Cryptocurrencies have begun dominating the financial market narrative in a way that they never have before. Bitcoin was just trading above $60,000. Coinbase completed one of the larger IPOs in recent memory last week. Dogecoin has become the market’s crypto darling. This past weekend, crypto prices plunged on the rumor that the U.S. Treasury may begin cracking down on cryptocurrency-involved money laundering schemes.
What better time to bring Dave Abner, Global Head of Business Development at Gemini, and Matt Hougan, CIO at Bitwise Asset Management, to the ETF Think Tank to discuss the state of the cryptocurrency space and where it is headed.
The first (and perhaps most obvious) question posed was whether what we are seeing in crypto is price discovery or a mania. Hougan says that mania always tends to run shotgun with disruptive innovation and we are still very early in that evolution. Despite the current surge we are seeing in Bitcoin, Ethereum and others, there is still much potential here because most people still aren’t touching cryptocurrencies. There is a lot of junk out there, but that doesn’t take away from the larger theme.
The topic of regulation came up and, perhaps surprisingly, both Abner and Hougan agreed that some type of regulation surrounding cryptocurrencies is probably on the way. What that would look like is up for debate, but Abner notes that at least some regulation would lead to greater acceptance. Hougan says he believes the SEC has done a good job of being clear in what would be required to approve a Bitcoin ETF and agrees that a more regulated crypto market would be good by cracking down on some of the bad parts of the market.
The current environment is also making it more comfortable for financial advisors to dip their toes into crypto. Hougan says that demand for cryptocurrencies has changed materially and it is growing at a compound rate. As it’s becoming more mainstream and accepted, headline risk is dissipating. Financial advisors, he notes, are no longer getting fired for adding Bitcoin to client portfolios.
What’s the magic number? At Bitwise, Hougan says that the typical weight is around 5%, enough to matter but not enough to really impact the portfolio. Above a 5% weighting, Bitcoin becomes the driver of downside risk. Below that, it’s equities. A lot of financial advisors are already there working with cryptocurrencies, but it is not a huge number yet. He also says that a lot of retail is way too overweight in cryptocurrencies at the moment.
The discussion of whether or not Bitcoin should be considered a “Store of Value (SoV)” comes up here as well. The level of volatility makes it difficult to be considered an SoV, but Hougan considers it to be an emerging SoV. He says nobody is really interested in a traditional SoV and demand for gold has only really surged during two periods historically. An emerging SoV could provide price gains in the short-term and potentially more stability in the long-term. Hougan thinks that’s where bitcoin could be headed.
The session wrapped up with the question of whether or not Satoshi, the pseudonymous developer of Bitcoin, would approve of a bitcoin ETF. Hougan says it plays against the construct of decentralization, but it is going to be the thing that broadens acceptance and collapses the cost of acquiring Btcoin making it more liquid and available. Philosophically, he probably wouldn’t approve, but practically, the answer is probably yes. In terms of a Bitcoin ETF specifically, Abner believes we are looking at a Q3 approval.
As financial advisors begin further accepting cryptocurrencies, Abner says it’s about working towards better investor outcomes. ETFs grew because they were better products compared to mutual funds. Blockchain, Bitcoin and cryptocurrencies, in general, are about eliminating fees. ETFs were going to save investors from costs and risks. Cryptocurrencies are next.
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