Dialogue with Bitwise executives: Why are cryptocurrency ETFs essential?

Organized & Compiled by: Deep Tide TechFlow

Bitwise is an investment firm focused on cryptocurrency, managing the world's largest cryptocurrency index fund (OTCQX: BITW), and has a groundbreaking track record in Bitcoin, Ethereum, DeFi, and cryptocurrency equity index products.

On October 26, Bitwise submitted its amendment regarding the Bitcoin ETF, which is seen as a response to comments and concerns from the U.S. Securities and Exchange Commission (SEC). Analysts have pointed out that if Bitwise's product is approved by the SEC, it will trade under the ticker symbol $BITB.

In this episode of Empire, Jason and Santi delve into the world of ETFs with Bitwise CEO Hunter Horsley and CIO Matt Hougan. They will discuss the skepticism and misunderstandings surrounding early ETFs, why the approval of a Bitcoin ETF could transform cryptocurrency adoption and maturity, and the safety and regulatory aspects of ETFs.

Hosts: Jason & Santi, Empire Podcast

Speakers: Hunter Horsley, Bitwise CEO; Matt Hougan, CIO

Podcast Source: Empire Podcast

Original Title: "The Bull Case for Crypto ETFs | Hunter Horsley & Matt Hougan"

Show: Link

Release Date: October 24

The Evolution of ETFs

• Matt pointed out that when ETFs first started, they were seen as "weapons of mass financial destruction." There were concerns that ETFs could lead to a liquidity death spiral or destroy the bond market, and there were even congressional hearings expressing worries that ETFs could destroy American entrepreneurship and end the American dream.

• Matt explained that ETFs are an evolution of financial technology. Before ETFs, people invested through mutual funds, which had been around for a hundred years. The technology of mutual funds was cutting-edge in 1920, but it wasn't until the early 1990s that the concept of ETFs was conceived. ETFs posed a threat to many traditional financial services companies, and some traditional mutual funds and bond trading via phone were impacted by ETFs.

• Matt noted that there are two reasons for people's concerns about ETFs: first, they could cut into the profits and pricing of financial services companies; second, they are new, and people do not know how they will evolve.

• Matt emphasized that skepticism about ETFs is not fleeting; it has persisted for 20 years. He recalled seeing the cryptocurrency industry being questioned before Congress, which is very similar to what they saw in the early days of ETFs.

• Matt stated that after years of development, ETFs are now widely accepted and have become a mainstream investment method, forming a $7 trillion industry where almost every American can access the market through ETFs. He believes that cryptocurrencies will undergo a similar journey and will eventually be widely accepted.

SEC's Concerns About Bitcoin ETFs

• Jason pointed out that unlike traditional financial markets, the cryptocurrency market operates 24/7, 365 days a year. When considering ETFs in the U.S., although there are international participants, all transactions are settled in a more controlled environment, whereas cryptocurrencies operate globally, which may raise concerns for the SEC.

• Matt explained that the SEC has been very focused on the issue of market manipulation. To approve an ETF, the SEC wants to be able to monitor the market and detect market manipulation.

• In the stock market, if someone attempts to manipulate the market, the SEC can inquire with the New York Stock Exchange or NASDAQ to ascertain the facts. In the crude oil market, if someone tries to manipulate oil prices, the SEC can look at who is trading oil futures and prosecute. However, in the cryptocurrency space, the long-standing challenge has been the lack of a clear agency or platform to inquire about the details of these trades.

• Matt noted that the first application for a Bitcoin ETF was submitted on July 1, 2013. But if we honestly look at the market at that time, it was not suitable for a Bitcoin ETF. There were no institutional custodians, no trading firms to act as market makers, and the market was more susceptible to manipulation. The SEC's reasons for rejecting Bitcoin ETFs in the first 5-7 years were reasonable.

• Matt emphasized that the market is now more mature and institutionalized compared to 2013. Now, you can monitor the CME Bitcoin futures market, and companies like BlackRock are seeking monitoring-sharing agreements with Coinbase. Matt believes that the concerns about market manipulation have now been addressed, and he hopes to see if the SEC agrees with this perspective in the coming months.

Deep Tide Note: CME refers to the Chicago Mercantile Exchange, one of the largest financial derivatives exchanges in the world, offering trading in a variety of financial products, including futures and options.

The Analogy of Gold ETFs

• Matt pointed out that before the launch of gold ETFs, gold was seen as a non-mainstream asset, with people hoarding gold bars and hiding them under mattresses; it was not a preferred asset for mainstream institutions.

Deep Tide Note: Gold ETFs are financial products that are based on gold as an underlying asset and track the fluctuations in the spot price of gold, which can be traded on the securities market.

• However, the launch of gold ETFs completely changed this phenomenon. Gold became more institutionalized and was seen as a stable, reliable asset. Matt mentioned that gold prices rose for 11 consecutive years, which is unprecedented in modern history, and this rise was related to the launch of gold ETFs and the subsequent influx of capital. The introduction of gold ETFs transformed gold from a marginalized asset into one widely accepted by mainstream institutions. Pensions, mutual funds, and other mainstream financial products began to include gold as part of their portfolios.

• Matt predicts that Bitcoin ETFs will also have a similar impact on the cryptocurrency market. He believes that the launch of Bitcoin ETFs will mark a new era for the cryptocurrency market, creating a "pre-ETF" and "post-ETF" market.

• Matt mentioned that the launch of gold ETFs led to a significant influx of capital into the gold market, which did not negatively impact other forms of gold investment, such as gold bars and jewelry. He believes that the launch of Bitcoin ETFs could also lead to a significant influx of capital into the cryptocurrency market without affecting other forms of Bitcoin investment. People underestimate the long-term impact of Bitcoin ETFs on the market. He predicts that in a few years, people will see the profound effects of Bitcoin ETFs on the market, which will fundamentally change the landscape of the cryptocurrency market.

• Hunter noted that many financial advisors are waiting for the approval of Bitcoin ETFs, believing that the launch of Bitcoin ETFs will be the most significant development for the cryptocurrency industry in relation to traditional investment experts. However, they also express concerns about directly investing in Bitcoin or other cryptocurrencies, as this requires them to manage private keys, wallets, and other technical details, which they are unfamiliar with or prefer not to handle. In contrast, they prefer simple, familiar investment methods, such as ETFs, which can easily be incorporated into clients' portfolios and traded through traditional brokerage accounts.

• Hunter emphasized that Bitcoin ETFs provide these financial advisors with a simple and secure way to invest in Bitcoin for their clients without requiring them to directly handle cryptocurrencies or learn new technologies. Hunter believes that the launch of Bitcoin ETFs will bring more financial advisors and their clients into the cryptocurrency space.

The Reality of Cryptocurrency Investment

• Matt described the three main components of American wealth: independent retail investors, financial advisors, and institutional capital (such as pensions and endowments). The wealth distribution among these three components is approximately: 20% independent retail, 40% advisors, and 40% institutions.

• Matt pointed out that the growth of the cryptocurrency market from zero to one trillion dollars has primarily been driven by independent retail investors, the smallest of the three components. While this segment may not have fully penetrated yet, the other two segments have seen little growth.

• The launch of a cryptocurrency ETF would allow the other two segments (advisors and institutions) to gradually reach the level of independent retail investors. Because ETFs provide a simple, familiar way to invest in cryptocurrencies without needing to deal with technical details directly.

• Although independent retail investors often receive media attention, they are actually the smallest segment in the market. Most of the capital is in financial advisors and institutional capital, which is also the target of ETFs.

• Hunter emphasized that the challenge for financial advisors is how to provide a comprehensive investment portfolio while staying updated on the latest developments in the cryptocurrency market. They need to establish relationships with a range of partners to ensure they are always informed about the latest market trends.

• Horsley believes that Bitwise is fully dedicated to the cryptocurrency space, making it an ideal partner for financial advisors, ensuring they always provide the latest information in the crypto field for their clients.

Which Companies Would Benefit if ETFs Are Approved?

• Matt mentioned that many people predict that large companies will enter the cryptocurrency ETF space and succeed, a view based on the success of large companies in other financial sectors.

• Matt recalled the early history of ETFs, which were launched by a company called Barclays Global Investors. This company was later acquired by BlackRock. He emphasized that while large companies may enter this market, historically, true innovation and leadership often come from experts and pioneers in the field.

• Hunter pointed out that Bitwise, as a company focused on cryptocurrency, has deep industry knowledge and experience, which gives Bitwise an advantage in competing with large companies. Financial advisors consider multiple factors when choosing partners, one of which is the company's expertise and experience, and Bitwise's in-depth expertise makes it an ideal choice for financial advisors.

• Both Matt and Hunter believe that while large companies may enter the cryptocurrency ETF market, there will still be a diverse range of products and services available for investors. This diversity will provide investors with more choices, making the market healthier and more competitive.

Concerns About Voting Rights in ETFs

• Host Santi mentioned that some criticize that the existence of ETFs has made the market too complacent. Large companies hold significant capital through ETFs, gaining substantial ownership in these companies, which is very passive. Before ETFs, there was a more direct relationship with company owners, which may have led to more oversight of management.

• Matt responded that when the first index fund was launched in the 1970s, there was an advertising campaign claiming that index funds were "un-American," a view that has persisted for 50 years. As long as there are enough active participants in the market, this view does not hold. He believes that while 100% of the market being dynamically managed could lead to governance issues, it may not be the case at 50%, 80%, or 90%.

• Matt explained that in the past, voting rights were primarily held by asset management companies, but now, through various fintech solutions, voting rights are becoming more transparent and personalized. He predicts that the cryptocurrency market will also follow this trend.

• The host mentioned that there are many representatives and validators in the cryptocurrency market, most of whom are representatives. For example, Lido holds about 33% of the representation in Ethereum. The host asked if owning an ETF allows for submitting votes if one wishes to participate in a company's annual shareholder meeting.

• Matt responded that this structure is changing. In the past, these rights were mainly held by asset management companies, but now, through various fintech tools and solutions, more transparency and personalization are being achieved.

• Hunter stated that Bitwise, as a long-term asset management company, aims to support the development and prosperity of the cryptocurrency ecosystem. He believes that as long-term asset management companies or those leaning towards long-term management gradually accumulate more assets, it will have a positive impact on the entire industry.