“I think getting smart on crypto is one of the biggest business development opportunities for advisers of the next handful of years.”

Joining “On Purpose” host Tyrone Ross is Matt Hougan, CIO of crypto asset manager Bitwise. Hougan and Ross discuss Bitwise and ETF Trend’s joint benchmark survey of adviser attitudes towards the crypto asset class. The report surveyed over 600 advisers and revealed key indicators of the Registered Investment Advisor (RIA) industry’s perceptions of crypto. How many advisers have personal crypto holdings? Why is there a discrepancy between advisers’ personal holdings and client allocations in crypto? What factors are holding advisers and investors back?

Adviser engagement with crypto assets is on the rise, but client involvement is lagging behind. Continued education is key to relieving concerns on regulation, volatility and more surrounding crypto.

Retail and institutional investors alike have a significant presence in crypto. Will 2022 finally be the year the RIA industry joins them?

This show is produced, announced and edited by Michele Musso with additional production support from Eleanor Pahl. Our Theme song is “Walk With Swag.”

Transcript

Tyrone Ross

Alright, welcome back to another episode of the "On Purpose" podcast. I am your host, Tyrone Ross, CEO and co-founder of Onramp. Special episode today because I do have crypto and financial services royalty with me, in my opinion, one of the most important folks in the space and I'm probably not sitting in this seat without him, his guidance, his tutelage and just overall advocacy. I present to you all the inimitable Matt Hougan, CIO of Bitwise Investments. How are you, sir?

Matt Hougan

What an introduction, Tyrone. It's great to be on. I'm doing great, really excited about this conversation. Love the podcast. So this is a treat for me.

Tyrone Ross

Fantastic. Well, I want to dig right in here. But before we do, I just have to say truly, there are a few people who experienced crypto, but also had the ability to make it so concise and clear. And honestly, I don't think folks do it as well as you, especially as you and I know, trying to beat the RIA drum isn't easy to do. So let's start there. So you guys put out a report, I believe with ETF Trends, right?

Matt Hougan

That's right.

Tyrone Ross

You know where I want to go, the section I just want to jump to, but I want to put it on you right away, like give some folks the methodology behind a report. Your initial thoughts from and what you all gleaned from the conversations that you had.

Matt Hougan

Yeah, I love it. We've been doing this survey for four years now with ETF Trends. And the reason we started it, Tyrone, is we felt that there were advisers out there that were allocating to crypto, that were excited about crypto, but honestly, were afraid to talk about it. I know that sounds strange today. But if you peel back four years ago, there was this sort of perception that thou shalt not talk about crypto, it was this insane idea. And we wanted to show people that it was a bigger deal than they thought individually. There were more people in this tribe of advisers that were interested in crypto, that were helping clients about crypto. We've been doing it for four years. We do it with ETF Trends. They do all the outreach. Obviously, if Bitwise did outreach, we'd find a bunch of advisers who are into crypto because that's who we talked to, but they do all the outreach. This year, we had 600 advisers enter qualified answers about a 25-question survey. The results are amazing. There's some really fun statistics we'll get into. But the idea is to show crypto is not a crazy idea among advisers anymore. In fact, I think there's some data in there that says advisers better have answers about crypto, or else they're gonna get passed up pretty quick. So, I'm excited to dig into it with you.

Tyrone Ross

The first thing that I noticed, I believe, and again, you know the numbers cold, but I think 94% of advisers, was it, they got questions on crypto? Yeah, let's just start there.

Matt Hougan

Let's start there. That's as close as you get to 100% in a survey, right? There's always some cranky individual who just says no. So 94%. That's up from 81% last year. What that means as an adviser is if you have clients, they're going to ask you questions about crypto. And that is a one way trend, that's not going away. There are Super Bowl ads about crypto now, like everyone is going to be answering questions. I think a few years ago as an adviser, you could be an ostrich. You could stick your head in the sand, you could see no evil, hear no evil, speak no evil about crypto. But that's ended. If you don't have good answers for clients right now, whether it's yes, no or maybe, they're going to leave you and find someone else who does because all retail investors are accessing it and they want their advisers to be smart on it. That was one of the big findings of the survey.

Tyrone Ross

Right. And that's one of the things that I know you've been preaching as well. And I've been saying forever, it's just like, FAs, just be conversant. Right, just be able to, like, you don't need to know what ZK-Rollup is, just understand the client is doing it away from you. They want to tell you, right, just make yourself available for the conversation. So that's super important. And I have this pulled up here because again, there's just so much I want to dig into again, we'll get to my favorite part. But there's a piece here about the percentage of clients' portfolios currently allocated to crypto. So let's dig into that a little bit. Because the numbers there were interesting, but what do you glean from that part?

Matt Hougan

Yeah, I think there are a few important statistics here. So let me run through them 1, 2, 3. The first one, what percentage of advisers have clients with allocations to crypto, that number was 16% in our survey, amongst RIAS specifically, it was 22%. Now that's not a ton, but it's not zero, right. And one in five advisers are helping their clients allocate to crypto today. That number has gone up a lot. When we started this survey four years ago, it was 4%. Right now it's 22% for RIAs. The second thing, though, that's equally important, is it's not every client, I think there are a lot of advisers out here who are thinking, I'm not going to roll out crypto across 100% of my clients because I have this 85 year old who doesn't know what it is doesn't need it in their portfolio. What we found is most advisers have allocations for between 0–20% of their clients. Right. And that's an important piece. And then the last thing is the allocations are relatively small, which is a great thing. Tyrone, 80% of advisers have between 0–5% percent allocation to crypto for those clients that they're allocating to. Now all these trends are going up, more advisers are allocating, more allocating across their books, the percentage is starting to go up from maybe 1% to 2%. But it's still relatively uncommon, but it's not super rare, I think is what I would say.

Tyrone Ross

Yeah, no great feedback. Now we're really digging into the part where I get giddy.

Matt Hougan

Bring it.

Tyrone Ross

The 47% that said they have personal crypto holdings. Almost doubled from the year before. Yeah, I could go on about this. But again, perspective from you all your thoughts?

Matt Hougan

Oh man, that's the biggest statistic in there. Yeah, half of all advisers are allocating on their own. Now let me give you the optimistic spin. And let me give you the thing that's sticking in the back of your head, Tyrone, I think. The optimistic spin is that many times the first allocation adviser makes is in their PA, they want to test the waters, they want to kick the tires, they add a little bit, they see how it works, they see how the onboarding goes. And then they roll it over to some of their clients, and eventually all their clients. We've seen that at Bitwise, I'm sure you're seeing it at Onramp. That's a fairly normal pattern. So one way to look at that is as a precursor to future client allocations as the positive way. Yeah. The other way to look at it, Tyrone, which I know has occurred to you, if it's good enough for them, why is it not good enough for their clients?

Tyrone Ross

Exactly. Exactly.

Matt Hougan

It's such a big one. And we'll add one more piece to that, I know you will get to it later. At the end of the survey, we ask people, what's your expectation for the price of bitcoin? And more than half of advisers expect to be $100,000 or more per bitcoin in five years. So they expect the price to go way up. They're allocating on their own, but to their clients, they're like: "Well, hold on there, Mr. And Mrs. Jones? Yeah, it's not time yet." And that is real tension. I'd love to know your thoughts on that.

Tyrone Ross

Well, you are reading my mind, because that's exactly what's gonna say. And I get so many text messages from advisers asking me questions about this protocol and this DeFi, they yield here, and I'm like, "Are you doing anything for clients yet?" "No, no way." What? I mean, it's just befuddling to me. But again, it just proves that there are, which we're going to get to my favorite parts. And we know advisers, right? It's almost that double talk, right? My mother calls it talking out of both sides of your mouth, but also why I say and I did a Spaces last night, the rebuttals you hear from advisers is well, it's too volatile, again, want to get into that, and the best interest of the client. And now I'm saying to advisers, too volatile for you? Apparently not. Oh, too volatile for the client. But guess what? It's not for them either. And in the best interest of the client, is the best interest of the client 0.03% on the money market at Schwab and you're getting a 6% at BlockFi? Yeah, that will stick between us, right. So it's just funny to see it all, but also, again, the real life part of it, which is why I think what you all are doing is so important. And all of us that are just trying to get advisers to understand it's like, folks to gig is up, right? Like, you just slowly come to it and convert, right? We'll hold your hand through it all. And again, I know I don't have you for a while, and I could spend forever on this thread. For folks listening, I was gonna come on, and rant heavily about this piece of the report. But Matt is more thoughtful and brilliant and pragmatic so he's gonna walk us through this. So there is a piece in the report where it says, "What is preventing you from either increasing your investment in crypto assets, or making your first allocation?" The caveat there should be for a client, right, right. For a client, so that'll be my little addendum to the next report. Number one: "regulatory concerns" 52% last year, now 60%, I'll just deal with the top three. "Too volatile," as I just discussed,  43% 2020, 38% now 53%. "No idea how to value crypto assets," which again, also hilarious to me, because you put out a beautiful research report with the CFA Institute, it's just, what are we doing? And then that's it at 34%. So again, sir, my mother taught me if I have nothing nice to say, don't say it on the podcast. I'll put that to you. And then I will interject as needed.

Matt Hougan

Oh man, I love it. It's so hard to know exactly where to go here. Because you have these things that people are saying they're saying they have no idea how to value crypto assets. They're saying that they are concerned about regulatory issues, not clear exactly which regulatory issues they're pointing to, like, I don't think they're worried about whether Gensler will crack down on synthetic stocks, and therefore one specific DeFi app has to move offshore. They have this generalized view. I mean, I'd love to know your thoughts. I still think a lot of it is that the name is crypto, and they're coming up with excuses not to allocate, because if they actually looked at the data, or they actually looked at the regulatory status, or if they read that CFA report, or the other people doing good work on valuation, if they looked at the fee generation dividends, and burns and things like ETH, there are good answers to this that are out there. You just have to remove the label and look at it for the facts. And I don't think people are doing that. What did you think when you saw this?

Tyrone Ross

I was furious. I would explain why. But I want to stop there and say when we were on stage at the Morningstar conference, you said something that I've been saying ever since. It's like the original sin of crypto was that. Calling it that, cryptocurrencies. It's just the name, and it's just holding on to that. And again, there's the Twitter beef on Web 2 and Web 3 and all that stuff is like LA gang wars in the eighties on Twitter. Are we changing the name of crypto? What do I do think, a very good point that you made there about it being the original sin. What bothers me is this again, I addressed it to fall apart. The regulatory concerns, again, was saying this on my Spaces just last night. Clarify me around what? The IRS, the SEC and the CFTC says about bitcoin and ETH. Let's just stop there. You just kind of take some time to learn about these two is a really good place to start to move forward. The SEC and Gensler have tipped their hands of how they feel about stablecoins and DeFi and all those other things. All of the clarity is there. Hester Peirce. When we launched Onramp, I interviewed her that day. She said, advisers just go be advisers. Like we want you to be fiduciaries to your clients, doesn't change here. Also, I've mentioned this often, the risk alert that they put out last year, last February, everything that advisers need: valuation methodologies, policies and procedures, books and records, form CRS. These are all things that advisers do. Just write the word crypto assets in there, and continue on. And also, if you are in RIA, and Gensler goes "60% of the assets at Coinbase are securities" and so on and so forth. You're an RIA, you can still proceed as if it's the registered reps who can't do anything anyway. Right? Except to tweet about crypto from a burner account on Twitter, right? Only my dumb behind was tweeting at Merrill Lynch with my face and everything else. But they know that. So that's my thoughts on it. So if I'm being honest, and what I would have said, I've softened it over the last 12 hours. It's becoming irresponsible to use some of these excuses. You're now not fulfilling your fiduciary responsibilities because you're not doing the work to go see that there's answers here. The next two, and I know this is where I get aggravated as well, "lack of easily accessible investment vehicles." I know you all had to go like "Hello?" Right, and for all of the folks, the advisers who are out there listening, when Bitwise launched, I had clients that wanted in. That's how long Bitwise had been around. Just so you know, three years in now, however long was like literally at launch, I had clients that wanted in. So that's out. And then it's like, all right for us, I throw my hands up like I'm not a vehicle, but we're giving you direct access very easily, which leads into the next thing. "Custody concerns fear of hacks." There's qualified custodians, there's federally chartered banks in the space, again, other infrastructure, concerns of things that still need to be built out with prime brokerage and batch trading and all these, sure. I think that the liquidity and all these different things that the largest RAIs need, but we're not talking about a Beacon point or Creative Planning or High Tower yet. But there's enough rails for folks to drive their Honda Accord through the drive thru. We're worried about the 18 wheelers later. I don't know those two have to be frustrating for you as they are for me as well.

Matt Hougan

They're incredibly frustrating. But I'm reminded of something from my ETF past. Right, Tyrone, you know, I come from a deep ETF background. We talked about whether ETFs were dooming American entrepreneurialism for 15 years. We talked about whether ETFs were going to destroy the bond market and creating a cascade of liquidations in the bond market for 15 years. We had congressional hearings about these things as recently as eight years ago, the lesson there is that these problems take forever to solve. Custody has been solved for a very long time. Fidelity is a custodian. You guys have solved direct access and other people have as well. The opportunity it creates for advisers to flip it on a positive side, is really significant. Because there are good answers to all these questions. There's good answers on regulatory, there's good answers on access. There's good answers on custody, there's good answers on volatility. advisers who are willing to look past the headlines and build their business, it's a huge business opportunity. One other stat in this survey which we didn't cover is the number one reason advisers were adding exposure was clients were asking for it. Client demand. I think getting smart on crypto is one of the biggest business development opportunities for advisers of the next handful of years. You have a window before it's pushbutton easy for everyone to have a leg up over your competition and that's pretty rare in the RIA space. That doesn't happen very often, particularly for smaller RIAs. There's a positive side to this, which is there are good answers to these problems. You just got to get educated.

Tyrone Ross

Yeah, absolutely. Again I continue to go on but the other thing I just have to end on this what I was gonna say is, it's funny with all that data and it's only those things are only issues until your largest clients want it and then you find a way to get it

Matt Hougan

Very true.

Tyrone Ross

That client, that $10 million account or a million dollar account you work so hard for, and they're like "I'll leave you if you don't figure this all out." "Oh, no, it's not a bubble anymore. Promise it's not. I've done some research." Finally read what Matt Hougan put out. Okay, now, one last one, and I gotta bring this to you. For everyone out there listening. This is a literal thing. I've been called to a truce on a bitcoin ETF. Shout out to my WisdomTree family. So, I no longer rant about it. I'm over it anyway. I just can't anymore. I'm just over it. But anyway, 82% of advisers said they prefer investing in a spot bitcoin ETF. You're at the forefront of the fight. I've been saying for a really long time if they are going to, for everyone out there listening, if you are putting in some type of ETF application, when the SEC approves an ETF it is going to Matt Hougan, he will get it before you all. Just let everybody know, sorry. But that's the truth. So anyway, there's nobody better to talk about that. What do you think the status of that is? Do we get one? Because that humbled myself in saying I do think as far as what it would mean for the infrastructure and better pricing and discovery into space. But anyway, that's about all I have nice to say.

Matt Hougan

Well, first of all, those were very nice things. I hope you're right about Bitwise, I'm sure there are other great applications as well. I think the market is overly negative on the prospects for a bitcoin ETF in 2022. It feels like the crypto Twitter segment has basically given up. It's almost a joke, there are memes about it never happening. Two things that I would point to. One is we did get a bitcoin futures ETF, which was a big zero to one moment for the SEC and it does change the game, and over time it becomes less and less tenable. But the other thing I would say, Tyrone, is that the quality of applications has improved dramatically. There are a lot of crypto applications that just sort of "yolo-shipped" "you should approve our bitcoin ETF, because." But if you look at, not just Bitwise's, but you look at what ARK is doing, you look at what Grayscale is doing. You look at a couple other providers, they're providing real data. And at some point, I think it's going to overwhelmed things. So I do think we'll get it. I actually think it'll be this year. But of course, I've been wrong in the past. It will be great for investors. And there are other ways direct ownership of coins was the fastest growing option among people surveyed. The number of people who thought that was the best way to get exposure rose dramatically last year. So I think an ETF will be great. I love that you've at least achieved peace. But it's just one of a bunch of options. But I do think we're gonna get it this year, we'll see.

Tyrone Ross

I did take that little direct exposure blurb out and sent that to my team. I'm like, here it is, right. This is the thing. But also I do stand by when the spot ETF does get approved, everyone knows, there will be my public meltdown on my Twitter live. Please standby.

Matt Hougan

I love it. I love it.

Tyrone Ross

Before I let you go, a couple of things that I would love for you to do. One is, give folks a little bit of background on Bitwise and how to reach you and everything else. Lastly, I would just love your thoughts on this. I think this year, there's going to be a lot of M&A. It's clear in these conversations, they want advisers in and they know that the next trillion in market cap is coming from the wealth management space. Everyone knows it. Now we've known it for a long time, folks are figuring it out. Retail is kind of walking the walk. They're done. Yeah, we'll be back. But for right now, we gotta get that wall down for wealth managers and family offices and RIAs and make it very, very easy and seamless. The floor is yours. And then your thoughts on the space in the year ahead.

Matt Hougan

Well, thanks for that. Bitwise is the leading provider of index funds in the crypto market. So we created the first crypto index fund, the Bitwise 10. And we continue to offer more of those strategies, the first DeFi index fund, the first NFT index fund, but we're really there to serve advisers, you can find us on bitwiseinvestments.com. You can find me @Matt_Hougan on Twitter. We want to talk to advisers who have questions about crypto, whether you want to allocate now or in the future, we built a team to help them, as you have at Onramp. In terms of the RIA space, it's absolutely the next big market for crypto. Institutional is trickling along, as you say, retail is all the way in. advisers control as much wealth as institutional investors. And they're like four times the wealth of self-directed individual investors. This is a massive market that's simply been overlooked by crypto for a long time. And I think what this survey shows is we're at sort of the elbow of the hockey stick, a significant 22% of RIAs are allocating client accounts. 50+% are allocating in their PAs. If you ask me where the next trillion dollars is coming from, it's coming from this space, and firms that are in this space are going to be in high demand from advisers and I do think we'll see more M&A, as you mentioned. I think it's a big space. I think maybe the story of 2022, 2023 is the entry of advisers into the market.

Tyrone Ross

100%, I couldn't agree more. As always, thank you so much for spending some time with me. It's always great to talk with you in person, but just at all, it is always a joy. Thank you all for listening. You know as always say, if you found any value at all in this podcast, I know Matt is a thoughtful giver as well. And fights with me on this mission to cure child hunger in this country. So go to nokidhungry.org, whether it's $1, two Satoshis, whatever it is, they do accept crypto. Help me, help CoinDesk, help Matt and everyone else that cares about any child hunger in this country. Do that if you found any value in this at all. Mr. Hougan. I appreciate you so much. Love and light to you for being here again. Also out there, please like, subscribe and share, sign up for the crypto advisers newsletter. We will see you all in the next one. Appreciate you.