The Bull Case for Crypto ETFs | Hunter Horsley & Matt Hougan

Transcript

this episode is brought to you by toku if you are planning to launch a token already have a live token are granting employees or contractors investing token Awards or just trying to figure out how to take care of taxable token events for your team from easy to use token Grant award templates through tracking vesting to managing tax withholdings make it simple today with toku all right everyone welcome back to another episode of Empire we have a very timely episode today uh today we're recording this on the day that uh some Bitcoin ETF news kind of spiked the market and then it turned out not to be true so we have Matt Hogan CIO of bitwise and Hunter uh CEO co-founder of bitwise Jens welcome to the

show thanks for having us excited to be here yeah yeah of course um so h i mean how's I gotta asked like how's today been I feel like uh coin Telegraph put out this news that Bitcoin ETF or was it the E Yeah Bitcoin ETF is here and the market pumped and it turned out not to be true so yeah what I mean how was today what happened man I'll uh I'll answer that and then Hunter can build on sometimes you wake up in this industry and you just want to shake your head uh this is uh unfortunate it's fortunate that I got corrected quickly right got corrected within 30 minutes uh but man uh you you do hate to see this you know it's probably some low-level uh newer reporter who misunderstood something and

posted something but you get this massive reaction in the market I do think you know this is a uh uh you know a a pre-roll of what we're going to see uh in the future I do think we're on the pathway I'm optimistic we're on the pathway towards the spot Bitcoin ETF as you guys know um but we really didn't need this this morning this is not what I wanted to wake up to on Monday morning I don't know about Hunter yeah I I I I agree I think uh the crypto Community rightly is fascinating with the filings and the filing process for ETFs we run an ETF News Bulletin Service uh through our website where we keep people updated I think there's a

lot of enthusiasm for knowing when things will happen but it's also a very technical and uh narrow subject matter the the filing process and I think sometimes uh people misinterpret things so um I think that was the story today but uh but glad it the uh the loop was closed pretty quickly h yeah a lot of shorts got wiped out huh one or two one or two not great Matt I actually wanted to start um uh pre- crypto land uh one of my favorite things to talk about with you is and for those who don't know Matt's been a long time adviser to block Works um Matt one of the things I love to talk about with you is just you ran etf.com right pre pre- crypto days and I love to almost hear

from you about like the mainstream iation of ETFs not the Bitcoin ETF but ETF F because I was uh when when you pull up old news articles right some of these headlines Financial Times called ETFs weapons of mass destruction I was reading something you will be able to explain this much better to me but they folks thought there was going to be this liquidity Doom Loop and that e ETFs could take down the bond market so can you just maybe talk talk to us about like the early days of ETFs and what similarities you see to just Bitcoin ETFs and what's happening today yeah that's exactly right even more than that there were Congressional hearings literally about ETFs destroying American entrepreneurialism and ending the

American dream uh as you mentioned they were weapons of mass destruction they were called efts no one knew what they were and yeah this liquidity uh Doom loop I mean to to back up what an ETF is is an evolution of financial technology so for a hundred years people invested through mutual funds that allowed them to access the Market once a day and that created a sort of shared collective experience of Taxation if we all own mutual funds and you sold Jason I would pay the taxes on that uh at the end of the year which is a a ridiculous idea but this was the best technology they could develop in 1920 and nothing improved it until the early 90s when

they came up with this idea of ETF and an ETF was threatening to a huge chunk of the financial services in industory right there were massive companies built on traditional mutual funds there were massive companies built on trading bonds which trade over the phone and not on a screen and an ETF threatened all that and then you know for for two reasons people were very worried about it one I think because it was so disruptive because it was going to slash margins and profits and prices and then two because it was new and people didn't know exactly how it would turn out people were hugely skeptical of it and they were skeptical of it not just for a year or two years not just through one stress test or two stress tests they

were skeptical of it for 20 years I not joking you know we see the crypto industry hauled before Congress and made to answer questions about the fundamentals of crypto we see Congress people asking ridiculous questions and talking about bitcom and mispronouncing names all of that is a replay to me of what we saw we saw Congress people haul Black Rock in front of uh of Congressional hearings and talk about this liquidity Doom Loop that could end the bond market and throw Millions out of work uh we saw you know the head of of of the q's and Invesco and leading lawyers come before and be asked about you know isn't this robbing

small companies of the ability to come to Market it was absolutely absurd and then you fast forward today and it's the mother's milk of investing it's how literally almost every American gets access to the market today today it's a$7 trillion industry no one questions it every major company has come on board and I think we're going to go through the same Journey on crypto right huge amount of skepticism we're starting to see that turn I think we're at that moment you're starting to see BlackRock wanting to launch a spot Bitcoin ETF Invesco launching a spot Bitcoin es UBS tokenizing bonds we're seeing that change and two or three years there'll be no more Congressional hearings people will be just talking about how much more efficient this made the market so history always repeats and it's

repeating with crypto can you give us a little bit of for folks that are not familiar I mean the ETF um discussion has been around for multiple years uh and it's constantly been uh dismissed by the SEC for a variety of reasons but I think there's a common denominator and maybe it would love for you to go into kind of the reasons why the SEC says hey look the Market's pretty premature there's a whole host of reasons why they deny these applications um so maybe if you could just give us a little bit of context for the listeners it' be great yeah yeah absolutely I mean it's worth noting that the first spot Bitcoin ETF application was filed on July 1st 2013 and if we're being honest the market was not ready for a spot Bitcoin ETF in July of 2013 there were no institutional custodians there were no

trading firms that could make markets in it and the market was more subject to manipulation than it is today so for the first let's say five or six or seven years the SEC had reasonable cause to deny a spot Bitcoin ETF they've been focused specifically on this question of Market manipulation and to be a little bit more precise in order to approve an ETF the SEC wants to be able to look at the market and surveil for Market manipulation so if someone tries to monkey with the price they can figure out who did it and prosecute it and therefore reduce the likelihood of Market manipulation so uh in the stock market if someone tries to manipulate

the market they can ask the New York Stock Exchange or NASDAQ who profited from this trade and shut it down in in the crude oil Market if someone tries to manipulate the price of crude oil they can see who is trading crude oil Futures and prosecute that the idea is that that reduces the likelihood of Market manipulation the challenge in crypto is for a long time there was no one you could ask who was on the other side of these trades profiting from this issue the reason the argument in favor of a spot Bitcoin ETF is now so strong is you have people to surveil you can surveil the CME Bitcoin Futures Market firms like Black Rock are looking for surveillance sharing agreements with

coinbase this Market is just much more institutional than it was in 2013 or honestly even when we started pushing for a spot Bitcoin ETF which was back in 2018 and 2019 the market has come a long way and I think those manipulation concerns um are now solved in my view uh and we'll see if the SEC agrees in the coming months when you look at a day like today where there's fake news of of an ETF approval and there's a you know h100 million do of long and shorts being liquidated in a span of a couple minutes you look at that and say that's definitely you know someone whether it was a stupid intern or actually something more behind that time and time again we do wonder if there is a coordinated action amongst

crypto whales if you will now a lot of that is hard to prove but think you have tools at your disposal like chain alyses and others that can allow you to kind of Trace I mean at the end of the day it's a transparent Ledger anyone can inspect so presumably you'd be able to understand who and how this manipulation is taking place but the thing that I want to get your take on is this is an international market uh whereas an ETF as we think about it in the US is just kind of you know I guess there are international participants but everything is settling kind of in a in the more I don't know controlled environment if you will whereas the crypto markets are 247 365 everywhere

does that worry the SEC is that because or or is that not does that does that not compute it it it makes sense that they would be worried about it but it's important to not two things one is that all markets are subject to this sort of action right so you can see in the equity Market uh people putting out fake press releases about burgers and prices going up you can see news in the gold or oil Market that leads to prices that turns out not to be true so this this happens and I think that that point about the gold or oil Market uh is directly analogous here right the SEC doesn't have perfect purview over the gold market which you know trades on on 47th Street trades in London trades in

India and Retail settings they can't penetrate all of that but the reason they've allowed a spot Bitcoin ETF to approve is even though there may be these these micro inefficiencies in the market the big Market is mature enough that you can surveil it right you can look at the comx Gold Futures Market you can have confidence in the London spot fixing price and even if there's things on the edges the market as a whole is okay and I think that's true with Bitcoin as well like even if you can't see through to every small startup exchange the market as a whole now has this uh this surface level level of institutionalization the CME Bitcoin Futures Market is large and established

you mention chainalysis lets you penetrate down the market there's AML kyc at Major spot exchanges and uh and so it doesn't have to be perfect to allow a spot Bitcoin ETF to exist it just needs to meet their requirements and I think we're at the point where it does what is it what is uh the introduction of spot ETFs actually due to an industry and Matt picking on you a lot here for for the ETF questions but hunter I want to get to to you on some financial advisor questions in a second but one more to you is so you were running etf.com just a couple years after uh the the first gold ETF was introduced right I think that was 2004 you running etf.com and I think 20078 nine 10 you know for a couple years then what what does it actually do to an

industry and to a market um and almost to like a market structure to have an ETF int introduced 100% And I was writing about ETFs even before the spot gold ETF and talking about it giving speeches it complet transforms the industry I actually think people understate the long-term impact of a spot Bitcoin ETF on the market and I'll give you the gold analogy today we all think of gold as this deeply institutional asset like without peer it's almost the most institutional asset oh if we can only have gold in the portfolio there's nothing more solid nothing more established nothing more suits and ties and bankers than gold but before the

spot Bitcoin ETF that really really deeply wasn't true gold was the land of tinf foil hats and crazy people you know stockpiling baked beans and guns and putting gold bars underneath their mattress it was not held by mainstream institutions you wouldn't have pensions having conversations with gold there were no mutual funds that allowed you to get exposure to Gold there were almost no gold mining funds you couldn't bring it up in in in in common conversation there were tiny gold conferences that were attended mostly by retail investors where people were excited about KW Brands and uh and different coins uh and then you had a gold ETF and all of a

sudden over a period of about three to four years it transformed into what it is today which is this institutional asset the other thing that happened uh and this is no guarantee that this will happen in Bitcoin but the price of gold went up 11 years in a row which it had never done in modern history uh you can go back as far as you can in modern pricing at least in US Dollars and you won't find an 11year string and the reason was over that 11e span 100 hundred billion dollars Flo into those gold ETFs and it didn't disrupt the other demand for gold people often wonder if a spot Bitcoin ETF will disrupt retail demand for Bitcoin

through other means that's not what gold shows us invest into gold bars investment in gold jewelry stayed the same and you just added this institutional piece on top uh so it really can be transformative for an asset class I think it will be transformative for Bitcoin I think there will be a before ETF and a post ETF and even though it will take a few years I think people underestimate the impact a few years from now of what this will do to the market what about on the demands so what that gold story tells you 11 years in a row is that there was just a gross uh Market mispricing due to a lack of a vehicle basically that gave investors so maybe Hunter this is the time to throw to you you're I know you're in a see you

I see you posting on LinkedIn about about all your meetings and stuff with financial advisors and institutions and Ras I'd love for you to almost take Santi and I into the room with these folks uh because there's there are a lot of reasons not to buy crypto right now or not to buy Bitcoin it's there's FTX or maybe there's tether fud or there's binance fud or there's regulatory reasons and Bitcoin ETF or lack of an ETF is probably just another one of those reasons what are can you just take us into those conversations and cover as much as you want to cover here yeah ABS absolutely my my my pleasure to do that we we love spending time with with clients bitwise as you know uh Works to help uh investment professionals understand and access the opportunities in crypto so you see my my posts on uh

on LinkedIn about uh about doing that maybe maybe uh it was the baren conference a few weeks ago uh the the way to imagine the investment professional generally in this moment is that they have 99 problems and crypto is just one of them so for all of us in crypto I think the four of us included we spend a lot of time and it's our job to spend time understanding the day-to-day developments the trajectory what uh each development means for the opportunity set and the thesis but for most of our clients they're overseeing portfolios of every asset class it could be you know stocks bonds International markets Alternatives real estate uh

Venture private Equity Etc and those markets uh are undergoing a lot of change right now both in the Outlook because of macro concerns about inflation and recessions um and uh also uh because uh just year-to date the performance has been confusing to many and they're not sure if they should go risk on should they be buying the NASDAQ when it's up 30% year to date or should they be selling it so they have those questions on the investment side uh to to wrestle with and then depending on the type of investment professional if you're an institution then this may not be the case if you're a financial adviser wealth manager you're also thinking about your practice your CL

your conversations with clients uh growing your practice and so between those two things you have a a pretty busy slate day-to-day and I think that's sort of an essential backdrop to imagine when you imagine the conversation that we have with clients who are thinking about the space they have it on a to-do list is just to you know think about the fact that the to-do list is very long uh how do those conversations actually go so I'll give you I'll give you a few stories I was with uh an advisor who's at a billion dollar plus ra which is an independent uh advisory firm that's that that term refers to not associated with a bank or a brook dealer

and they uh manage about a billion dollars in assets um and that's been growing a lot and they're really excited about that they're wrestling with clients wanting to meet over Zoom versus iners uh if they should be expanding their footprint to different different uh States um but one of the principles of that firm a few years ago uh attended a a talk that we gave uh on crypto and saw the unique opportunity for their clients to put a low correlation and high growth potential asset into the portfolios um and the unique role that that could play both through an academic lens uh and through a client lens um and so over time they built a 2% sleeve uh across all clients they use one of our

our products uh for that sleeve uh and then rely on us for for research on the space but they're sort of on one end of the spectrum where they have built things out um they have addressed sort of the crypto opportunity and now they're trying to stay up to date with what's happening in the market um but have only so much time for that so they want to know when there's something important that they need to understand on the other end of the spectrum we have you know we have thousands of conversations per quarter and I think uh for many advisers the state of play in crypto is um it's interesting but we don't have time to do something right now or the way that this is sometimes

expressed is we're we're waiting to see what happens with the spot Bitcoin ETF which is the same as saying we're waiting we're waiting a little bit longer uh to see are you actually hearing from them like we are waiting for an ETF to put money or is the demand really dried up because yeah I'm just sort of curious how much like demand and and and capital is there chomping like just on the sidelines waiting for the ETF yeah yeah it's a great a great question I think it probably comes up in a fourth to a third of our client conversations the demand and perspective demand uh is massive I think it'll be the most important development uh the industry has had uh for traditional investment professionals because of the

benefits that the ETF rapper provides uh the regulatory benefits and and comfort uh with compliance and disclosures as well as the Simplicity uh each of these firms is operating on a stack of trading reporting uh accounting compliance and so on and so forth that is really well suited to the ETF rapper uh for which a lot of other rappers are a bit harder um so I think I think it'll be a breakthrough moment Matt is there anything you'd add to that yeah I just wanted to add one important piece of context which is if you want to think about wealth in America you should think about it in three buckets there's sort of self-directed retail people trading on their own there's financial advisors people helping other people invest and

there's institutional Capital pensions and endowments and the breakdown of wealth is about 20% self-directed 40% advisors and 40% institutions and if you think about crypto going from zero to a trillion dollars it's been built almost entirely on that left bucket the self-directed retail investors the smallest bucket by far and it maybe isn't fully penetrated there but it's it's made some penetration but these other two buckets are either ex you know single digits in terms of their growth and what a what a ETF will do is it will allow those two other buckets 80% of the market to gravitate up to where self-directed retail is and that's why it's so important it's just a scale game we talk

so much about these self-directed retail investors because they're loud there's a lot of media coverage of them but they're really the smallest segment of the market most of the money is in these other two buckets which is what the ETF serves who are like the biggest winners in the event of an approval of an ETF I mean you have obviously a custodian like coinbase you have multiple different players you have you guys have an index I'm just sort of curious how you think about obviously grayscale which you know if you look at the premium like historically it traded these products gbtc eth and others traded at a premium and that was for me I just read into that that that's just a convenience factor that people just want to kind of they're willing to trade IL liquidity and pay a premium because they don't

want to do it themselves they don't want to self custody they don't want to set up and spin up a full operation uh now of course that's trading at a discount but compressing so I'm ious how you think about like the shifting kind of tectonic plates once you have an approval of an ETF what does that do to the existing kind of players including you guys uh going forward I I I just want to uh uh build on something that you just said Santiago uh around the the role of of a product like gbdc because I think it it it reemphasizes a point here that is very helpful to understanding why an ETF is so important for Matt laid out the different constituents for for many constituents in capital markets at large

there's actually it's not just convenient it's that there's no alternative if you're a financial adviser you cannot open a coinbase account for a client so if you want to support a client getting exposure if you want to take care of that for them the same way you're taking care of uh emerging markets and growth and real estate and munis and their financial plan and their taxes and their reporting um if you want to embrace crypto as part of that and sometimes clients ask for it or demand it you don't have a way of buying uh a Bitcoin directly by and large of course we have smas and a few other things today that are becoming possible but historically uh these publicly traded products and their ETFs

as well now um are the only way so uh I would just I think you you you said the right thing there and I would just even dial it up further from convenience to um only only option in many cases uh so I think that's one of the reasons and and and a reason that sometimes people underestimate the size of the Breakthrough here um because it's not just going from uh good to better or good to more convenient but but actually going from uh in some cases not possible to possible um and that's uh that's a big deal um as as to the question about uh who the winners are I think one of the reasons that I mean we we've been in this spacee for six or seven years now um and have tried to be good stewards of

the space and um and of course play our role in helping people understand it and its merits I think that one of the reasons it's so exciting to see the whole industry uh sort of rally around an effort like uh a Bitcoin ETF which we've been working on for a very long time is that I think that uh almost the entire industry and investor base will benefit from this development it does a lot to uh bring credibility and uh maturation to the space there you go you got the thumbs up uh uh rearing its head there um uh yeah let's let's see it let's see it this is your this is your trigger to go

watch on YouTube folks oh my gosh yeah I think it does a lot to to to build that that comfort that people can participate in a in a mature and mainstream way um which enhances the credibility of the whole of the whole industry I think of course all all of the parties involved in managing these products be at the issuers like bitwise uh custodians like coinbase um even administrators like Bank of New York melon who will be you know the administrator on funds or New York Stock Exchange which would be our listing venue uh all benefit um and then investors benefit uh hugely existing investors who took the harder path of getting access before um it sort of unlocked for a broader set of investors

and then of course new investors who can really benefit from the low correlation uh the high growth potential um but haven't had uh a workable way of incorporating that so uh I know it's it's not the most sort of intriguing answer but I think it's the reason that there's so much uh unified um enthusiasm for this development is that I think it's it's a tide that will lift uh lift the whole industry much like Matt mentioned the first gold ETF in 2004 really did a lot to uh uh lift the maturation of of that space as well yeah I mean of course go ahead Matt I don't know if you wanted I was just going to build that one one one maybe uh Nuance on top of that there there's some people who think the large companies

will come in uh from traditional finance and and win the space in this new more mature market and I think they'll get their fair share it is worth noting that historically that's not what tends to happen to go back to the ETF example uh Jason in the early days of the ETF it was developed by a company called barky's Global Investors and they became the dominant player eventually got acquired by Black Rock when we talk about black Ro leading ETFs today it's because they bought this small shop that managed really very little money called Barkley that came up with this idea and grew it substantially the other winners were were firms like PowerShares or State Street Global advisors which is part of a big company but not a giant player uh and in ETF land that is true

often in these Niche markets you see the large companies come in but it's the specialist that uh that more than hold the ground so I think Hunter is right it will benefit everyone it will benefit the ecosystem uh both both the existing specialist players and the the larger Financial firms that are coming in have you have you guys ever been approached by someone like a JP Morgan or a black rock for an acquisition we we we have we have relationships with with lots of uh uh large traditional firms and um find find that to be productive but uh my viewpoint is that to uh play the most productive role for our clients having a

full-time focus on crypto is imperative as you guys know so much happens in a 24-hour span clients have a very limited aperture of time but need to know the important things that are happening and so the confidence that comes from having a partner like bitwise who's looking at this space 247 um and is always week to week there to talk about it uh I think is the essential element um a challenge that traditional firms have is of course they need to be talking to clients about short duration income this week and how the yield curve is developing and that is actually in many cases or most cases

the most important thing that they need to be talking to their clients about um and there's a prioritization challenge when you when you take that and then of course you add to it what's happening in commercial real estate right now are there any developments there is private credit something that I should be prioritizing what's what's the the house view on Venture should I be in value or should I be pushing out and tilting towards growth uh all of those questions are imperative for a broader portfolio in which crypto is a 1 to five% allocation so if you're an investment professional how do you surround yourself with a set of relationships that is going to uh make sure that you have a a vector into everything you need to know and I think a reason that we have uh been able to lead in this

category uh and our client bases over doubled in the last 18 months um uh the information's not not public generally but I I suspect we have the broadest client-based of investment Professionals in in America today uh is because people value knowing for certain that we will always be monitoring the latest in crypto and they can tap into that at any moment in time and we're ever we're never going to not talk about something important because we had some other priority yeah I'm just curious like okay so we have the ETF uh the SEC had until until yesterday to uh dismiss or I guess what's the right word appeal uh one of the applications and they didn't now there was a couple of folks

that said who okay this means that at some point between now and January q1 like there will be an approval I my understanding is that's not it's not a straightforward they can find other reasons not to approve an ETF um although maybe on the margin they're running out of they're running out of reasons but um I am curious as you guys think about that just is it true um how do you kind of see the that path unfolding for the approval um and any perhaps potential reasons why the SEC may not U or continue to reject these applications yeah sure I can jump in we

of course can't talk about bit wise's application or any application but we can talk generally about the space um it is the case that the way to think of this grayscale lawsuit and the focus on Market manipulation is that that's necessary but not sufficient to allow an ETF to come to Market so it's a hurdle you have to clear but there are other hurdles you also have to clear some of those hurdles have to do with custody and how you store Bitcoin some of them have to do with uh trading and how you acquire Bitcoin and then some have to do with disclosures and other items so there are these these other hurdles that uh issuers have to jump over but it is worth noting that you have a large

number of issuers uh from very reputable firms focused on this space uh and so so I'm optimistic that we'll get there much more optimistic than I've been at any other time uh during our our five-year Journey but there's no guarantee there's no guarantee that we will we will get there by January 10th which is the date that the arc fund has to be approved and many people uh think they'll line up all the funds there's no guarantee we'll get there by March which is when most of the applications have to be approved there's no guarantee that we'll get there at all but I am optimistic and I think the balance of arguments is on the side of of of pushing this over the line which would be great as Hunter mentioned for

investors yeah there is a criticism on just generally ETFs and Matt you correct me here but that that there's this idea that the in general markets have become complacent and you have huge firms that just most of the capital that ends up in acquiring a substantial ownership in these companies is very passive um you're not voting you're not paying attention to uh what's happening whereas before ETFs there's more direct relationship with the owner there was more perhaps oversight of managers principal agent problem y y y there is a contingent within the space that says ETFs have actually been damaging to corporate governance and generally how

these companies are managed I am curious uh when you apply that lens and argument to crypto in a world where there's a lot of ETFs um you do certainly shift more towards a centralized version of ownership of these things um and when is it relates to proof of stake even worse right because then there is uh even more centralization of the particular token that needs to be staked so I am curious how you think about that one do you actually agree with argument that ETFs can can lead to that kind of complacency in the market and how does that apply to crypto in a kind of a steady state where there's a bunch of ETFs yeah great

question uh the first part the answer is no it's one of those seductive arguments because if you take it to its extremes of course it is true if 100% of the equity Market is passively managed then there is no governance and no incentive to to innovate and there's potentials for collusion in fact when the first uh Index Fund launched in the 1970s there was this huge advertising campaign calling index funds unamerican so this argument has been around for 50 years it it it it fails as long as there's a sufficient portion of the market that is actively engaged in the product right so uh while it's true at 100% it's probably not true at 50% it's probably not even true at 80 or 90% because the active

sleeve will still have that incentive to profit from being uh aggressive and managing it um on on the governance side uh yeah I just don't uh it's again seductive because at 100% it would be absolutely true but I just don't think that's the way the market will mature there's nothing about an ETF that prevents people from owning Bitcoin directly that prevents them from owning their own keys and it's a little bit like those arguments that the crypto industry is uh too concentrated today that assume that a wallet that belongs to coinbase represents one owner when in fact it represents uh millions and that will be true in the ETF space as well so

um yeah a seductive argument but uh but not one that I think holds water uh in the real world this episode is brought to you by toku toku makes implementing Global token compensation and incentive Awards simple with toku you get unmatched t tax and legal support to Grant and administer your Global teams tokens from easy to use token Grant award templates through token investing to managing tax withholdings toku understands every Grant structure token purchase agreements restricted token Awards restricted token units token options token appreciation rights and even Phantom tokens for legal finance and HR teams it is a huge complex task to have

to comply with global regulations around compensating people with tokens not to mention the payroll tax obligations tax reporting in every country that you employ someone it is difficult timec consuming manual and costly and it is drawing more and more attention from regulators and governments toku makes this simple for leading teams across the space protocol Labs dydx Foundation Mina Foundation hadera nosis safe getcoin and a lot more reach out to toku at tok.com Empire or click the link in the description yeah I mean you have right now in crypto u a lot of like delegators right people can or validators and

people Del most of the people are delegating right if you look at ethereum like Lio for instance has 30ish 37 33% of all ethereum um being delegated to their network of you know validators um as it relates to corporate governance like if you could just refresh our memory like if you own a ETF and you want to get involved in you know there's a annual shareholder meeting of uh Walmart and you you have a particularly strong opinion on how they should do X or Y or the director that the directors that are being correct me here but most of the time or if not all ETFs allow you to submit the vote um or

do they withhold some some of that and then they they vote on behalf of kind of the constituent base and then of course how does that kind of translate into crypto right yeah the the answer is it's changing in the past it was it was held exclusively through uh through the asset manager and now through the application of various uh uh sort of fintech Technologies and solutions you're getting more pass through voting and more individualized holding it's a solvable problem that's being solved actively in the market and I suspect the same thing would be true crypto Market but the overwhelmingly important thing uh is that people who are frustrated with the position that these centralized

entities are are taking can simply sell and redeem and then buy it directly themselves right with some tax implications so there's a on the margin some you know unw you know disincentive if you will but to be sure yes to be sure that's that's it's absolutely true and if you thought that these ETFs were going to vacuum up 80% of the Bitcoin in the world again think you you might you might be worried about this but in reality what this is going to do is it's going to capture a sleeve of Bitcoin from owners who are you know probably not prepared to take active governance positions uh and and uh I think it's a I think it's a theoretical concern I I'll admit that

but it's not one that practically concerns me right the big Community is strong I would also just chime in chime in with a perspective that uh I think it will be a huge Boon for this base to have more and more assets uh with a long only asset manager like bitwise through Vehicles like ETFs if you think about the very productive role that coinbase plays as a steward and a tent pole for the industry uh advocating and investing in its long-term Health um and in its development um a long only product so a product that doesn't make active investment decision doesn't go doesn't

go short um is structurally aligned with the space's health and um progress uh over time and has a very long-term time Horizon isn't necessarily thinking about three-month windows or six-month windows or even year-long windows so I think that uh in a subtle way one of the real benefits as as long only asset managers or long biased asset managers uh accumulate larger and larger uh Stakes on behalf of their clients is uh our incentive is absolutely to support the development of the ecosystem and the flourishing uh and maturation of the ecosystem uh we do that in a number of ways but I think that having more um

more sort of tent poles like that for the space will be a very productive thing in the same way you've seen coinbase be so productive even outside of just its day-to-day business and the role that it plays in advocating for the space can we talk about um you know maybe as a someone that is listening to this conversation might be skeptical and say Hey you know you've had all these blowups you've had exchanges or folks like blockfi and Voyager and that have for variety of reasons blown up and then the the skepticism might be well what happens and how do you prove that you know it's whoever is you know operating set ETF is actually managing Keys correctly and setting up a secure

infrastructure and using a you know registered or you know custodian if you will and maybe has insurance and has proof of reserves like I assume all of this is part of the application process like you you need to kind of show uh your competency and the service providers that you're using but there there's still like the tail risk as it relates to kind of generating enough entropy and managing your keys like there is a risk of you know someone being hacked and then oh you know all of a sudden investors are out of loss there and there's very limited Insurance in the space still so maybe it's kind of a wild goose chase where it's not not that much of a

problem but I'm curious if you believe kind of what your opinion is on on on that yeah I I I can jump in Hunter can build on it it it's it's a reasonable question it's worth noting that ETFs have existed in crypto around the world for a large number of years in Scandinavia in Germany in Canada in Brazil in other markets successfully stewarding investor Capital uh it is these well-regulated well documented entities that have to go through multiple approval processes uh that have regulation in place that provides the safety that investors want and it's actually the case conversely that the inability for Crypton native entities in the past to access traditional Financial Services has led to many of the blowups

that we've had in the past so this is uh strictly a positive development from my point of view in terms of the safety of the products that investors can access and uh and yes of course there's a huge amount of work and discussions to go through in order to set up these investment vehicles uh that help build that trust and secure and make it very real yeah I mean I guess you see these blowups right uh there's like there's there a ton of Commodities out there where like you know JP MO is buying copper or nickel and it turns out to be like not not even real like I mean it's like it case but you know there's always a risk but to your your Point's a really good one which is on the margin like what's better the existing lack of an

ETF or with an ETF well for all most most of the time you're gonna be better off using an ETF product because the the reality is that most people are not sophisticated enough uh to kind of do it themselves I would just uh I would just I would just add to it in Santiago I also want to say these are fantastic questions and and I'm I'm I'm really actually really really enjoying you know I think a lot of people are familiar with ETF as a concept but haven't pulled back the the layers uh like you're doing and Matt knows it better than anyone so so uh I think great questions I I think when when when you think about the benefits from a peace of mind and security perspective with an ETF there's actually a bunch of of layers that stack on top of each other um that really

results in something that allows an investor to say I want exposure to crypto and and I can sigh a bit of relief that I don't have to to worry week to week that uh it's going to disappear or blow up just to just to illustrate some of those those layers and uh on our website we have a page called the professional approach um that details some of these but uh you have uh a qualified custodian which means a custodian with regulatory oversight um you then have uh an administrator so a third party in the case of an ETF Bank of New York melon as an example who will go in and mark the value of those assets via a uh published uh uh methodology for how they're

valuing those assets that is described in detail uh in the perspectus then you have an auditor who will confirm that the administrator and the assets were described accurately then on top of that you have an issuer who is overseeing all of this and can actively take action and intervene if there is any development that needs to be addressed um we did that you know over the course of of managing um assets uh for the past six years we've I think have a great track record of U navigating these situations avoiding FTX blockfi Genesis Luna BNB ftt um so then you have the the issuer then a a layer up from that you have uh

the sort of regulatory piece you have the disclosures so you have the requirements of an ETF to disclose risks to disclose financial reporting um and all of those things stack together uh the uh and and I think that that picture as a whole is really important when you think about stories like the developments uh uh and some of the claims about FTX it's not just that they necessarily um uh lost the password or something right there there there was uh potential misrepresentation um not enough third party eyes or audits on the information and I think with an ETF you not only get

uh the best regulated uh service providers and solutions but you also get the benefit of many eyes on the information and what's happening across that whole stack that I just described and I think that that is in again in idiosyncratic and subtle way a huge benefit um to the protection that an investor can have and it's one of the reasons that you know Matt and I think others say that an ETF would be um an amazing benefit to American investors because it offers that combination of uh of protection layers that um can be really useful in a space like crypto and in general yeah I mean certainly like a lot of we know a lot of retail just

holds other coins and exchanges and uh in traditional Finance that's not the case like there's there's clearly more divisions of all the different kind of components when you're when you're buying and then you're custodian and and so anyways yeah certainly like it would be much safer I think we could all agree if if they held an ETF now the reality is um we're likely going to go baby steps here uh maybe uh I'm curious what you think of the sequence Bitcoin first then ethereum ethereum has a a little bit more complications because of the yield and stake and and perhaps some liquidity component attached to that but like um in ETF land I think you saw a similar progression now you see all kinds of flavors of ETFs uh you know you

go 3x long rates and 3X long a particular sector and there's just uh a very uh sort of a plethora um of of products how do you think this space evolves what's the sequence and timeline of the type of ETFs that we may see kind of in a year from now three years from now 5 10 years from now and and I kind of want to ask that because you guys of if I look at the progression of the type of products you've offered over the years it's it's been it's been interesting to observe you try to compose kind of certain indices and um yeah I'm curious how you think about that may may maybe I I could comment on

on our our point of view and Matt you could maybe share a little bit about specific products you mentioned santiag I think it's a great question just just to to zoom out for a second on on bit wise's point of view uh our view as I've sort of described is that investment professionals have very limited time for the space not because they're disinterested but because they have so many responsibilities and for us to be the best partner to them we need to work to make sure that whenever there's a uh useful way of accessing the space that we are bringing that forth so that they have the opportunity to consider it and benefit from it so if you look at the history of a bitwise uh we got started in 2017 with a private crypto Index Fund and since then every time we've seen an

opportunity to benefit clients and investors through a wrapper or a strategy we've brought that forth so uh we launched the first publicly traded crypto Index Fund we launched the first crypto innovators Equity ETF we launched the first defi Index Fund the first nft Blue Chip nft Index Fund um just uh two or three weeks ago we brought to market the first ethereum linked uh ETFs um so Matt can comment on the specific uh products but I think at this point we have a six-year track record of showing that if there is a useful new aperture um be it an ETF rapper or a strategy um our point of view on it is that we will

be working with uh the SEC or other relevant parties to make sure that we're we're bringing that forward for investors to consider um and to your point there are some interesting interesting things on the table recently the ethereum linked ETFs that became possible and uh and then the spot products that were uh in dialogue around now yeah mat yeah I I could just build on that I think that's right towards the specific products you know if we are on the pathway to get a spot Bitcoin ETF I think it's reasonable to assume that an ethereum spot ETF is down that pathway as well and not that hard to get to beyond that it gets more difficult because those ETFs approval uh would hinge in part on the existence of these

regulated Futures markets for which they're only regulated Futures in the us for Bitcoin and ethereum eventually I think we'll get to the point of having uh ETFs provide exposure to multiple different Assets in the crypto Market but that's going to take uh either some legislation or or maturing developments of the derivatives Market or other things in order for us to get there I think if you think about what people will wrap in those ETFs they will try everything uh just one asset multiple assets momentum strategies hedge strategies leverage strategies that's what you see in the ETF world people use the rapper to express all these different views the interesting thing maybe is historically the most

successful ETFs the vast majority of the market are the Diversified index products that goes a little bit against crypto's history where people own Bitcoin or they own ethereum or they own salana but in the ETF Market where you're dealing with financial professionals which as Hunter mentioned have 1 to 5% of their Market their portfolio maybe in crypto what they want is crypto exposure and so I think over time you'll see Diversified products win uh the largest share of the market that's what we saw in Commodities that's what we certainly see in the equity space and I suspect that will that's what we'll see in crypto as well I've said this like you know personally I've been wanting to do this for a while like because we're so early I almost want to

constantly rebalancing index of the top 10 coins to make sure that I capture whatever is going to be in the it's sort of like the S&P it's really hard to outperform the S&P like you could have like not cared about the internet but if you had Expos you to the S&P because the composition of the S&P has changed dramatically and then then you would have benefited from that and in crypto I I need a product like that to hedge my bias to be very focused in a particular ecosystem in my portfolio but I don't have it right and so if you could have like an if I could wave a wand on to your point on a divers index it would really just be that just give me the like my ability to express I'm long innovation in the space I just don't

know and I'm pretty sure that the top 10 or 20 by market cap is going to look radically different like if there's one bet that I can make with high conviction is that the top 10 that you see right now in coin gecko is going to be vastly different in three five and 10 years from now I want to be able to capture that growth in the ecosystem without you know obviously I'm actively investing but I also want to hedge my bet by having exposure to this type of product but it there isn't one right and so or it's not as easy to to kind of like get access to this unless you're like accredited or institutional whatever it's t it's tough though s because so bitwise has the um one of your s's most popular ones right it's the the bit W right yes but in there are these coins

that I think a lot of people who have been in the industry for a while would agree that there's not much happening in those like like Litecoin like I or like Bitcoin cash or something like that but that has included so inherently you're buying you know Litecoin but when you get the B bit W because it's one of the top on still for some foolish reason so I don't know yeah well look I mean that that's the thing that that's what that's what I'm saying you know like I I obviously have a particular opinion on on the top 10 I think some of the top 10 are just it's crazy how they're still there but they're there and I've been not making money because of that so that's the best counter argument I could be intellectual or I could make or you

know what is do you want to be a writer or do you want to make money that's what I'm saying like ultimately you know anyways I think there's a lot of innovation and a lot of really interesting products that you can make maybe as a I know Jason want wants to throw a question to you to wrap it but uh you've been around the ETF industry for so long um what are some of the things that the ETF industry can learn from crypto some things that they it can adopt from crypto whether it's blockchain technology uh Atomic settlement like just um the transparency nature of it I'm curious if you like the ETF industry is not perfect I mean it's been huge Catalyst it's been hugely beneficial but

is there an opportunity to kind of utilize this technology to revamp the financial industry particularly within kind of ETF land yes absolutely absolutely you know everyone who rides an innovation wave thinks they're at the end of history and that there can be nothing better and that's certainly true in ETF land the people who have operated there think we've solved the problem of how to access the capital markets but of course that's not true ETFs trade you know six and a half hours a day they don't trade on weekends settlement takes two days for many International stocks or bonds or some parts of the ETF Market settlement takes 30 days if you can imagine that right the costs to transact

are dramatically High the ability for individuals to build portfolios uh in a tax efficient way are still limited and so I absolutely think uh uh the ETF industry is just a stepping stone to a more perfect future that has Atomic settlement that has 247 365 that has individuals able to either own Collective vehicles or direct index which means own your assets yourself with the push of a button which of course you can do in smas today but not as efficiently as you should be able to so there are few people who have been in the ETF industry that have moved into the crypto industry because they recognize we're not at the end of history on that one uh and I think

you're going to see more and more of that I think you know crypto is where maybe ETFs were in 905 or 97 right before it really hit that mainstream point which started to occur on the early thousands but I think we're going to get there and there's lots of gains still to be made give the thumbs up Matt maybe we could end uh I remember an episode you did with the with our research guys back in December 2022 talking about uh your your coinbase thesis we're 10 months later I'd love to just hear your updated thesis around coinbase as a public company right now coinbase is the same valuation as Pinterest which strikes me as nuts

I love Pinterest I know a lot of people who use Pinterest but it's have you used Pinterest recently I have not use Pinterest but I do know I have friends use Pinterest uh but it's not potentially one of the most important financial services companies in the world which I think is true of coinbase I think if you're uh if you're looking at a company that's sub uh $50 billion that you could imagine one day being a trillion dollar company I think you'd be hard pressed to find a better candidate than coinbase that doesn't mean it will be but it means that it has a dominant position in an industry that's in an early stage of growth with exponential potential growth ahead of it and it's executing exceptionally well uh the other two

things I would point out about coinbase as an update from that December comment is they dramatically reduced their cost basis right they lowered their burn substantially they had significant layoffs which were painful but their execution has never been better than it has been been over the last nine months of the year whether you're talking about a base or the diversification of their income stream or even their public setting and their they're lobbying they're more effective today than they were in 2022 with a third fewer people that is an exceptional corporate performance uh and I think they're a strong leader for the industry so uh I could not be more excited about coinbase I think anyone who has a crypto portfolio that is excluding public

equities and particularly companies like coinbase is uh is underallocation they're making an active bet that those companies won't matter and I'm not sure I would make that bet if I wanted to diversify crypto I would own my Bitcoin I would own my ethereum I'd own my uh bitwise 10 uh to your point Santiago but I would make sure I would tick this box because I think if you look at how well coinbase is executing now uh you look at their revenue versus where we were in 2019 it's manyfold higher I think it is in an exceptional position and it's being uh extremely well-run so I'm very bullish yeah the trend with broker the counterargument would be that the last

five years with brokerages fees have gone to zero and coinbase you know if you look at Robin Hood or TD mer trade or anything like that you almost jumped out of your seat so I feel like you have a thought here uh but I I I'd just be curious it sounds like you think that they will be able to execute against that that downtrend yeah again there you know there there there's value to have been in the market for a long time the same thing was true of Charles Schwab it got launched on commissions trading for 29.95 and then ER trade and now Robin Hood commissions are zero it's bigger than it's ever been and the reason is if you control a base of investors with significant assets and you have a strong reputation and a high level of trust you

will find ways to monetize those users you will find interest income you will find advised assets you'll find products development you'll find things like base coinbase is doing that right now in front of your eyes if you look at the share of non-commission Revenue it's been going up and up and up and I don't understand why traditional uh Wall Street analysts haven't taken the lessons from Charles Schwab the last really disruptive brokerage service which today charges zero for commissions and applied it to coinbase it's just so obvious to me and they control a really important market and they're doing a really good job about it I think it's one of the most uh misunderstood public companies out there and and you know you

talk about like being you know early contrarian and then eventually right you know what are you believe in that others don't and eventually will like if if you're excited about crypto I I would love to have a discussion someone who's really excited about crypto and doesn't think that if crypto continues to grow in what version of the world probabilistically does coinbase not do better given and everything that they've done there's a lot more probis you I think you'd be surprised of Santi I posted something on Twitter about a month ago I think coinbase gets more amongst crypto Natives and doesn't get enough credibility like before Bas After Base people like oh wow they're doing a lot for the space like yeah no uh but even before that it

was sort of like a vilified like oh you represent everything that's wrong the world and traditional financial institutions but they've done a huge service to the space incredible probably the most important company in crypto I would just add I think that's a really important point I think one of the reasons it's so contrarian is the stock has a lack of natural buyers because the crypto people don't like it and the non- crypto people don't want crypto yeah so who's going who is left to buy coinbase but eventually eventually value will win out and uh I suspect that's what we'll see I I I just d double down on none of this is Legal Financial advice you know true don't go out and YOLO into the coinbase okay guys please I uh I would double down what you said Santiago I I

think coinbase is is the most important company in crypto it's hard to imagine the space without it um they provide so many services behind the scenes and I think that'll be more and more of their growth story U but even just setting aside looking at them as a as an investment or as a as a corporation um they're also tackling one of the sort of original sins of crypto that continues to plague the crypto space which is that c crypto uh has the worst communication problem out of any Innovation sector I've ever seen if you think about just as a heuristic what do people want to know about uh the developments in AI they want to know how can I use it what are other people using it for and is it

going to be good or bad for the world those are the same things that people want to know about crypto but instead we tell them about mining rigs powered by volcanoes in countries that they can't even locate on a map um and we talked to them about hash rate and you know ZK proofs these are all good things but we're talking right past them uh it's like the physics Professor who walks into the one1 class and alienates 80% of the Class by uh s this is a Wendy's um and uh so so I think I think that uh that crypto has a really inspiring message to tell about democratizing access about re building

trust in the internet era um about moving the world forward and and not not taking the sort of state of play in 2023 as the final uh you know progress that that Civilization can make um but I think has been relatively poor at recognizing that uh most audiences who are not in crypto have a small amount of time and want to answer the same questions they have about Ai and I think that uh coinbase has done more than than anyone particularly in this past year if you think about their campaigns around uh update the system such a simple way of conveying what I think everyone in crypto believes in but is so rarely the subject matter of conversations uh the recent campaign in in DC uh about America loves crypto

pointing out that more Americans own crypto than watch the Super Bowl again such a simple Point um but somehow gets lost in all of the discussion uh about uh the more idiosyncratic and Technical aspects of the space so I think that they do an incredible job and I I would also just say I I've said this a few times but I think it's so important to sort of having this self-awareness about the crypto space um for many of our clients we work with about 1,800 wealth teams institutions Ras and family offices now for many of them they schedule a quarterly conversation with us and we produce a quarterly report it can be found on our website if people are curious but we produce a quarterly report and they want

to know what happened over the last quarter that's how much sort of time time and of course they're they're watching things here and there and of course we say there's this important development you should know about but you know that that sort of helps I think visualize the aperture that most of the public that is not in crypto has for this space so when we have those moments those Beautiful Moments where someone offers us some of their attention in time uh how do we fill it and is it productive relative do they want to know and I think historically crypto has been squandering that time uh by filling it with things that they find Curious or some technical detail not that those don't matter we care deeply about those our CTO noun 40 you know writes uh comments on Improvement proposals and write some of them himself uh but we

have to recognize the audience um and I think that's just one other aperture through which I think coinbase has un been unbelievably important I think that they see that clearly and have done incredible work over the course of this year to help tell the story of crypto at the same level that the discussion around AI is happening um which is how do I use it it what are other people using it for is it going to be good for the world that's what the general public wants to know yeah that's such a good point I mean I think it's great what ended because you know base might be the most important development because they're going to really and they're really emphasizing consumer non-speculative use cases like restaurant rewards programs and the whole campaign around bass I think is going to be is incredibly exciting it

feels like it will deliver on getting Builders to to build actual products because I think that is my understanding talking to people that are close to Regulators are like you just bunch of people got lucky and then they you can't stop talking about this thing but show me a really useful application to this and AI is you know farther way farther along and and crypto has really that's kind of our has been I think our weakest uh line of defense uh we we we've seen seen that as well I think we put out a report maybe in April or May Matt's team and the the research team here called the 12 real world use cases that millions of people are are using today and it and it illustrates 12 examples of use cases that actually have traction

and put some statistics and narrative behind it and that has been one of our most popular pieces amongst clients all year it says nothing about return potential nothing about sharp ratios or correlations and it speaks I think Santiago to what you said which is people again just want to understand these very simple things which is how can I use it how are other people using it will it be good for the world and the way to interpret that is through understanding uh use cases I think Bas is very productive Rel to that I think you know conversations around those subject matter will always be very productive and a good heris for people in the crypto space is you know uh is this the same type of thing same type of conversation that would be productive in AI if you're if you're if you're at a

dinner talking about AI what do you want to know how many people are using it what are they using it for What's it gonna be used for in two years and is that GNA be good for the World perhaps you want to have a conversation about uh you know hardware and Transformers and how different Transformers will help with the compute necessary to run uh the models in certain conversations that is a productive uh line of discussion but please invite me to those because most of them you know most of the time it's you don't even get that far well we'll definitely have to link to that report I would love to for for people to to browse it and double click on it because it's so important to arm ourselves with just you know stable coins nfts uh there are some really good use cases out there

and I think people oftentimes lose sight of that but they're there talk to people on the ground and they're definitely getting a lot of value and really appreciate the core tenants and and and applications that are there and so um yeah uh putting price aside there there's some really useful applications out there and people just need to be constantly reminded of that yeah Hunter Matt thank you guys this is great yeah thanks for all the work you do uh I know you you you talked about coinbase doing great work and DC but I know you guys are also talking out there to you know a lot of a lot of the folks on the street so really appreciate that and uh yeah keep doing great work and and um yeah we'll we we'll hope to see some ETF sometime soon thanks guys or not thank you this

is this is wonderful and appreciate those comments we you know we we we try to be good stewards of the space and and feel grateful to be part of this industry with others like you who are thinking about the long term so thanks for the conversation all right [Music] JN