Date: Sep 04 2018
Matt Hougan was the CEO of ETF.com, a three-time member of the Barron’s ETF Roundtable, and the co-author of the CFA Institute’s Monograph on ETFs. He was also a presenter at FOX's 2018 Autumn Global Investment Forum in New York. In February 2018, he left the ETF industry to join Bitwise Asset Management, creator of the world’s first cryptocurrency index fund. He wrote about his reasoning below.
I’ve spent the past fifteen years helping investors, financial advisors and institutions understand exchange-traded funds (ETFs): how they work, how they trade, and how they can save people money. Through those years, I’ve extolled the virtues of diversified, low-cost, index-based investing, telling investors to “just be boring”.
So in February of this year, when I let my friends and family know recently that I was leaving the ETF world to take a new job as the global head of research at a cryptocurrency asset manager, the response was incredulity.
Are you crazy? Bitcoin’s a fraud! Tulip-mania! It’s all going to zero.
I understand those sentiments. Viewed at a glance, the crypto space has all the hallmarks of a bubble. Massive price appreciation has attracted a phalanx of scammers, con artists, self-promoters and bad actors. Practical applications seem years away, and few of us use cryptocurrencies in our day-to-day lives. The very idea can seem ephemeral, like it could all disappear tomorrow and we’d look back and laugh.
Digital money? How is that a thing?
I hear that skepticism loud and clear from many of the professional investors I know, be they family offices, financial advisors or institutional investors. They’ve seen bubbles come and go, and they are quick to write-off crypto as the latest iteration.
But if you can get past the hype and the hucksters and actually understand the underlying technological breakthrough, it becomes clear that the potential for cryptoassets and blockchain technologies to impact the world is generationally significant.
Take Bitcoin, for instance. Bitcoin is billed as the first digitally native currency and store of value. But critics point out --- correctly, I might add --- that from any objective viewpoint, it’s pretty terrible at actually doing those things right now: its price is volatile, transactions take hours to process and fees are high.
Writing off Bitcoin today, however, ignores how technology works. People are used to thinking on a linear scale, but technology accelerates exponentially. As a result, people almost always write off digital innovations as “impossible” or “impractical” when they first launch. Digital cameras, streaming TV, digital advertising, online retail … they were all dismissed as impossible when they launched. However, they are now part of our everyday lives. Like most early-stage technologies, cryptocurrencies are only really helpful today in isolated use cases and among early adopters --- international remittances, for example. But, the technology is improving fast. In the past six months alone, new blockchains have launched that can process thousands of transactions per second, compared to four transactions per second on the original bitcoin network. Every day, thousands of engineers are working on making crypto more useful, and the progress is impressive.
Will Bitcoin be the currency of the future? I don’t know. But dismissing the possibility out of hand ignores both the massive inefficiencies of the current payment system as well as the epochal shift embedded in the rise of digital natives. That seems just as crazy as feeling 100% confident it will go to the moon.
What does all of this mean for investors?
Like the technology itself, the frameworks for investing in crypto are new and imperfect. There’s no agreed upon method for valuing or classifying cryptoassets, nor any agreement on exactly where they fit in investor portfolios. Many people buy crypto for all the wrong reasons and day-trade it at great risk. Still, for the right investor with the right framework and the right timeframe, there is a truly significant opportunity. Cryptoassets have, to date, combined high potential returns, high volatility, low correlations to other assets and daily liquidity. Studies show that adding a small allocation to crypto and rebalancing regularly has the potential to improve the portfolio’s risk-adjusted returns.
In my past career, I was fortunate to get the chance to see ETFs grow from something nascent and misunderstood to a $4 trillion industry that is today a bedrock tool in investor portfolios. I’m not expecting crypto to follow exactly the same path; it solves for different problems and has a different role to play in investor portfolios. But I do think it has some similarities, in that many in the mainstream financial industry are overlooking its potential.
I think they’re doing so to their peril.
Matt Hougan is the Global Head of Research for Bitwise Asset Management. Matt spoke on The Future of Currency: Risks and Opportunities in Cryptocurrency at the 2018 FOX Autumn Global Investment Forum, September 13, 2018 in New York. Click here to see the agenda.