📺 SotN #36: DeFi Crypto Index For Financial Advisors | Bitwise CIO Matt Hougan

all right bankless nation welcome to another episode of state of the nation this is our opportunity to talk about what is happening lately in crypto related to some of the big picture stuff we talk about on the podcast and in the newsletter and drop some insights and action items i am super excited about the guest we have today he is the cio chief investment officer of bitwise matt hogan we're going to get into how defy is going mainstream with traditional

investors but first we're going to give you a bit of intro information david how you doing today absolutely fantastic while the markets are doing one thing the crypto world and specifically dfi is continuing to march forward unhindered and i'm super excited just to get into the conversation about how uh bitwise is connecting defy and defy assets to the world of what i consider big money which i like yeah absolutely this is going to be an exciting uh conversation because matt

really comes from that world and he he basically helped to mainstream etfs at the very beginning of etfs now crypto is sort of entering it's uh it's close to mainstream movement there's a big educational campaign with traditional investors we're going to get to all of that and introduce matt in in a moment but first let's talk about what is new in the nation david we're getting ready to celebrate our one-year anniversary in fact the podcast is now officially as of today one year oh and we're gonna be i know dude i can't wait

well this was all your idea so for the good and bad guys david was the person who convinced me to do a podcast and i was like i don't know what are we going to say will we have enough episodes well here we are is there going to be enough content yeah that's what i said uh here we are 150 plus episodes later uh just just uh back from mark cuban on the podcast in our first year pretty exciting anyway we're gonna be doing a one-year anniversary episode david do you want to tease that yeah yeah so it's gonna be kind of a bankless episode zero reprise where we

go in and introduce like what is the what did what does it mean to go bankless right and we talked about in our second episode which actually we labeled number one um it was like all about crypto monetary policy it's just going to be i think a synthesis of a lot of our introductory uh uh content but now that we are a year older a year wiser uh which i mean for the crypto space that's 10 of all of crypto history and it's 25 of all of ethereum's history so there's a lot that we've learned in

the last year and so we want to kind of a little bit redo some of our initial content but do it i think more with more precision and more information and better perspectives and i think that's going to be a really valuable takeaway yeah so this is going to be on the podcast stream next monday and what we're really trying to do is is have a canonical episode when somebody goes and asks you okay what is defy what is this crypto thing you could send them to this one episode that that spells it out um we're trying to fit like six or seven episodes into one so we'll see how this

goes but you let us test our skills that we've developed we're gonna test our skills one year we're one year vets now so i think we can do this uh david we've also got some awesome content coming out on youtube i know you're doing some meet the nation videos with all of these different crypto projects uh some digital art stuff any any teasers there yeah we're doing we're doing something with connext and i specifically have questions about how connects is going to help bridge liquidity across l2 roll-ups i know that that is a huge conversation so we're recording that this week i also

have a meet the nation with b protocol for those that are interested in that gonna learn all about that but something i'm recording today with my good friend kitty who uh people on the our east finance reddit will be all too familiar with uh i i showed him he i know he he's a digital artist so a 3d digital render artist he's not a cat he's not a cat he's not a cat and i showed him a a picture of some something that people put out on twitter and i was like wow this is really cool uh and he was like no no dude this is like really simple like just slap some

some stuff together digital artists would know and would know how to identify that but typical people like more people that are just trying to get into the world of digital art might not be able to know some of these things so kitty and i are going to go through some of uh the digital art nfts that are out there and he's going to evaluate them them like on on the video and he's going to i think use his thought process and his mental like knowledge about digital art to kind of explain to us how he evaluates digital art and i think that's gonna be useful for people that are getting into the world of digital art and nfts yeah for sure um also some stuff coming

up david the yang speaks episode oh it's coming out this thursday so um i yang speak so this is andrew yang's podcast they invited me on for a podcast episode that's for like an intro to crypto that releases this thursday i'm super excited about this um and i think this kind of will help open the door to to some traditional channels we haven't previously like folks are interested in crypto so subscribe yang speaks if you don't listen that podcast stay tuned for that and i hope i did the crypto and bankless

movement some justice on that episode um i was a little bit nervous i got to confess going in this is andrew yang but that comes out this thursday the last thing is david the consensus conference is coming i believe that is may 24th so that is a fantastic crypto conference this year of course of course it is virtual but ray dalio is speaking there and david i heard that you were speaking there as well do you know what your subject is yeah even bigger than ray dalio right

um i'm still chewing on my subject matter but i'm i've something i've really been fascinated about is the job opportunity the labor monetization opportunity surface area that ethereum creates and i think that really fits in well with um coindesk which is not an ethereum-centric uh uh company right they are just crypto they are whatever like all all the blockchains are going to be there remember it's like like even though we kind of say on on bank list it's just bitcoin and ethereum on coin desk everyone's going to be there and so i think it's a worthwhile

conversation to talk about the job surface area that crypto is creating specifically ethereum and like there's conversations with nfts with d5 treasuries there's so much potential for ethereum to pay people's you know paychecks right and help them live in this world and i think that's a really valuable conversation especially when the greater societal conversations are of like wealth inequality uh gargantuan silicon valley uh monopolies i think that is an interesting conversation i think that's a good topic to talk about

at coindesk absolutely do not miss a crypto conference during the bull run there are a lot of fun so go check this out we have a link in the show notes you can get 20 off with the bankless code that's bankless as the code there will be a link in the show notes here shortly if there's not already david all right before we get in what is the state of the nation today my friend yeah the state of the nation is recovering right we had our first i feel like we had our first major pullback in crypto prices uh we were to me it was like every

individual crypto person has their own like pain threshold i was on the verge of mine but we didn't actually go there i i was making the joke about how like you ether price can't actually go below 1300 it doesn't actually there's nothing that actually exists down there and that was right that was right at the bottom if that actually holds then that would be pretty cool but um like i said at the beginning like defy innovation developers protocols are continuing to build while the prices are doing their thing so this week on the state of the nation we are recovering pull back 35 or

so pull back pretty normal for the bull run it still feels very much like we are in a bull run all right david before we get to our next guest uh matt hogan we want to take a minute to tell you about the fantastic sponsors that made this episode of state of the nation possible synthetics is ethereum's decentralized derivatives liquidity protocol what does that mean synthetics is a platform for creating and trading synthetic assets which are assets that are priced via an oracle rather than bids or asks traders

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monolith.xyz to sign up and get your monolith visa card today all right everyone we are back we want to introduce you to our guest matt hogan he is the chief investment officer at bitwise he spent 15 years in etfs when they were first invented so he knows that space very well he saw it emerge and now he is seeing the emergence of crypto as an asset class for traditional investors and that is the subject of

today's conversation we're going to talk about how crypto is going mainstream with traditional investors how defy is now going mainstream with traditional investors and how they understand it matt really excited about this conversation because i think there's so much the crypto world just doesn't understand about traditional investing you are here to help us out with that how are you doing today sir i'm doing well thanks for having me on happy happy to be that bridge for you very good that's what we need we need bridges because uh you know for a lot of folks tuning in to bankless

they don't really understand how the traditional finance world works i guess i want to start with this question matt is when we think about traditional finance in general where's the money so like who holds the capital where is it parked i think we have this general sense that uh if you look at dispersion across generations of course baby boomers have far and away the bulk millennials you know still trying to buy their first house in general so so we understand that generational dispersion but how would you split out

where the wealth is and where the capital the investing capital is uh today and maybe maybe focus on the u.s first yeah sure it's an amazing question actually it's one that most of crypto misses for reasons that aren't clear to me the way i think about wealth in america is that they're three buckets so they're self-directed retail investors which crypto knows very well right that is the group that built crypto from the ground up the early adopters there's institutions that people talk about as this sort of pantheon of the capital gods right endowments foundations

the institutions are coming that's right we've been hearing that forever and they control a lot of capital and and crypto has been serving that market for a long time as well you mentioned institutions are coming we have you know major venture capital firms that have been marketing to that group forever the piece of the american capital distribution pie that people miss is that the fat center is financial advisors who control the wealth of most americans like so if you think about how big these three things are self-directed retail investors really small you're

talking like 10 to 20 of all wealth in the us institutions pretty big 40 of the wealth the other 40 is controlled by these wealth advisors like we laugh at names like morgan stanley or ria's but we all know that wealth in america is mostly concentrated amongst a relative few all of that relative few have their money with financial advisors so it's this huge segment of the market that in crypto no one has really marketed to and it's just starting to come into the market right now so yeah that's the area that bitwise focuses on

and it's an area that i think is going to be critical to the growth of crypto it was the reason etfs emerged uh those were the first adopters and i think you're gonna see that you're starting to see that in crypto as well so so matt my parents have a family friend that works at edward jones and he was my old baseball coach when i was in little league and he manages my parents money is that is that who we're talking about is that the cohort that we're talking about that's definitely a big piece of the cohort is is your baseball coach that's an example they're also independent raas so they're really two

groups they're big groups like like raymond james or morgan stanley and then they're independent people with their own shingle but that's exactly it and they tell your parents where to invest and they set the capital allocation uh and they control again something like you know 20 30 40 trillion dollars of wealth in america i mean just a huge wow yeah wow okay so uh we want to dig in more to make sure we understand it because because again we're talking to crypto people who are in sort of that retail bucket primarily and they they may not know all these terms you laid out the the term ria which stands for

registered investment advisor can you talk about what an ria is is that the same thing as a cfa or a cfa sort of a subtype break down some of these financial acronyms for us yeah so cfa is chartered financial analyst this is an independent designation you could think of as sort of a graduate school for quant finance right you go there and you take tests and you study for a billion hours and you suffer for three years and then you get this designation uh an interesting fact uh the average salary

of a cfa higher than the average salary of an mba so it's actually a good approach to take much more cost-effective way if you're looking for graduate education um those people can cfas operate in all parts of the financial ecosystem you'll find them in banks you'll find them at regulators you'll find them at ras the wealth management market they're really two kinds they're people who are affiliated with large broker dealers like morgan stanley where morgan stanley directs some control over what they choose and then their ras which are typically independent people

for instance if i opened a shop to manage money for my friends and i didn't have morgan stanley sitting on top of me i would be an independent ria and typically the way adoption moves is those people are the first right they're the first to adopt new things they've typically left firms like morgan stanley because they're more experimental because they want exposure to things like crypto like art like real estate like alternative lending platforms um and that's really the early adopter market but that's that's the group cfas

just a designation that means you've studied a lot of math uh raas mean you have to manage money for people in a fiduciary manner and then broker dealers which have have lower fiduciary standards but still try to do the best for their clients that's that's more or less the breakdown okay and to be someone like uh david mentioned edward jones yeah for his parents uh what designation is required yeah you have to typically go through some sort of training there are certain uh sec level designations that you have to get but they're they're

relatively low i think the important thing to realize that there are people in that market who are extremely sophisticated and know a lot about portfolio management and then there are people in that market who are primarily relationship people right they are my kids soccer coach or they are a retired school teacher who have relationships in the community who basically use other people's portfolios to allocate so that the barrier to be a financial advisor is relatively low and the dispersion of quality and experience is relatively wide

but it is a huge market there are 300 000 of these people in the us again they control something like 30 or 40 trillion dollars of wealth uh and that's just that's a lot that's as much as the largest endowments in the world yeah that's massive now in general across these categories obviously we understand what retail represents you know generally not people who are accredited investors right but in the in these other two categories we've got institutions and financial advisors is it the case that the institutional money skews more high net worth individuals

whereas the financial advisor category is more middle america upper middle america is that generally the case unaccredited investors that's close yeah the way i think of institutions is like the stanford endowment or the harvard endowment or the yale endowment or pension funds that run like you know the teachers union money or the firefighter union money those are really true institutions and what's distinct about them is there's typically a board that makes decisions about how they invest uh and those that

board tends to be relatively sophisticated rias and financial advisors serve a wide spectrum of people so they're ras who have average clients who have 50 or 100 thousand dollars uh to invest and they're ris who dress themselves up with fancy names like family offices or multi-family offices that sound fancy and allow them to charge more which manage clients who have 50 million 100 million 200 million dollars in wealth so anywhere between you know like a hundred thousand dollars to a couple hundred

million dollars you typically have some of this financial advisor action taking place and controlling where the portfolio is allocated it's a big space so i want to get to bitwise in a second because i think that's that's helpful to understand it um but give us the real high level here so in this financial advisor class which represents 40 trillion in capital in the us what do they think about crypto right now just a high level because we're going to spend some time camping on this a little bit later but just give us the broad strokes it's 2021 do they think

crypto's a scam uh are they able to buy crypto what do they think of it yeah i think it's 2016 and crypto for them so there is a there is a small sliver of them it's not zero at all i mean these are bitwise's clients we're a billion dollar asset manager so they're they're a number maybe five percent maybe six percent maybe ten percent who are already allocating to crypto for some clients there's a very small fraction who's very excited and thinks it belongs in every portfolio and then there's a huge swath who is distrustful and

uncertain i will say however that it has trained dramatically in the last year and we can get into the reasons why it has changed but a year ago the vast majority of people i talked to were simply dismissive of crypto they thought it was uh rat poison squared or harvested baby brains or choose your favorite epithet uh people are have a different view now right they particularly because they saw it run up in 2017 pull back and then recover which is really a unique characteristic that recovery has brought a lot of people

into the market the infrastructure has improved so you're starting to see rapidly spiraling adoption i'll throw one stat in just to give you a view we do a survey of financial advisors we have about a thousand people fill it out each year now this is self-selected so don't take these numbers in isolation but last year six percent said they were allocating this year nine percent so it was up fifty percent last year seven percent said they planned to allocate this year seventeen percent said they plan to allocate in

the year ahead so it's more than doubled in terms of adoption and i think particularly if we get an etf or other easier ways to access i think this could become the single fastest growing area of money moving into crypto in the us much bigger and faster than even the institutional side when we talk about numbers like nine percent and 17 well they doubled from last year we get we can see this is just a tiny part of the the pie there's so much growth potential there we do want to get back to that um because i think that's a

bulk of the story of of what these financial advisors you know how they think about crypto and how that's evolving and what's going to change for them moving forward but before we do i don't want to spend uh too long before we actually talk about what bitwise is because i think that's important context for understanding you've alluded to this that bitwise was sort of constructed in some ways to help these financial advisors to help unlock that 40 trillion in capital but what is bitwise and what are some of your core products yeah that's exactly right bitwise is a

specialist crypto asset manager we manage about a billion dollars we're best known for having created the first crypto index fund in the world so it holds the 10 largest crypto assets mostly bitcoin and ethereum but also uh you know chain link down to uniswap ave even is in there the 10 largest crypto assets it makes it easy for people to make a bet on allocating to crypto without deciding which particular asset they want to hold so yeah there's there's our website you can see 805

million dollars in this product that's up significantly over the last six months if you scroll down you can see the returns and the portfolio allocation there bitcoin ethereum litecoin shame link bitcoin cash etc we run this index in a very institutional manner so for instance the former head of indexing for s p uh who used to sit on the s p 500 index committee advises our index but what's unique about bitwise is we try to combine traditional finance experience with crypto expertise so alongside the

former head of indexing for s p and a member of the s p 500 index committee spencer bogart from blockchain capital also said on the index committee uh actually uh but i i hired spencer i gave him his first job back in my etf days he used to work for me so i've known him for a long time but we try throughout to marry crypto expertise traditional finance expertise the people at our company come from companies like google facebook instagram from software backgrounds but also blackrock deutsche bank goldman sachs etc so we marry those

two together and then mostly what we do is we educate people on why crypto isn't insane and we do that around the world we talk to them about what it really is what it really isn't why their opportunities why their risks and just today i was talking to a group of financial advisors for an hour an etf focused podcast earlier the cfa society of slovakia there's huge interest in crypto and we try to sort of bring that to them and then provide simple products that let people invest

so matt i want to ask about your guys's relationships with your customers i would imagine that customers who are interested in exploring the crypto space probably an index might come into their mind first because they're like well there's a lot here maybe i'll just go with a simple route and get the index right but i'm assuming that they're still going to have questions right so what what's the relationship between your guys you and your guys's customers how do you guys how much handholding do you guys do how much questions do you guys how many questions you guys answer what's that what's that process like

so much hand holding i know this sounds strange for the crypto world uh but we have a full traditional sales and distribution team with six people in six different uh categories or six different parts of the country who do thousands of meetings with financial advisors every month before covid i used to joke that like the future of the crypto industry was being built in morton's steakhouses because we would travel around the country and have 10 financial advisors and the questions you would get they really start from the beginning how can this thing have any value if it doesn't

have any cash flow is the government just going to shut it all down uh isn't china controlling crypto we still answer those the really interesting thing is the questions have started to get a lot better they've started to get a lot better and people have started to move beyond bitcoin which was the only thing they knew uh down chain into eth into d5 and and further on and that's really happened in the last year the sort of existential questions that dominated 2018 and 2019 which were anchored on this idea that crypto was just going to

go away those have evaporated in the last six months and now it really is how big is this opportunity what are the risks and what should we monitor to see if this is succeeding or not in the future yeah let's go let's go further down that hole one what about the biggest things that i enjoy about this particular bull cycle if if we're calling this a bolt cycle which i think we will is that you know in 2017 people will said say like you know don't invest more than you can lose because it could all go to zero no one is saying that it can go to zero in this in this cycle

like no one believes that anymore and earlier in uh when you were talking about um how uh the recovery aspect is the uniquely compelling aspect about bitcoin the fact that it did go from twenty thousand dollars in 2017 down to three thousand dollars and then it came back right uh and and so you alluded to some shifting sentiment in people's questions so let's let's go into that a little bit more like what in in addition to um bitcoin as hard money and perhaps the money printer go burme first first question is that is that part of the

conversation uh and then also what else is part of the conversation especially when it comes to defy yeah so uh that definitely rising concern about inflationary outlooks and the ability to a search for an efficient head is part of the conversation a fundamental understanding of crypto as a technological breakthrough built on decades of computer science work is becoming an important part of the consideration right there's still a lot of people out there that think some guy created a spreadsheet like a google doc online and keeps track of things now

it's worth half a trillion dollars people are starting to step through that and understand the fundamentals of blockchain and what they are defy is really unique uh because it took years and lots of meetings to get past these sort of existential core questions about what bitcoin is and people still really wrestle with it how can you have this thing that's so volatile it's a store of value i don't think they're that complex questions i i you know it seems obvious to me a new store value can't emerge and be fully formed and not

volatile it has to go through but people still wrestle with that but the thing about d5 is people get it instantly so the idea that the traditional banking system needs to be disrupted by finance is something that takes exactly that long to explain once you say that once you say a lot of what happens on wall street is just if then statements that can be replaced by software people are like aha and the the investment and the speed at which people have invested in our d5 index fund swamps what happened in our

our index fund even though it's a tiny slipper of the market i mean i've never seen something where it's so instantaneous does wall street need to be disrupted yes how do i invest it just is obvious to people so it's been a really fascinating phenomenon so when people ask about d5 how granular do their questions get like do because there's some aspect of cash flow with these defy tokens which i would imagine investors can resonate with but like i can imagine if the further and further you go down this rabbit hole eventually

you're gonna have to talk about this thing called uniswap which has this unicorn branding thing and it was mint is made by this guy with you know a ten thousand dollar grant and then if you go even further you ask you have to talk about sushi swap which is based off of sushi like how do these conversations play out yeah you know it's it's fascinating that you ask those questions i don't i don't think the unicorn brand definitely helps um but i use i use uniswap all the time it's really easy to talk about uniswap replacing some combination of the new

york stock exchange and firms like jane street right these institutional market makers that make huge amounts of money managing tiny spreads in the space um so i can talk about unit swap the thing that makes it that lets you get over the unicorn hurdle if you want to phrase it that way is it did 37 billion dollars in trading volume and it's generated huge amounts of fees and you could talk about how the token is pre-revenue just like traditional technology stocks were pre-revenue but went on to be multi-billion dollar behemoths you can

look at coinbase in the valuation that it's getting and even though it has a unicorn and was founded by a guy who like didn't have any money and barely snuck by and there's the beautiful blog on unit swap with this phenomenal sort of classic entrepreneurial it doesn't matter 37 billion dollars in volume hockey stick growth massive fees people get it and you don't have to get to flash loans and synthetics and like how does urine finance work people just accept that there can be a software driven analog of everything

that exists in traditional finance and probably 80 percent of it can be disrupted uh and you just need to give them one or two examples and they're in this is amazing hearing you you you say this matt um i i i saw this tweet from from hunter uh horsley who's your c ceo and i retweeted this out but it's so important this kind of underlines it he said i've been surprised to notice that in many ways d5 makes more sense to many means mainstream investors than bitcoin does bitcoin is digital gold sure but

most don't like real gold either defy which can be used and has free cash flow or a fee cash flow much easier for many to wrap their heads around that that that sounds like he's summary summarizing it too so it's exactly what you said it sounds like the narrative of um financial advisors know that traditional finance is broken that there are all of these rent-seeking intermediaries that it needs to be disrupted so that's already a mental model that they understand they understand how to do discounted cash