Last Bitcoin ETF Hope Standing

September 30, 2019

Matt Hougan

Longtime readers of will recognize the name Matt Hougan as one of the founding employees as well as past CEO of He has since moved on, serving as CEO of Inside ETFs and managing director of global finance at Informa, and currently is managing director and head of research for San Francisco-based Bitwise Investments, a digital asset management firm.

Bitwise has a bitcoin ETF proposal before the SEC, awaiting approval that could come as soon as Oct. 14. spoke with Hougan to discuss why Bitwise’s bitcoin ETF is different from other proposals, which he thinks will make the difference in getting it approved. The SEC is expected to approve or reject your bitcoin ETF on Oct. 14. Tell me what’s going on in the regulatory pipeline.

Matt Hougan: Bitwise has filed two ETF applications. One was for an index-based ETF tracking our Bitwise 10 Large Cap Crypto Index. You can think of that as the 10 largest assets by market capitalization in crypto, which is kind of equivalent to the S&P 500. It captures about 80% of the market.

We also have another application that, like the Winklevoss application, is just going to hold bitcoin. It’s called the Bitwise Bitcoin ETF and is physically backed, and it proposes to hold bitcoin with an insured regulated third-party custodian.

We haven't named that custodian, but there are about a handful of custodians that meet those two qualifications. They have insurance in place, and they're regulated as a state trust charter. It’s fair to say that we’re not actively pursuing the index-based application. While that’s filed, we’re not actively pursuing or doing research on it.

The one we’re pursuing aggressively is the Bitwise Bitcoin ETF application. We’ve had five or six meetings with the SEC staff and the commissioners about that application. We’ve submitted over 500 pages of research in support of that application, then more than 50 comment letters around that application. This comes to a head on Oct. 14. What’s the difference between your bitcoin ETF and the proposed (and rejected) Winklevoss physically backed bitcoin ETF, “COIN”? How do you see yours jumping through a hoop that others didn’t? (See: SEC Rejects Winklevoss Bitcoin ETF)

Hougan: There are three differences. The first difference is that Gemini was going to use itself as custodian. Gemini is an insured regulated custodian, so they would meet our definition. But we’re using a third-party custodian. That’s one difference.

The other more important difference is that they were pricing their bitcoin based on the price on the Gemini exchange. Gemini is one of the smaller bitcoin exchanges. They were using that as the sole pricing source. We proposed to use an aggregated price from all of the significant spot exchanges in the world. Part of the SEC’s concern surrounds the potential for market manipulation, both around the price and of the underlying markets. We believe using all of the available exchanges is helpful for that.

But the biggest difference is that the market has matured significantly in the past two years. Two years ago, there were no insured regulated custodians. And now there are more than a handful. That’s not anything we did.

Another example is that two years ago, the markets were relatively inefficient, with large arbitrage opportunities, and uneven pricing. But now market makers have entered the market in the past year. The futures market has become truly significant. And as a result, it’s just a much different market today.

The passage of time and better structuring have contributed to separate our proposal. I guess there's another piece. The growth of the CME bitcoin futures market is truly significant. One of the arguments we’ve made is that the CME market is now doing $200-million-plus a day on average volume. We think it satisfies that requirement. Now we’ll see if we've convinced the SEC. But that’s one of the reasons we think we have a better shot than the Winklevoss proposal did. It’s that the market has become much more institutional in nature. You argue better market stability, but over the last few days, we’ve seen a complete crater in bitcoin prices, for whatever reason. If I’m this skeptical regulator, and I look at price more than other elements, these last few days has to give me pause.

Hougan: One of the hallmarks of the bitcoin market is that it’s historically been extremely volatile. We expect it to continue to be volatile in the future. I know you were talking about a specific move. But if you look back over history, there've been six periods where the bitcoin market has gone down more than 70%, which is a lot. Now, of course, over that entire period, the market’s up about 1,000,000%, literally. But it has periods where it falls down a lot.

I actually don’t know that the SEC is worried about the fact that the asset can be volatile. We have plenty of ETFs tracking volatile markets that exist for a while. Volatility is a volatile market. Nature gas is a volatile market.

What they're really worried about is, are the underlying markets being manipulated without a surveillance sharing agreement? Bitcoin trades on a mix of regulated and unregulated exchanges. And whether it goes up or down shouldn’t really matter to the application. What matters is whether that’s a fair and reasonable price, or whether it’s being manipulated by the market.

We’ve made the argument that of course Bitcoin is volatile. There's no reward without risk. But what we were trying to argue is that the underlying markets, despite that volatility, are functioning well. There are arbitrages in place; it’s a two-sided market. And it’s an increasingly regulated market that can support ETFs. Who would buy your bitcoin ETF in the first month?

Hougan: We’re out there right now, talking to financial advisors and family offices and small-sized institutions. Many of whom would love to have a safe, secure way to provide exposure to some or all of their clients to digital assets. Right now, they're not really set up.

The thing about the bitcoin market is, there are great ways for retail investors to invest today, through Coinbase and other services that are perfect for small investments. There are good ways for large institutional investors to invest in private funds, like the one Bitwise and other people offer. There's not a great way that fits into the workflow easily for financial advisors to invest.

There is a real market for this. We can help financial advisors’ portfolio problems, finding noncorrelated source of returns. What is the expense ratio for this ETF?

Hougan: Our bitcoin fund, which is a private fund, has an expense ratio of 1% for the institutional share class, and 1.5% for the retail share class. You can use those numbers as a stalking horse. But we haven't published the expense ratio yet.

One important thing to keep in mind is that every new asset class that’s been opened up in ETFs has taken a long time. It took multiple years to get bond ETFs over the line. It took about $12 million in legal fees to get the SPDR Gold Trust (GLD) over the line. We just had nontransparent active ETFs—which were filed when you and I were children—get approved. It takes a long time. The SEC does due diligence. They're doing that. And honestly, they’ve been asking great questions.

Contact Drew Voros at [email protected]

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