Bitwise CIO Expects Billions to Flow Into Spot Bitcoin ETFs

As anticipation mounts for a near-term approval of spot bitcoin ETFs, Bitwise Asset Management's Chief Investment Officer Matt Hougan spoke with etf.com and gave his perspective on how he sees the regulatory process unfolding, how Bitwise’s spot bitcoin ETF would differentiate itself from the pack and why he thinks ether futures ETFs failed to grab investors' interest.  

Bitwise manages five crypto ETFs with total assets of $79.7 million.

etf.com's Lucy Brewster: Will the SEC approve one application, or all of the 8-to-10 said to currently be under review? 

Matt Hougan: I don’t have any inside information on this, but I do have a background in ETFs. My gut tells me that the SEC is not going to want to anoint a single winner. My guess is that they will want to approve multiple filers. That’s what happened with ether futures ETFs, which is a good proxy example. 

Also, you're seeing that the SEC provided comments back on S-1’s to multiple filers, and you can tell that because there's been multiple updates.  

Will they allow everyone to launch at the same time? One nuance is that not all people may want to launch, or that not all applicants may have all the ducks lined up to launch. I think it's entirely possible that some people decide it's not worth competing on a playing field with [so many] other players, and some may drop because they just don't get it done. You need to sign AP agreements, you need to find seed, and you need to go through all the legal processes. 

There are only so many lawyers that can do this kind of work. I do think you'll probably see multiple launches, but there’s no guarantee. 

LB: In the event multiple funds are approved at once, how would you differentiate your product and grab market share from bigger firms? 

MH: I'm a student of ETF history, and I'm not aware of any other situation where you've seen multiple products tracking a single commodity launch at the same time. The competitive dynamics of that is really unique. What makes Bitwise unique is that we're a crypto specialist firm that focuses on the financial advisor market. All we do 24/7 365 is think about crypto, study the news and developments, and provide products and support to help advisors gain exposure to the opportunities in crypto. I think that may be a differentiating factor. 

There’s this assumption in ETF land that the largest firms will dominate, but actually, the history of specialty ETFs is more in favor of specialty providers. 

LB: I saw that your firm, along with others, recently amended your filing and are moving forward with the process. What’s your idea of the timeline for the amendment process? 

MH: It’s not easy to update filings. That sort of legal work does take time. 

Some people tried to be really fast, some were more methodical, and some were in the middle, so I'd suspect we could see more firms amending filings. I also suspect you'll see more [rounds of] amendments. As I read through these prospectuses, they're not complete. Many lack AP agreements, many of them don't list expense ratios, and they don't all list custodians. It’s not going to be effective until there's a complete filing on the record. 

LB: One thing I noticed in some new filings was updated information and details about the underlying indexes. Is the agency asking people to take a second look at their indexes or is this just part the process of adding standard additional information? 

MH: That’s a great question. A nuance in some of the filings is that here is a discrepancy between what is using to value the NAV and what they’re benchmarking against. I don’t know that I would read too much into that. US GAAP requires you to have a single primary exchange as opposed to a blended price, so I think you’ll see people talking about GAAP account and pricing sources different, but I don’t think this will be a stumbling block, my guess is people will figure it out.  

LB: What, if anything, needs to be worked out with the SEC in terms of the ‘big issues’ of market manipulation and pricing? Have concerns largely been addressed?  

MH: We’re hopeful they’re being addressed. It’s still the case that no spot bitcoin ETF has been approved, and no 19b-4 has been approved. Until those are no longer true, you can't foreclose on the Donald Rumsfeld ‘unknown unknowns.’  

I'm hopeful we're on the pathway to see a spot bitcoin ETF launch in the next few months. It feels like we're in the red zone, to use a football analogy ("close to potentially scoring"). The question is, can we get across the line? 

I would say that market manipulation is a potential stumbling block, even though we have the GBTC lawsuit and you're seeing a lot of progress. The AP agreements still aren’t there in a public way. Custody still isn't a wrap. Then there are other things like arranging seed and the march to launch. There’s still a lot of work to do. We’re working 24/7 here at Bitwise, and I'm sure all our competitors [are too]. 

LB: In terms of the risk disclosures we’re seeing added to amendments, is this a situation where the specific way the firms answer the risk disclosure questions will sway the SEC one way or another? 

MH: The SEC is a disclosure-based regulator, that’s at the core of what it does. What you've seen in other ETF applications is a common standard emerges.  

It's highly unlikely that someone doesn't get to market because they can't figure out how to disclose associated environmental risks with bitcoin. That actual wording may not be settled yet, but likely we'll set on remarkably similar wording. That’s because when the SEC gets comfortable with that language, everyone just adopts it. 

LB: Your firm and others recently rolled out ether futures ETFs. Those received lackluster inflows, at least so far. Were you surprised or disappointed by that? Did it change your outlook on the market for spot bitcoin at all? 

MH: I was a little bit surprised at the reception of the ether futures, but not overly surprised. I think one of the lessons from that is about launching at a relatively quiet moment in the market. 

I think many investors still don't still differentiate between crypto assets. That was a takeaway for me because in my mind, bitcoin and ethereum are as different as Apple and Exxon. But I think in the minds of many investors who don't live in crypto, it's more like they're just all one.  

It doesn't dim my view of how successful a spot bitcoin ETF will be. I think it will be one of the most successful ETF launches of all time. Our internal forecast is that we expect to see somewhere north of $50 billion in inflows over the first five years. I think that will be weighted toward the back years, but I think you'll be talking about billions, not millions in year one.

Contact Lucy Brewster at [email protected].