Last month Financial Advisor checked in with Matt Hougan, global head of research at Bitwise Investments, to check in and get his latest thoughts on the state of the market for digital assets. Hougan is a true believe in the future of this emerging asset class and he sees many parallels with other early-stage investments. On November 19, Hougan and Edelman Financial Services founder Ric Edelman will con conduct a webcast on the subject with Financial Advisor at 2:00 p.m.
1. Matt, one year ago, Bitcoin was at $6,200. Today, it’s at $6,400. Prices are down sharply from their all-time peak near $18,000 and opinions on where things go from here all over the place. What happened?
The right way to think about crypto is to think of it like an early-stage venture capital investment. It combines high potential returns with high levels of risk. The difference with crypto is that it also comes with intraday liquidity, so you can see the expression of that risk and return in real time.
I like to make the analogy to Airbnb. Back in the day, before Airbnb was established, there was a moment where it was banned in San Francisco. Imagine what would have happened to the price of Airbnb’s stock if it were trading at that time. It would have been down 50 percent-plus, 80 percent, maybe more! But early-stage venture capital investments typically get priced once a quarter or once a year, so you don’t see that kind of intraday volatility.
The past year’s volatility is nothing new. Crypto has experienced four 70 percent-plus drawdowns in the past; at the same time, prices are up 1,000X or more. In each case, the drawdowns set the stage for a subsequent rally. I think the crypto markets got a little ahead of themselves in December of last year, and the pullback was a healthy correction.
The question is: Now that prices have stabilized for a while, where do we go from here? The answer to that question will depend on the speed at which professional investors move into the space, and on the speed at which the massive development effort taking place in crypto right now results in meaningful real-world applications.
We will see, but I’d note that we’re seeing fast-moving institutional adoption. In the past few weeks alone, Yale, Harvard and Stanford have all allocated to crypto. It should be an institutional rest of the year.
2. Aside from prices and markets, crypto-currency trading desks have sprung up all over the place. What’s going on with the crypto infrastructure?
Crypto infrastructure is evolving and maturing at an incredible rate. Just a year ago, the space was largely dominated by startups and crypto-specific firms. Today, virtually every major financial services company has launched a pilot program serving the space, and many firms are live with commercial offerings. Fidelity made a big splash recently with its offering, but the list of firms entering the space this year has been unreal: Jane Street, Susquehanna, Nomura and so on.
There is still a ways to go, even on basic things like custody. The number of different coins that can be handled by SEC-qualified custodians is still somewhat limited, for instance. But that’s changing quickly.