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132: Investing in the Internet… 2.0

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Remember ARPANET?

There’s a good chance you don’t. It was a precursor to the internet that essentially allowed researchers to access each other’s data.

It was actually a revolutionary technology that, as you know, ultimately led to the creation of something that fundamentally changed the world.

With the rise of the internet and all the companies built on top of it, a lot of people made a lot of money quickly. During the burst of the dotcom bubble, a lot of people also lost a lot of money.

People like to bring that dotcom bubble up all the time to show the classic fall from grace of a new asset class—just like tulip mania in early 17th century Europe, right?

Well, not really. Tulips never really recovered. On the other hand, two of the first trillion dollar companies in the history of the world, Amazon and Apple, arose from the ashes of that dotcom bubble.

If you were lucky enough to ride the wave of those companies all the way up, you’d be a very wealthy person today. Easier said than done, right?

So, why do I bring this up today? Well, I think distributed ledger technology is at a similar phase in its development to ARPANET in the 1980s and I am pretty darn sure that when the dust settles on this one, the winners will come out at least as wealthy as the early internet investors.

The biggest problem blockchain projects have right now is that they are not user friendly for most people. Believe me, as someone who is relatively competent around computers, it’s still a challenge with multiple storage wallets, software and hardware.

Wide scale technological adoption of distributed ledger technology cannot happen until it’s easy to use for EVERYONE. When that happens, all of the big money will have already been made by early adopters and investors. 

So, if you are not technologically savvy but want exposure to this “Internet 2.0” while there is still meat on the bone, how do you do it? After all, like I said before, it’s not that technically easy to custody this stuff on your own. And even technologically savvy people really don’t know for sure what projects will take off and become the Apples and Amazons of the future.

Well, let’s try to take a lesson from history. Let’s say it’s the early nineties and you can either try to pick a single stock from a myriad of dotcom companies ranging from Amazon to pets.com or invest in an index tracking the the top ten biggest tech companies by market capitalization for the next 10-20 years. Which option gives you a better chance of making money? 

Unless you are REALLY GOOD at picking stocks, the index obviously would give you a better chance of success. An index of the top ten tech companies during the rise of the internet would have included Amazon and Apple in their relatively early days and you would have done quite well.

So, let’s fast forward to the current tech inflection point—blockchain and distributed ledger technology. Do you know which projects to pick? Do you even know how to buy this stuff? Well, what if we could just use our regular old US dollars to invest in the top ten crypto projects by market capitalization and just ride up that index without ANY technical skill required?

Well, that’s exactly what Bitwise Investments allows you to do. If you want to invest in digital assets but find it too daunting to move forward, you will NOT want to miss this interview with Bitwise Investments founder and CEO, Hunter Horsely.

Hunter Horsley

Previously Product Manager on monetization at Facebook and Instagram. Received his BS in Economics from the Wharton School of the University of Pennsylvania.

Shownotes:

  • Hunter Horsley’s background
  • Big institutes getting into cryptocurrency in 2018
  • What’s holding back the investors
  • What’s the cost if I DON’T invest
  • Bitcoin vs everything else
  • Bitwise
  • Hunter’s typical investors
  • Bitwiseinvestments.com

 

Interview transcript:

Buck: Welcome back to the show everyone. Today my guest is Hunter Horsley. Hunter is the co-founder and CEO of Bitwise Asset Management. Bitwise was founded in 2017 and pioneered the first cryptocurrency index fund and has recently thrown its hat also into the ETF race, which we’ll talk about a little bit, with the Securities and Exchange Commission. Hunter thanks for joining us today!

Hunter: Absolutely! Thank you so much for having me on the show.

Buck: So I wanted to start out a little bit just talking about you. You’re a business school guys at University of Pennsylvania, well at least you went to Wharton so I’m imagining there’s some business stuff there. What’s your background in general? I mean after you’ve finished your economics degree at Wharton, how did you find yourself weaving into the cryptocurrency space?

Hunter: Thanks, yeah. So there was some steps in between. After after school I went to be a product manager at Facebook and Instagram. I first joined Instagram and got to be part of the team that helped monetize Instagram, get it to over a billion dollars in run rate and my role there as a product manager was to work with teams of engineers, data scientists, researchers, policy people, partner managers, product marketing, people that you know, everything you can imagine to build new software products. And in the case of my time at Instagram, for our advertising clients. After that I went over to the Facebook side and there I did a number of things, one of them was from while I was in charge of the branded content ecosystem, which is a multi-billion dollar ecosystem, on Facebook and approach to monetizing digital media and then got to help figure out how we would monetize videos, which ended up being putting commercials into videos, there again as a product manager. I left to start Bitwise and Bitwise is the firm that I’m now the CEO at. We do cryptocurrency index funds as you know and the transition so you know the way I got from from there to Bitwise was really organic. In 2017 in San Francisco if you’re software people, pretty quickly someone says do you remember do you remember that that a cryptocurrency thing? Do you remember block chains? And I’m not I’m not an OG crypto person, you know I wasn’t involved in 2009 or 2010. I had bought some Bitcoin back many years ago but didn’t really pay attention to it, didn’t think much of it. And it wasn’t until 2017 when it really became its own asset class that I started paying attention, and I should say my co-founder who did software security in the military and had worked at Google, him and I both together sort of started taking a look at the space.

Buck: Interesting so you hopefully you thought enough for your Bitcoin initially not to throw it out.

Hunter: Yeah

Buck: Good yeah there’s a lot of computers sitting in you know some dumpsters out there right now with millions of dollars of Bitcoin. So you know being in the being in the space for even a couple of years, I mean it’s like this the space just travels at Lightyear pace, I mean it’s it’s unbelievable, right? And when you look at what happened in 2017 in particular I mean that’s like crazy in and of itself. And so obviously we’ve had a significant correction last year which I’m curious kind of when you guys entered and how that ended up playing out talk. But talk about that a little bit. How did that affect your fund and your outlook on cryptocurrencies in general?

Hunter: Yeah yeah I actually I wrote an article for Coindesk which is as you probably know one of the most prominent trade publications called 2017 Your crypto became a new asset class. And so I think the narrative that is common amongst our clients and we talked a little about what we do but we work with sophisticated investors, family offices, multi-family offices, wealthy individuals, and then institutional investors, asset allocation committees and CIOs, I think the trend that we saw getting started in 2017 was for most people they hadn’t heard of crypto before 2017. It was this tiny little asset class at you know a 12 billion dollars it’s barely an asset class and that’s that’s what it was something something near there at the beginning of January 2017. And then throughout 2017 it picked up steam and we could talk about why that might be, but people started to notice and that really came to a point around September, August-September-October where everyone was was hearing about it, you had in the news some headline about a teenager becoming a millionaire or relative telling them about it or a co-worker telling them about it and I think in that environment, what happened was a lot of the more nimble investors, so individuals, wealthy individuals who had the ability to take risk and to make decisions quickly, a lot of them decided to put some money into crypto at that moment. The professional investors, the institutional allocators, investment committees, advisors, at that point in time they were asked to look at it because their clients were looking at it or their board told them to look at it and I think a lot of them were frustrated with it their first their first reaction to it was oh my gosh this looks like mania, asset prices going like this that you know, that’s not something that should be happening and we don’t understand this thing. It’s not backed by any physical asset and it doesn’t have cash flows. And so I think it towards the end of 2017 what we had was a lot of individuals deciding to participate in the market and a lot of the professional investors being frustrated and I think some point Warren Buffett said something like Bitcoin is rat poison squared, and just having sort of a very negative knee-jerk reaction. Now that’s sort of in some ways countered truly that that’s changed in 2018 so in 2018 it’s almost flipped. So the market peaked towards the end of 2017 December and then in 2018 we’ve been in a bear market. The markets are down maybe 60% since the beginning of the year at least our large-cap index. So those are the you know I think small cap and mid capped index is down a little bit more than that and during that drawdown. I think the individual investors, some of those who had allocated in the fall of 2017 have become a little bit a little bit more hesitant and in some cases feel burned and conversely the the professional investors and the institution allocators have become way more interested particularly over the last quarter and I think what happened there is you know those individuals as professionals we’re forced to start paying attention in Q3-Q4of 2017. But things are moving so quickly they didn’t have time to understand, if prices were behaving in a way that prices generally shouldn’t. And then in 2018 it turned a corner and started to drop down. And it didn’t go to zero and over the last three quarters, those professionals have had the opportunity to read about the space, research the space, meet with managers like us have us in to speak to their asset allocation committee’s, develop their view on whether or not one day public law chains in crypto assets will fit into their portfolios and for many of them the result of that view is that it would in some allocation size. And then if you look at the market in 2018 in Q3 2018, I think too many of them it feels like a really attractive cost basis. You recently said to us the the most important thing for me to be doing in 2009 was just buying anything and that remark was about the fact that in 2009 because we were going through the the recession, asset prices were cheap and it wasn’t as important to call the bottom specifically as it was to be buying while things were cheap. And so I think that’s the attitude that many of the institutional investors have had recently as they’ve been moving the market, we’ve seen Yale, Stanford and Harvard making announcements.

Buck: So let’s talk a little bit about that because I’m curious you know, I’ve been talking about this you know on the Consensus Network Weekly Crypto News, I mean in the last couple weeks alone, I mean listen I think Bakkt now has an actual day mid December sometime where they’re releasing their first Bitcoin product and Bakkt is owned by the same owners as in New York Stock Exchange, The Intercontinental Exchange. You have Ares X,  you got Fidelity announcements as you mentioned, you got Yale’s endowment now involved with cryptocurrency. So now what strikes me as interesting about this and it sort of is curious and I’m curious about your thoughts, is usually this kind of news, I mean this is very bullish news, but to me at least I would expect a bump, right? I mean this is beyond rumors, although people mostly usually buy the rumor, right? But this is reality and to me this is a signal of probably likely hundreds of billions of dollars emptying into the space. Why is the market is flat right now? That’s what I can’t get my head around and I’m curious if you have any thoughts on that.

Hunter: Yeah I think that there’s three things that come to mind. The first is these endowments have have made allocations, other large families have made allocations, but it’s still  very small. This is the tip of the iceberg and in terms of institutional money being managed coming into the space, those flows themselves are not big enough to move the prices. And so I think the first thing I would say is to what you know why we’re not seeing a huge you know turn in the market is the flow is coming from institutional allocators themselves can’t cause the buying pressure to move asset prices. The second is what you might expect is the existing market participants, the managers of crypto funds, individual investors to buy positions on the news upon hearing endorsement from some of the most well respected endowment managers that they would see the ratification in this space and I think there also I think many of the long-term participants in the market have sort of expected that that would happen. They felt that it was inevitable for many of them, they’re fully allocated and so I think for the existing market participants who recognize the significance of the news it’s not something that is really I think a huge surprise. I think the fact that it’s happening now is a surprise, but I think that they always expected it would happen and then again I think they’re allocated more or less. I mean so  I think that the third thing on my mind is you would need significant new flows to move asset prices if you know if you think about real estate as a proxy if you have this you know roughly same set of supply residential units you need you know a huge new set of buyers to come in to meaningfully change the trajectory of price movement and so I think that can be institutional allocators and we’re just the beginning of that I think the other is for the general investing public, and not just the existing market participants who interpreted this news, but people who are not yet in the market who haven’t heard of Bakkt and who read Coindesk’s article about Yale. And I think for that audience there are some pieces of infrastructure that need to be in place for them to consider consider allocations today.

Buck: So do you think that, I mean if I’m understanding you right, sure you’ve got participation and from family offices and maybe from from smaller funds that are not required to necessarily have custodians. Is the custodianship the big potentially the big limiting factor? And obviously we’ve got you know Bakkt and some of these others who are coming in that might be able to provide that, but do you think that’s part of the limiting factor?

Hunter: I think I think it’s part of it. I don’t think it’s the whole story and I think sometimes it’s for the sake of simplicity, it’s you know many people in the space point to it as one of the big sort of binary factors, but so I’ll talk about custody for a second and then I’ll talk about what I think some of the other things are. The state of custody today, there are a number of custodians in the market and it’s rapidly getting better. So the beginning of 2018 maybe there were two serious custodians now there’s this maybe six, not all of them are completely public, and then you know Fidelity just announced that at the beginning of 2019 they’ll be offering custody it’s something they’ve been working on for a very long time and and there been rumors that others like Goldman are working on solutions there. So I think that’s gonna rapidly get better and the solutions that exist today are are extremely robust, the firm’s are being run by very competent individuals, some of them manage tens of billions of dollars or you know very large sums and while the regulatory status the issue with being a qualified custodian which is part of the investment advisors Act of 1940, you could argue that there is some additional clarity that’s needed there. There’s a strong dialogue with regulators happening between these players and they’re doing the set of things that need to be taking place to move into compliance. And there are already firms that have trust charters or broker dealers which is what it would take to be considered a qualified custodian which is what people say this. So I think that custody is in a good place and getting to a great place. I don’t view the custody situation as there are no good custodians and there are no qualified custodians and as soon as we have one things will switch. We do have qualified custodians today at least in the way that that piece of regulation is written and they’re great service providers, they’re getting better more coming into the space. So that’s my view on custody I think you know we’ll continue to improve but I don’t think the big binary eye perspective. The big sort of category that’s holding holding back the other investors is two things, one education getting up to speed on how to think about how to think about public blockchains and crypto assets how to think about, what they can do for a portfolio, which sleeve does it go in, does it come out of their equities, does it come out of their bonds, does it come out of real estate, does it come out of alternatives, and to build consensus internally, I think that’s one piece. So we you know we did a webinar of about 500 financial advisors, 80% said that clients had asked them about crypto, but one of the top barriers to investing was education. So I think that one you know one element of what’s needed for the mainstream of being professional investors and an investing public to participate in crypto, one piece of its needs they need to understand what crypto is and in the same way that for most people, you’re probably familiar with CRISPR the genetic editing technology. So you know you could tell people CRISPR is this breakthrough technology, it’s going to enable these improvements in you know and how we do procedures, here are some of the companies that are doing it. They understand that there’s something important happening there but they don’t really understand how it’s gonna change their world you know, what it represents is an opportunity for them and I think that’s the relationship most people have with crypto so I think education, and then last thing I would say and then I’ll you know I’ll wrap up, but there’s also workflow infrastructure. So our index fund is a private vehicle, it’s available through Schwab but most investors work with a platform like Schwab or Pershing or Fidelity or Marilyn Chege and they can’t really access crypto through those platforms today. Many advisors want to work with an ETF or a mutual funds. They don’t want to work with a private fund structure or they don’t want to buy assets directly they needed to integrate into the reporting flows the way that they pay taxes, the way that they manage portfolios, and I think a lot of that infrastructure and wiring that’s that’s behind the scenes is missing and making the barrier to investing too high for the general mainstream and it’s also what creates the opportunity for people who are investing now, means that that infrastructure is getting built but isn’t in place just yet for everyone to be able to participate.

Buck: Yeah and it’s interesting because I think a lot of those things that you talked about, I think 2019 is a big year for a lot of that infrastructure, a lot of those pipes to be laid.

Hunter: It’s happening now. We actively spend a lot of time working on that as well.

Buck: So I assume then that your take, and I’m not obviously asking to predict the future but this is going to be as you’ve got you know these more sophisticated institutional investors sort of more of a you know gradually rising market instead of going up to $25,000 in a matter of months this time around, just sort of people dipping their foot in, maybe they’ve got you know half a percent they allocate into this space and you know they kind of just see how things are going. And also part of it is you know people not wanting to be the first one to do it, right? I mean all right but then there’s also a, and again I don’t pretend to understand how these people think, but I would think that there’s also this element that all right well Fidelity is involved so if we lose money because we invested through Fidelity that’s okay, but if I invest it through somebody else and lost money but I lose my job, that kind of thing.

Hunter: Yeah yes I think some things to look for are when access to crypto becomes available through the existing brokerages. So instead of having to download a new app that I haven’t heard of and don’t really feel comfortable with, if it becomes possible for people to easily access crypto through trial Schwab that’ll be a big day. And that could happen through an ETF, could happen through mutual fund, could happen through them offering direct purchasing, but that would be a meaningful moment for the space. I think another meaningful moment would be another Bull Run. Historically but you know bitcoin’s been around for almost 10 years and historically it has moved in these in these big swings followed by draw downs and then in periods backup and so that’s the type of I think price movement that gets the the public’s attention. In the US I think it’s estimated that 8 percent of Americans own some crypto, so it’s definitely not the case that most investors have not participated yet so I think that’s the second thing that would really impact people participating. And then you know that I think the third is seeing peers allocating to the space and that’s just happened now and it has absolutely had an impact. The fact that the CIOs we meet with see that Yale and David are invested has changed the way they think about things now. That now many of them you know have the thought process which is what does David see that I don’t see? Or what do I know that David doesn’t know that causes me to think that this doesn’t make sense?

Buck: And I think some people are, I’m guessing that some of these fund managers are looking at this saying, you know what’s the cost if I don’t invest in this and it takes off and I don’t have and I’m still at zero you know? And if I can put in you know if I can just dip my foot into this and if we have that same kind of growth, I mean that could have real impact on the fund returns in general.

Hunter: Absolutely we’ve done an analysis, we do a custom analysis for firms and we’ve looked at what is it 1, 5, 10 percent allocation to Bitcoin over the last four years we looked at Bitcoin because it is a longer history even though it’s it’s still short history, but over the last four years which includes starts with a drawdown ends with a drawdown, in a 60/40 portfolio so 60% equities 40% bonds, if you rebalance data one percent allocation added I think over four percentage points of return.

Buck: It’s unbelievable, right?

Hunter: Decrease max drawdown which is a risk metric improvement. the Sharpe ratio which is a risk adjusted return measure, and again the worst case scenario which you know many people don’t think is very likely, but the worst case scenario that it went to zero you only lost 1%. And so different versions that you could do that with 25 basis points. I got with ten basis points. I think if for managers and individuals who resist the idea of owning any amount of crypto, you have to recognize that might be an emotional or philosophical or in some ways irrational view. Now certainly if you develop a thesis about how things will play out and in that thesis you conclude that it doesn’t make sense as an investment or your objectives your portfolio don’t include something high-risk, high-reward like this then then it doesn’t make sense allocate. But if it’s simply that you don’t like the idea of investing in the category, you know I don’t know that is as common or popular of an explanation as it was in 2017.

Buck: Or even even like three months ago right? So let me ask you a question before we get into Bitwise more. I want to ask you a question which is sort of what I’ve been thinking about a little bit lately is that you know I remember hearing and I’ve heard people say on many occasions that they considered, let’s just talk about Bitcoin in particular, an uncorrelated asset, uncorrelated to other markets. But you know we did see, to me I’m looking at Bitcoin right now I’m thinking that the majority of investors I’m not talking about those in Venezuela or other places where their fiat currency is not stable, but for most people it’s still kind of you know probably a speculative investment. So if it’s a speculative investment, would it be uncorrelated or would it be correlated? Because I would think it’d be the first thing that you would sell off and so at least until there’s an established baseline then maybe you can think about it as digital gold, but what’s what’s your take on that?

Hunter: That is a great question. I think people are definitely of two minds, one mind is that it’s a liquid risk on asset and so you know like a large cap internet stock exposure or a hedge fund exposure, it’ll be the first thing to take off if you move into a recessionary environment to move into to more conservative investments. So that’s why I said I think there’s real merit that. The other mindset which you referenced is that. It’s a hedge asset historically it’s had low correlations to equities fixed income gold. The US dollar and that because it has different drivers of price, instead of corporate earnings growth or interest rates drivers are things like millennial wealth accumulation, regulatory developments, network effects or network adoption. Because those are separate things, they can intersect with each other but they’re separate that the correlations will remain low. So I think over time, I think it over time because those drivers are different, my perspective is that correlations will be divergent and today they’re  close to zero, but it’s a very, I shall say this is a very limited data set, right? You know Bitcoin has been around for less than 10 years and oftentimes when we look at you know data around financial products we try to look for a very long period of time. So there’s there’s two different mindsets exist and I think they both have merit. I think that we will have to see crypto has largely only existed in a bull market US equities and we don’t yet know what it will look like through a recessionary climate. So far this year there’s been a few periods where equities markets were down, even just recently, and I believe that the crypto continued to behave in an unrelated way. So I think that there’s merit to both sides over the longer run, you know our expectation, our research teams expectation would be that there are different things driving the value here and sort of in the same way that you might expect gold or a commodity to behave differently with some intersection around the larger economy that crypto will move towards behaving a little bit like a commodity.

Buck: The other thing that I think is an interesting thing to think about, because you know we still are in such infancy in the space that we kind of lump everything together as cryptocurrency right? But the reality is that if you look around what you really see or what I’m seeing at least when I hear people talk is that Bitcoin for the most part seems to have you know gotten enough legitimization by you know some of the bigger players as a you know digital gold type of play, like a use case. People are really coming around to maybe believing that that’s the case. But I think that to me at least is very different than everything else. So right now to me it’s like there’s Bitcoin and then there’s everything else. Do you think that that’s the case or do see it differently?

Hunter: It’s a great question. I think that people definitely hold Bitcoin apart from the rest of the market in many cases and it’s the oldest by far, it represents something around 50% of the market cap presently and those two attributes are very meaningful. And so yes and accessing it is the most widespread right CME, SIBO had futures for Bitcoin. There’s some products that only offer Bitcoin trading and selling and has the most liquid markets, the best OTC venues. So I think so I think in those ways it’s obviously distinct. In terms of the narrative around digital gold or cryptocurrency, I’m not sure. There are other assets that are seeking to do what Bitcoin does as you know there’s over ten billion dollars of money that have gone into ICOs and in funding  new public blockchains and projects some of which are doing completely different things and some of which are doing overlapping things. And I think that it remains to be seen both if other blockchains can serve a piece of what bitcoin is doing, if they can for one reason or another moving to serving the needs that bitcoin serves today, and then of course also if what bitcoin is doing today isn’t the most important thing. If some other use of blockchains is more important than if private payments or micro payments or remittance or allocating file storage or creating a marketplace for genomes or creating a marketplace for virtual goods. You know all of those things are experiments that are taking place today. The way I think of the status of crypto is that similar to how TCP/IP and the introduction of the Internet led to an exploration of all the different ways that we could use that that protocol and that new technology and infrastructure. People experimented with corporate corporate wiki’s, corporate intranets which are private networks obviously, much like private blockchains today and people also experimented with these unfamiliar new things like Wikipedia and putting news articles online and buying things online through something like Amazon, which at the time remember people were uncomfortable putting their credit cards on Amazon. I mean certainly now we today we also have Netflix and YouTube and all these other great services that would be hard to imagine. So anyways I think people was enabling new technology which was tcp/ip in the internet and then people explored all the different ways that it could be put to work. I think that’s happening now in crypto. Bitcoin just demonstrated an enabling new technology which is a blockchain with a consensus protocol and people are exploring, can we use it in private contexts within companies? Can we use it in public context to transfer money, to transfer ownership of items, to transfer ownership of property, to transfer etc. And so I think we’re in the early moment of things sort of fanning out now and people exploring all of those all of those different opportunities.

Buck: So you know and that that kind of brings me to you know what you guys are doing. So talk a little bit about what led to the, talk about Bitwise specifically and kind of the reasoning for your specific approach.

Hunter: Yeah great so the firm is called Bitwise Asset Management. We’re based up in San Francisco. We’re about 16 people, half of it has backgrounds in software, half of it has backgrounds in traditional index fund investor management. We’re the leaders in cryptocurrency index funds and indexes. For most people it’s helpful to think about what we’re trying to do for for clients as the way they would think about Vanguard or SPE or BlackRock. We we’re focused on clients, which is a little bit different than a hedge fund we also manages money in portfolios but we’re focused on meeting with clients providing research and then structuring funds. To date they’ve all been index funds that help them get exposure to the space. So our flagship fund the Bitwise 10 is a little bit like an S&P 500 for crypto. It gives investors exposure to the largest ten public blockchains and crypto assets and then holds them in a market weighted fashion and rebalances it and so the what that accomplishes for investors is it allows them if they have a belief that something valuable will come out of the space. There might be a valuable crypto asset one day, some of these public blockchains might be important and valuable. It allows them to hold whatever emerges as a winner without having to guess which thing that’ll be is it Bitcoin or one of bitcoins competitors, is it Ethereum  or one of Ethereum’s competitors, is it something completely new we haven’t heard of. The index will hold whatever emerges as most valuable and if that’s something new or something old it doesn’t matter, and if it’s one thing or if it’s five things it doesn’t matter. And so it simplifies getting exposure to the space and then we have other other products as well.

Buck: That index in particular covers what, about 80-85 % of the market capitalization?

Hunter: That’s right and that’s actually very similar I think sometimes that surprises investors, but it’s very similar to the S&P 500. So they’re about four thousand publicly traded companies in the US and the S&P 500 of the 500 largest and they make up about 80% of the market.

Buck: You know one of the one of the things I think, the way I think about that approach which I think might be of interest to people who are kind of understanding that there’s something going on but really just they’re not tech savvy, they’re not really interested in learning how to use a wallet, you know a hardware wallet, and all these things and it sounds like a big task is to say okay, if you believe that this space there’s this new technology happening and it’s real, this is a really good way to ride the entire market cap, right? I mean this is really buying the market in the same way that the S&P 500 is. And so who are your typical investors?

Hunter: Yeah I think you said it exactly right and what I want to add is it’s not just people who aren’t tech savvy. It’s also, we serve and work with a lot of the most sophisticated investors and they could, this is conventionally how they get access to spaces, they work with with index strategies, they work with active hedge fund managers, but they’re not picking specific names themselves. They’re not integrating with the liquidity providers and the trading desks themselves. And so it makes sense that’s how they would want to approach the crypto space as well. In terms of the clients we work with, our existing products are only available to accredited investors and up and so our cross-section of clients looks similar to a cross-section of the space today. There’s a few institutional funds, multi-family offices and investment advisors, then there’s there’s many investment advisors who are on a platform that hasn’t yet approved any crypto products and so they will just introduce their clients to us, sometimes they’ll even set up a call with us to help their client learn about the space or they’ll just send send them to our to our website. And then there’s a lot of high net worth individuals, wealthy families involved. We again because of the the nature private funds only serve a subset of the of the wider public. We can’t we can’t serve investors who are not accredited.

Buck: Certainly on Wealth Formula we’re used to that but we’ll be playing this on Consensus Network as well. Just to reiterate the definition generally for accredited investors is two hundred thousand dollars per year for two years as an individual, three hundred thousand dollars if filing jointly or a million dollars of assets outside of your personal residence. Anything else to add to that definition?

Hunter: That’s right yes it’s either those income thresholds or that net worth threshold.

Buck: You can’t use your San Francisco house that went up by two million dollars.

Hunter: Yeah that’s outside of your primary residence. And then we we have a software for it that helps.

Buck: Right and for those of you who are used to us talking about it, this is Reg D 506C. And what one of the things too that I think is important to point out here Hunter is that your your minimums are actually very, I mean listen you you’ve got major investors who are dumping you know millions of dollars on this. But your minimums are really very reasonable. Can you talk a little bit, because it makes it a lot more accessible for country club investors.

Hunter: And again we’ll have multiple funds in the same of you expect Vanguard to have multiple different ways to get exposure to things. We’ve some new ones coming but our first and flagship fund that I think makes sense for a huge majority of investors is the Bitwise Ten, the large cap fund. These two share classes, so it is an institutional class which is a million dollar minimum, but then it also has an investor class, for accredited investors who aren’t institutions and the minimum their is twenty five thousand. An important thing to note is that as an index product it has weekly liquidity so you’re not locked up in the same way that you which expect to be an adventure fund or a hedge fund. I know we have an investor portal where investors can see the holdings on a daily basis. They can see the price on a daily basis. We do an audit, we prepare taxes and to an earlier point as an organization, we’re focused on clients. So we want to have the most, we want to serve the most investors possible. We do monthly investor letters and investor calls, well you know we publish research. I mean our orientation is very much in that direction versus I think some people have them you know a mental model of a of a hedge fund manager or portfolio manager if you understand something about how the market works that other people don’t understand and that person is gonna go generate alpha and is gonna you know interact with the LPs as little as possible if they could they would have as few LPs as possible. That is that is the hedge fund model that’s just not not what we’re doing again our model is more similar to something like Vanguard.

Buck: So makes it really simple. You want exposure you want to get in minimums aren’t significant and you can basically

Hunter: Yeah we have a website and some investors and can it can fill out the paperwork in less than five minutes. We built in an online flow that that then pre-populates a document and since you’re DocuSign and and we see some people fill that out you know in a matter of minutes. And so we try to make it as simple as possible, which is obviously as we talked about earlier one of the big barriers to accessing the space today is difficult to use some of the workflows.

Buck: Yeah and I think it’s it’s something that a lot of people may want to check out. I know a lot of people are interested but are intimidated by the tech, especially some of the investors that we have in our in our Investor Club. So this is a great way to do that and you can invest in this the same way you’re investing in any of our other Reg D 506C type things so shouldn’t be that difficult.

Hunter: There’s also a way on our website to schedule call with someone from our Investor Relations Team. We have resources available. My perspective on this is that the space has been made too complicated for most people. Many people have high owed corporate debt in their portfolios, but it would be unreasonable to expect that they would become experts in a Microsoft, you know triple B issuance, whether be reading Microsoft’s 10k to understand the roadmap for that debt and for the company that issued the debt. But that’s sort of the expectation in crypto today, not only that you’ll you know download a different set of apps and and tools but also that you’re gonna you’re gonna become a jet propulsion engineer or you know you’re gonna become an expert and our view is that for you know for the vast majority of people it makes sense to consider an allocation of crypto, but it does not make sense for them to be a jet propulsion engineer just to invest in Boeing. And so it’s the responsibility of firms like us and and and people like you and others to figure out how can we accurately, acknowledging both the merits and the risks, convey in an understandable way what people need to understand about the space and that’s you know that’s the mission that we’re all on.

Buck: So I want to just kind of talk a little bit before we go about the the whole ETF space. Because you know one of the reasons why this is so useful right now what you’re doing, well there’s a couple reasons, one is there really is no ETF, there’s no way you can right now go and just go buy sort of a bunch of a little bag of cryptocurrencies on Fidelity. You can’t do that. What is the implications, where are we with the regulation? I know that you also you guys also in Bitwise threw your hats in on  in ETF as well.

Hunter: Yeah we have a number of individuals of the firm who have incredible expertise in ETFs so maybe I’ll mention that I can talk about where we’re at and where we see that going generally. So our firm, sixteen people, our head of ETFs is an individual his name is John Highland. He’s incredibly experienced in ETFs, he launched the first oil ETF in US history, it’s the largest today it’s called US commodity for US Oil. He launched the first and largest natural gas ETF, the first and largest copper ETF, the second ever quantity index ETF. You can imagine in 2006 when they launched the oil ETF, what were some of those concerns? That OPEC was manipulating the price of oil, that custodying barrels of flammable liquid would be it would be a challenging custody problem. And I think from his perspective a lot of those same issues are now the issues that we that we’re having to grapple with and that the regular just having to grapple with for crypto and we have conversations with them about that. We also have an individual, Matt Halgen who’s our head of a research. He was the CEO of ETF.com which was the largest data and analytics provider for ETFs, co-authored the ETF section of the monograph for the CFA exam, ran the largest ETF conference in the country. ETFs are an important part of our of our team’s DNA. And so the second part what I was gonna say we as you mentioned filed the first ETF filing for the first ever commodity index fund ETF. So firms like the Winklevosses have applied for Bitcoin-only ETFs since 2013. And so you know it’s been basically five years now of slogging away at that and most recently their application was rejected in I believe the beginning of August. The Commission wrote a 90 page letter outlining some of their concerns and so I think there’s work that needs to be done there and that sort of leads me to the third thing I was gonna say which is our outlook, we think that it that a public registered product will happen. The SEC is the relevant regulator is being extremely thoughtful about it, they’re having lots of conversations with firms like us about it. But they’re rightfully concerned to make sure that if the public is given access to the vehicle like this that no harm will come from it and there’s no upside you know to for them to put something out the door that had a little bit of risk and then you know and then blows up and it harms individuals it impacts people’s savings and ability to retire. And so they’re gonna proceed very cautiously there and I think that that makes sense and that’s the role that they play for capital markets. So I think something will happen but I wouldn’t expect it to just happen suddenly because the crypto space is writing more articles about it and and paying closer attention to it, you know the real issues are the ones that they’ve outlined which are market manipulation. Trade volume I think has has become less of an issue, custody is a real issue and so those are the things to keep an eye on for that getting approved.

Buck: One last thing I’ll just point out is all of those things and I personally I’ve been thinking that this from what I’m hearing you know the Chicago Board of Options Exchange Bitcoin fund with Vanek solid, it sounds like something that has a decent chance perhaps in 2019, but that said that probably would come with potential influx of money so it’s probably also an argument to get in before that.

Hunter: Yeah. I think like so many like so many things, everyone has to decide where they are in the risk/reward spectrum but Uber, you know at one point you were was valued at four million dollars and there were a lot of reasons to believe that that would never work out. And there’s a lot of uncertainty and they hadn’t been you know rolled out in multiple cities and so there was a ton of risk and a ton of upside and there were investors who you know at a hundred million dollars didn’t think that the risk reward made sense. Investors at ten billion dollars didn’t think the risk/reward made sense. So now you know now they raised money at fifty billion dollars and there’s some people who don’t think it makes sense. So everyone is going to wind up you know somewhere on that curve, but I think the fact that there are still these meaningful risks and there is still this meaningful infrastructure that’s not in place is part of what creates the opportunity for investors now who are willing to bear that risk in exchange for the opportunity for the return.

Buck: There sure is a lot of smart money and they’re getting in line folks so check it out again Hunter what’s the website?

Hunter: Yeah the firm is called Bitwise Asset Management BitwiseInvestments.com is is the website.

Buck: Definitely check that out. Hunter once again thanks so much for being on the show today.

Hunter: Thank you I really really enjoyed chatting.

Buck: We’ll be right back.