFs. Large companies hold large amounts of capital through ETFs, thereby acquiring large ownership of these companies, and this ownership is very passive. Before ETFs, there was a more direct relationship with a companys owners and perhaps more oversight of management.
Matt responded that when the first index funds were launched in the 1970s, there was an advertising campaign claiming that index funds were un-American, and this view has been around for 50 years. This argument does not hold true as long as a sufficient portion of the market is actively participating in the product. He believes that while 100% of the market being dynamically managed may lead to governance issues, 50%, 80% or 90% of the time it may not.
Matt explained that in the past, voting rights were mainly held by asset managers, but now they are becoming more transparent and personalized through the application of various fintech solutions. He predicts that the crypto market will follow this trend.
The host mentioned that currently in the crypto market, there are many representatives and validators, and most of them are representatives. For example, Lido has approximately 33% representation in Ethereum. The moderator asked, if one owns an ETF and wishes to participate in the companys AGM, is the ETF allowed to submit a vote?
Matt responded that this structure is changing. In the past, these rights were mainly held by asset managers, but now more transparency and personalization are being achieved through the application of various fintech tools and solutions.
Hunter said that as a long-term asset management company, Bitwise’s goal is to support the development and prosperity of the cryptocurrency ecosystem. He believes that as long-term asset managers or asset managers with a long-term bias gradually accumulate more assets, this will have a positive impact on the entire industry.
